Full Definition
Due diligence is the thorough investigation and analysis process that investors conduct before making an investment decision. It covers financial, legal, technical, and operational aspects of the target company to verify claims, assess risks, and confirm the investment thesis.
Types of Due Diligence
- Financial DD: Revenue analysis, burn rate, projections, cap table review
- Legal DD: Corporate structure, contracts, IP ownership, litigation risks
- Technical DD: Technology stack, code quality, scalability, security
- Market DD: Market size, competitive landscape, customer validation
- Team DD: Background checks, reference calls, team composition
- Commercial DD: Customer interviews, churn analysis, sales pipeline review
Timeline
Due diligence typically takes 2-6 weeks for early-stage deals and 1-3 months for later-stage investments. Having a well-organized data room with all relevant documents can significantly accelerate the process.
Due Diligence Checklist by Category
| Category | Key Documents | Timeline |
|---|---|---|
| Financial | P&L, Balance Sheet, Projections | Week 1-2 |
| Legal | Incorporation, Contracts, IP | Week 1-3 |
| Technical | Architecture, Code Audit, Security | Week 2-3 |
| Commercial | Customer Interviews, Churn Data | Week 2-4 |
| Team | Background Checks, References | Week 3-4 |
Real-World Example
After signing a term sheet, a VC firm spends four weeks conducting due diligence, reviewing financials, interviewing customers, and auditing the codebase.
Frequently Asked Questions
What do investors check during due diligence?
How long does due diligence take?
What is a data room for due diligence?
Related Terms
A non-binding document outlining the key terms and conditions of a proposed investment deal.
A secure digital repository where startups share confidential documents with potential investors during due diligence.
A spreadsheet showing the equity ownership, dilution, and value of shares in a company.
The primary investor in a funding round who sets the terms, contributes the largest check, and often takes a board seat.
The estimated monetary worth of a company, determined through various methods and negotiations.
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