Thoughts on startups by investors that
fund them & entrepreneurs that run them

Startup Due Diligence Is Not a Mysterious Black Art

After you have successfully attracted angels or venture capital with your business case, your million dollar product idea, and you have a signed term sheet, there is still one more hurdle to overcome before investors write the check. This is the dreaded “due diligence” process.

For no good reason, this process seems shrouded in mystery, when in fact it is nothing more than a final integrity check on all aspects of your business model, team, product, customers, and plan. In my view, understanding due diligence can only improve information flow, and leads to a better long-term partnership with your investor.

Remember that up to this point, the investor has primarily seen and talked to the founder and CEO, and studied written documents. Before smart investors write a check, they, or a trusted consultant, will want to meet and talk with your key team members, several customers, and evaluate the real product. If results don’t match what they have been told, all bets are off.

This is where they find out if your team is all behind you, your customers are truly excited, your product is ready to ship, and there aren’t any skeletons in the closet. All private equity groups go about due diligence in their own way, but there are a few key areas of focus that entrepreneurs should always expect:

Team strength and health. For small teams, every team member will likely be interviewed. Investors are looking for your depth of talent, loyalty and commitment, strengths and weaknesses, teamwork, and management style. A dysfunctional team, or even one naysayer in a critical position can stall your investment.

• Product or service readiness. Technical due diligence typically starts with a full one or two day review with the engineering and product marketing staff. Investors are evaluating your process as well as your product. The goal is to feel 100% confident that the product has the features and quality you assert, and the team and process to keep it true in the future. Finally, they need to validate intellectual property protections and status.

• Market need and size validation. A good investor can do a lot to help a company, but can’t make customers buy products. Investors will likely talk to dozens of potential customers, starting with your reference list (undoubtedly well prepped). They will also speak to technical leaders and industry contacts where they have prior relationships. No validated pain, no deal.

• Sustainable competitive advantage. The kiss of death is for investors to find unanticipated competition you neglected to mention. They try to confirm from industry analysts that your differentiators are indeed unique, and that there are no future competitors or big gorillas in stealth mode just around the corner.

• Business and financial status. How well have you met previous financial and business milestones? Investors will validate pre-existing investments and stock ownership to create an accurate market capitalization sheet for your company. Founders with bad credit, active lawsuits, or recent bankruptcies dramatically increase the risk.

As you go through the due diligence process, there are some practical tips to keep in mind. First, be proactive in asking if you have answered all the key questions, and ask how you compare to others. Get to the truth early. Waste no time. Use the feedback to strengthen your presentation and your company.

Secondly, conduct your own due diligence of the investor. This process is the foundation for the long term partnership, so both sides need the same level of comfort and trust. The investor relationship is akin to marriage. It’s nice to have a little mystery in your marriage, but you better understand each other on the fundamentals.

Written by Martin Zwilling

user Martin Zwilling Founder and CEO,
Startup Professionals

Martin is a veteran startup mentor, executive, blogger, author, tech professional, and angel investor. He is the Founder and CEO of Startup Professionals, a company that provides products and services to startup founders and small business owners.

prev next

You might also be interested in

The UrbanTech Movement is Transforming Cities

Urbanization is a defining process of modern life.

More than half of the world’s population now lives in cities, and the number of urban citizens around the world is projected to rise to 66% by 2050.

In the US, over 80% of the population lives in urban areas with 1 in 7 Americans living in New York, Los Angeles and

Read more >

Angel Investors Spotlight: An Inside Look at Hudson Valley Startup Fund’s Investment Process & Advice for Founders

Hudson Valley Startup Fund brings together a network of the region’s successful business and community leaders to give back, supporting the launch of the next Hudson Valley visionaries. We sat down with fund managers Chad Gomes, Johnny LeHane and Paul Hakim as they shared insights into their investment process, what they look for in both group members and startups, and

Read more >

The Right Startup Advisors Are As Valuable As Money

If you are a new entrepreneur, or entering a new business area, it’s always worth your time to assemble an Advisory Board of two or three executives who have travelled that road before. You need them before you need funding, and if you select the wrong people, or use them incorrectly, no amount of money will likely save your startup.

Read more >

How do I get in touch with investors/funds with just an idea and no product?

There are many wonderful ideas, and they are not necessarily easy to come up with. So congratulations on having thought of one!


“Having value” and “Being fundable” are two completely different things. What the more experienced responders here are saying is completely accurate: while a good idea is usually a necessary ingredient for the formation of a good company, it is

Read more >

Is there an incubator for aspiring Angel Investors or VCs?

No, but there are several sets of courses on angel investing that can provide a good base from which to start. The most comprehensive and best known is the Power of Angel Investing seminar series developed by the Angel Resource Institute (formerly known as the Angel Capital Education Foundation, and prior to that part of the Angel Capital Association). It

Read more >


2 thoughts on “Startup Due Diligence Is Not a Mysterious Black Art”

  1. John Colley says:

    Great Post Martin, I would add – Customer Traction – investors are going to drill down on your sales pipeline, prospects and suspects.  Have you sold anything – if so to whom, on what terms, a pilot or real sale.  This is vindication that your solution or product has a real market, meets a real need.
    Will definitely RSS your feed
    Thank you