What Investors Look for in Due Diligence: A Founder's Preparation Guide

You've had a great first meeting. The partner says, "We'd like to move to due diligence." This is good news—it means they're seriously interested. But it also means weeks of intensive scrutiny where poorly organised documents or unexpected surprises can derail your raise.

This guide explains exactly what investors examine during due diligence, how to prepare your data room, and common pitfalls that cause deals to fall apart.

What Due Diligence Actually Is

Due diligence is the investor's verification process. They've heard your pitch—now they want to confirm:

1. The opportunity is real: Market size, competitive position, customer evidence
2. The numbers check out: Revenue, growth, unit economics match what you presented
3. The team can execute: Founders' backgrounds, key hires, culture
4. The risks are manageable: Legal issues, technical debt, customer concentration
5. The deal terms are fair: Valuation, cap table, existing investor rights

For seed rounds, this process typically takes 2-4 weeks. For Series A and beyond, expect 4-8 weeks of detailed examination.

The Five Areas of Due Diligence

1. Financial Due Diligence

Investors will verify every number you've shared. Expect requests for:

Historical financials:

• Monthly P&L for the last 12-24 months
• Balance sheet (current)
• Bank statements (last 6-12 months)
• Accounts receivable and payable aging

Revenue verification:

• Customer list with contract values
• MRR/ARR breakdown by customer
• Cohort analysis (retention by signup month)
• Revenue recognition policy

Projections:

• 3-year financial model with assumptions
• Scenario analysis (base, upside, downside)
• Headcount plan
• Use of funds breakdown

Document	What They're Checking
Bank statements	Cash balance matches what you claimed
Customer contracts	Revenue is real and recurring
MRR waterfall	Growth and churn match your pitch
Burn rate	Runway calculation is accurate

Red flags investors watch for:

• Revenue that doesn't match bank deposits
• Large one-time deals disguised as recurring revenue
• Aggressive revenue recognition (booking annual contracts as immediate revenue)
• Undisclosed liabilities or debts

2. Legal Due Diligence

Legal issues can kill deals. Investors will examine:

Corporate structure:

• Certificate of incorporation
• Articles of association
• Board minutes and resolutions
• Shareholder agreements

Cap table:

• Current ownership breakdown
• Option pool size and grants
• Convertible notes and SAFEs outstanding
• Any unusual rights or preferences

Contracts:

• Customer agreements (especially large ones)
• Vendor contracts (lock-ins, termination clauses)
• Employment contracts for key employees
• IP assignment agreements

Compliance:

• Data protection (GDPR compliance)
• Industry-specific regulations (FCA for fintech, etc.)
• Outstanding litigation or disputes

Issue	Impact on Deal
Missing IP assignments	Can halt deal entirely
Messy cap table	Requires cleanup before closing
Outstanding litigation	May require escrow or indemnity
Regulatory non-compliance	Major red flag, often deal-breaker

Common problems:

• Founders who never assigned IP from their previous employer properly
• Early employees without signed IP assignment agreements
• Cap table errors (shares issued without board approval)
• Expired option grants

3. Technical Due Diligence

For tech startups, investors (or their technical advisors) will assess:

Architecture and scalability:

• System architecture overview
• Current infrastructure and hosting
• Scalability plan (what breaks at 10x, 100x scale?)
• Technical debt assessment

Security:

• Security practices and policies
• Penetration test results (if available)
• Data handling and encryption
• Incident response history

Team and process:

• Engineering team structure
• Development methodology (agile, sprints, etc.)
• Code quality practices (testing, code review)
• Deployment frequency and process

Product:

• Product roadmap
• Feature prioritisation process
• Customer feedback integration

Area	What They Want to See
Architecture	Sensible choices, not over-engineered
Security	Basic hygiene in place, awareness of risks
Team	Right skills for current stage
Process	Some structure, not chaos

Red flags:

• No version control or code review process
• Single points of failure (one engineer knows everything)
• Security incidents that weren't disclosed
• Massive technical debt with no plan to address it

4. Commercial Due Diligence

Investors verify your market position and customer relationships:

Customer references:

• Calls with 3-5 key customers
• Understanding of why they bought
• Satisfaction and renewal likelihood
• Expansion potential

Market analysis:

• Market size validation (TAM, SAM, SOM)
• Competitive landscape
• Differentiation and moats
• Market timing

Sales process:

• Pipeline and conversion rates
• Sales cycle length
• Customer acquisition channels
• Pricing strategy and history

Churn analysis:

• Churned customer details
• Reasons for churn
• Recovery attempts
• Trends over time

What customers tell investors: Investors ask pointed questions: "Would you renew? At what price increase would you consider alternatives? What would you change about the product?" Prepare your champions, but don't coach them—investors can tell.

5. Team Due Diligence

Investors bet on people as much as products:

Founder backgrounds:

• Reference calls with former colleagues
• Verification of credentials
• Prior startup experience
• Domain expertise

Team composition:

• Org chart and reporting structure
• Key person dependencies
• Hiring plan and gaps
• Culture and values

Equity and incentives:

• Founder equity split rationale
• Employee equity grants
• Vesting schedules
• Retention risks

Question	Why They Ask It
"Why did you leave your last company?"	Looking for red flags or misrepresentation
"How do you resolve disagreements?"	Assessing co-founder dynamics
"Who would you hire next?"	Understanding priorities and self-awareness
"What's your biggest mistake so far?"	Looking for honesty and learning ability

Building Your Data Room

A well-organised data room accelerates due diligence and signals professionalism. Use a secure platform like DocSend, Notion, or Google Drive with proper access controls.

Recommended Structure

Data Room/
├── 1. Company Overview/
│   ├── Pitch deck (latest version)
│   ├── Executive summary
│   └── Company fact sheet
├── 2. Financials/
│   ├── Historical P&L (monthly)
│   ├── Balance sheet
│   ├── Financial model
│   ├── Bank statements
│   └── MRR/ARR analysis
├── 3. Legal/
│   ├── Corporate documents/
│   │   ├── Certificate of incorporation
│   │   ├── Articles of association
│   │   └── Board minutes
│   ├── Cap table/
│   │   ├── Current cap table
│   │   └── Convertible instruments
│   ├── Contracts/
│   │   ├── Key customer contracts
│   │   └── Vendor agreements
│   └── IP/
│       ├── IP assignments
│       └── Trademark registrations
├── 4. Product & Technology/
│   ├── Architecture overview
│   ├── Product roadmap
│   ├── Security documentation
│   └── Technical team structure
├── 5. Commercial/
│   ├── Customer list
│   ├── Pipeline summary
│   ├── Cohort analysis
│   └── Competitive analysis
└── 6. Team/
    ├── Org chart
    ├── Founder bios
    ├── Key employee contracts
    └── Hiring plan

Data Room Best Practices

1. Organise before you need it: Don't scramble when an investor asks
2. Keep documents current: Update monthly at minimum
3. Use consistent naming: "2025-01_PL.xlsx" not "P&L final v3 LATEST.xlsx"
4. Track access: Know who's viewing what
5. Redact sensitive data: Customer names in some documents if needed
6. Include a document index: Help investors find what they need

Common Deal-Killers

Based on conversations with investors and founders, these issues most often derail deals:

1. Inconsistent Numbers

When your pitch deck says £80k MRR but your financial model shows £65k, investors lose trust. Ensure all documents tell the same story.

2. Undisclosed Problems

Investors expect problems—every startup has them. What kills deals is discovering issues you didn't mention: a co-founder dispute, a key customer churning, regulatory concerns. Disclose proactively.

3. Cap Table Chaos

Missing option grants, incorrect share counts, undocumented convertible notes. These require legal cleanup that delays or kills deals.

4. Customer Concentration

If one customer represents 40%+ of revenue, investors worry about dependency risk. Have a plan to diversify.

5. Founder Misalignment

If due diligence calls reveal co-founder tension or misaligned visions, investors walk away. Address internal issues before fundraising.

Timeline and Process

Typical Seed Due Diligence Timeline

Week	Activity
Week 1	Data room access, initial document review
Week 2	Financial deep-dive, follow-up questions
Week 3	Customer calls, technical review
Week 4	Legal review, final questions, term sheet negotiation

How to Manage the Process

1. Assign an owner: One person (often the CEO) manages all DD requests
2. Respond quickly: 24-48 hour turnaround on requests shows you're organised
3. Track questions: Use a shared doc to log requests and responses
4. Prepare your team: Brief anyone who might receive calls
5. Stay in communication: Regular updates, even if just "still working on X"

Preparing Your References

Investors will call customers, former colleagues, and anyone else who can verify your claims. Prepare them:

For customers:

• Give them a heads up that a call is coming
• Don't coach them on what to say (it backfires)
• Choose customers who are genuinely happy
• Ensure they can speak to specific value delivered

For professional references:

• Ask permission before sharing contact details
• Choose people who know your work well
• Brief them on what you're raising for
• Thank them afterward

After Due Diligence

If due diligence goes well, you'll receive a term sheet or move to final negotiations. If issues arise:

Minor issues: Investors may request specific remediation (clean up cap table, get missing signatures) as a condition of closing.

Major issues: Investors may adjust terms (lower valuation, more protective provisions) or walk away entirely.

No feedback: If investors go quiet after due diligence, ask directly what concerns they have. Sometimes issues are addressable; sometimes the fit isn't right.

Checklist: Are You DD-Ready?

Before starting fundraising, verify:

• Cap table is accurate and documented
• All IP assignments are signed
• Financial model matches historical data
• Customer contracts are organised and accessible
• Employment agreements are signed for all employees
• Corporate documents are up to date
• No undisclosed legal or regulatory issues
• Bank statements support claimed cash position
• Customer references are prepared

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Preparing for due diligence or need help organising your data room? Get in touch—we've helped multiple startups navigate this process successfully.