The Due Diligence Process: What Investors Actually Check

Due diligence is where the gap between narrative and reality becomes visible. Sophisticated investors — VCs, micro-VCs, and serious angels — have a systematic process for verifying that the story you're telling matches what the data shows.

The process typically takes 2-6 weeks from term sheet to close, depending on the stage and the complexity of the deal. Understanding what's coming helps you prepare and avoid surprises.

This guide is for both investors running diligence and founders going through it.

The Diligence Timeline

Week 1: Background Verification

Goal: Verify the team and company fundamentals.

Days 1-3: Reference calls on founders

• Professional references (2-3 former colleagues, bosses, co-founders)
• Ask about execution ability, character, and judgment

Days 3-5: Background checks

• Employment history verification
• Education verification
• Court records (civil and criminal)
• Previous company outcomes

Days 5-7: Product and technology review

• Technical architecture review (for tech-heavy companies)
• IP ownership verification
• Open source compliance check

Week 2: Business Diligence

Goal: Verify the market, product, and business model.

Days 8-10: Customer diligence

• 3-5 customer reference calls
• Deep-dive on retention and usage patterns
• Verification of revenue claims

Days 10-12: Market analysis

• TAM validation
• Competitive landscape review
• Market sizing assumptions

Days 12-14: Financial review

• Financial model review
• Unit economics verification
• Cap table review

Weeks 3-4: Legal and Final Review

Goal: Verify legal standing and close.

Days 15-20: Legal diligence

• Corporate structure review
• IP ownership
• Outstanding litigation
• Material contracts

Days 20-25: Final review

• Investment committee presentation
• Final reference calls
• Terms negotiation

Days 25-30: Close

• Documentation
• Wire transfer

Background Verification

Employment and Education

What investors check:

• LinkedIn employment dates vs. founder claims
• Education credentials (degree, institution, dates)
• Previous startup outcomes (did they deliver on what they promised?)

Where investors look:

• LinkedIn (employment verification)
• Crunchbase (previous funding, company outcomes)
• Personal websites and portfolios
• Direct reference calls

Red flags:

• Employment gaps not explained
• Titles inflated relative to actual role
• Previous company failed with no explanation
• Education claims that can't be verified

Reference Checks

Professional references: Ask references about:

• How long and in what capacity did you work together?
• What were their greatest strengths?
• What would you improve about them as an operator?
• How do they handle conflict, pressure, or disagreement?
• Would you invest in them again?

Customer references: Ask customers about:

• What problem were you solving?
• How does [company] compare to alternatives?
• What would you change if you could?
• Would you recommend them to a peer?

What to watch for:

• References who are all investors (not customers)
• References who can't speak to specific experience
• Vague praise without specifics

Business Diligence

Revenue and Metrics Verification

What investors check:

• Revenue breakdown (ARR vs. contracted vs. one-time)
• Customer concentration (top 3 customers by revenue)
• Retention cohorts by acquisition month
• Unit economics (CAC, LTV, payback period)

How they verify:

• Payment processor data (Stripe, PayPal)
• Bank statements (1-3 months)
• CRM data (HubSpot, Salesforce)
• Direct customer calls

Red flags:

• Revenue appears before product existed
• Large customers who can't be independently verified
• Retention that looks fabricated
• CAC that doesn't match marketing spend

Market and Competition

What investors check:

• TAM calculation methodology
• Named competitors (do they actually compete?)
• Market timing (why now?)
• Competitive moat

How they verify:

• Third-party market reports
• Customer interviews (do customers agree the problem is painful?)
• Competitive analysis (named competitors)
• Industry expert calls

Red flags:

• TAM that's "global $X market" without segmentation
• No named competitors
• Competitive moat that's "speed" without evidence
• Market timing that's "because it's 2026"

Legal Diligence

Corporate Structure

What investors check:

• Entity formation and good standing
• State of incorporation
• Ownership cap table vs. actual
• Outstanding debt or SAFEs

Documents to prepare:

• Certificate of Incorporation
• Bylaws
• Stock ledger
• Cap table (ideally from Carta or Pulley)
• All financing documents (SAFEs, notes, previous rounds)

Intellectual Property

What investors check:

• Are all founders on IP assignment agreements?
• Is the IP actually owned by the company?
• Are there open source components that create obligations?
• Any patents or trademarks filed?

Red flags:

• IP assigned to a different entity
• Open source licenses that require source disclosure
• Founder IP not formally assigned
• Competitor IP that may create litigation risk

Financial Diligence

What Gets Reviewed

• Historical financial statements (1-2 years if available)
• Current financial model (3-year projection)
• Burn rate and runway
• Outstanding commitments
• Accounts receivable/payable

Cap Table Review

What investors check:

• Fully-diluted cap table
• Option pool size and grant status
• Any undocumented equity (advisory shares, contractor equity)
• SAFEs and convertible notes

Red flags:

• Cap table that doesn't add to 100%
• Large option pool grants to non-employees
• Undocumented equity obligations
• Option pool that wasn't created properly

The Founder's Diligence Prep Checklist

What Soloanalyst Does

Soloanalyst automates the first-pass diligence check: team background verification, funding history cross-reference, product signal analysis, and competitive landscape mapping. Use it before you go into a fundraise to identify the gaps before investors find them.

Verify your company before your next fundraise at soloanalyst.com.