Startup Due Diligence: An Investor’s Checklist

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Written By Chris Graebe

In the exhilarating world of startup investing, due diligence serves as your compass. It’s a critical process that helps investors navigate potential risks, uncover opportunities, and make informed decisions.

But what does due diligence entail and how can you effectively conduct it to maximize your investment potential? 

This guide will walk you through the essentials of due diligence in startup investing, providing practical insights to level up your investment strategy.

Understanding Due Diligence

Due diligence refers to a potential investor’s thorough evaluation of a startup to understand its assets, liabilities, and overall business viability.

In simpler terms, due diligence is your homework as an investor. 

It’s about digging deep into the startup, understanding its business model, assessing its financial health, evaluating its team, and much more. It’s a crucial step that helps you identify potential red flags, understand the risks involved, and ultimately, make an informed investment decision.

While due diligence can’t eliminate all risks associated with startup investing, it can significantly help mitigate them. It provides a clearer picture of what you’re getting into, helping you decide whether the potential rewards outweigh the risks.

The Due Diligence Process

The due diligence process in startup investing is a systematic approach that involves several key steps. While the specifics can vary depending on the investor’s preferences and the nature of the startup, the general process typically includes the following:

  1. Initial Screening: This is the first step where you assess the startup’s basic information, such as its industry, the problem it’s solving, its solution, and its target market.
  2. Management Team Evaluation: Here, you assess the qualifications, experience, and skills of the startup’s management team. A competent and committed team is often a good indicator of the startup’s potential for success.
  3. Business Model Assessment: In this step, you evaluate the startup’s business model, its products or services, its market size, and its competitive landscape.
  4. Financial Analysis: This involves thoroughly reviewing the startup’s financials, including its revenue, expenses, cash flow, and financial projections.
  5. Legal Review: This step involves checking the startup’s legal matters, including its incorporation status, ownership structure, intellectual property rights, and potential legal issues.
  6. Product/Service Review: Here, you assess the quality of the startup’s product or service, its market fit, and its competitive advantage.
  7. Exit Strategy Evaluation: Finally, you evaluate the startup’s proposed exit strategy to understand how you might get a return on your investment.

Startup Due Diligence Checklist

Here are some key questions to keep in mind as you work your way through each stage of the due diligence process.

StageKey Questions
Team EvaluationDoes the team have the necessary skills and experience? How committed are they to the startup? How well do they work together?
Business Model AssessmentDoes the startup’s product or service solve a real problem? Is there a market need for it? How does it generate revenue? Are there clear customer acquisition strategies?
Market AnalysisHow large is the potential market? Is it growing? What is the competitive landscape like?
Financial AnalysisIs the startup generating revenue? What is its burn rate? Are the financial projections realistic? What is the startup’s capital structure?
Legal ReviewIs the startup properly incorporated? Does it own its intellectual property? Are there any ongoing legal disputes?
Product/Service ReviewIs the product or service scalable? Does it have a competitive edge? Is there positive customer feedback?
Exit Strategy EvaluationWhat are the potential exit strategies? What is the expected timeframe for an exit? What is the targeted exit valuation?

Due diligence is not a one-size-fits-all process and should be tailored to the specific startup and your investment goals. The key is to be thorough, ask questions, and seek professional advice when needed.

Evaluating the Startup’s Team

Evaluating the startup’s team is one of the most critical components of due diligence in startup investing. The team is the driving force behind the startup, and their skills, experience, and commitment can significantly impact the startup’s success or failure.

When evaluating the team, consider the following aspects:

  1. Experience and Skills: Does the team possess the necessary industry experience and technical skills to execute their business plan? Have they worked on similar projects or in similar roles in the past?
  2. Commitment: Is the team fully committed to the startup? Part-time commitment might raise red flags about their dedication to the project.
  3. Team Dynamics: How well does the team work together? A team that collaborates effectively can often overcome challenges more efficiently.
  4. Advisory Board: Does the startup have a solid advisory board? Experienced advisors can provide valuable guidance and lend credibility to the startup.

Remember, a great idea or product is only as good as the team executing it. Therefore, taking the time to evaluate the team is crucial to your due diligence process.

Assessing the Business Model

A startup’s business model is the blueprint for creating, delivering, and capturing value. It’s a critical component that can significantly impact the startup’s ability to generate revenue and achieve sustainable growth. During your due diligence, assessing the startup’s business model is vital to understand its viability and potential for success.

Consider the following aspects when evaluating the business model:

  1. Value Proposition: What unique value does the startup offer to its customers? Is it solving a real problem or fulfilling a need in the market?
  2. Market Size and Growth: How big is the potential market for the startup’s product or service? Is the market growing, and if so, at what rate?
  3. Revenue Streams: How does the startup plan to generate revenue? Is the revenue model sustainable and scalable?
  4. Cost Structure: What are the startup’s major costs, and how do they align with its revenue model?
  5. Competitive Advantage: What sets the startup apart from its competitors? Does it have a unique technology, intellectual property, or strategic partnerships?
  6. Customer Acquisition: How does the startup plan to attract and retain customers? Are these methods cost-effective and scalable?

Financial Analysis

A thorough financial analysis is a cornerstone of the due diligence process. It provides insights into the startup’s financial health, performance, and future projections, helping you make an informed investment decision.

When conducting a financial analysis, here are some things to look for:

  1. Revenue and Profitability: Is the startup generating revenue? If not, when does it expect to start? Is it profitable, or when does it expect to become profitable?
  2. Cash Burn Rate: How quickly is the startup spending its cash reserves? Does it have enough runway to achieve its next milestones?
  3. Financial Projections: Are the startup’s financial projections realistic and based on sound assumptions?
  4. Capital Structure: Who are the startup’s current investors? What is the ownership structure?
  5. Previous Funding Rounds: How much capital has the startup raised in previous funding rounds? At what valuation?
  6. Financial Controls: Does the startup have robust financial controls in place? This includes budgeting, financial reporting, and cash management.

Legal Review of a Startup

Legal due diligence is a critical aspect of the overall due diligence process. It involves reviewing and verifying the startup’s legal matters to ensure no potential legal issues could impact your investment.

When conducting a legal review, consider the following aspects:

  1. Incorporation and Ownership: Is the startup properly incorporated? Who are the current owners, and what is the ownership structure?
  2. Intellectual Property: Does the startup own its intellectual property (IP)? This includes patents, trademarks, copyrights, and trade secrets.
  3. Contracts and Agreements: Review any contracts or agreements the startup has, including with customers, suppliers, employees, and partners.
  4. Compliance: Is the startup in compliance with relevant laws and regulations? This includes labor laws, environmental regulations, and industry-specific regulations.
  5. Litigation: Is the startup currently involved in any legal disputes or litigation?

Product/Service Review

A key part of due diligence involves assessing the startup’s product or service. This can provide insights into the startup’s value proposition, its market fit, and its potential for growth and success.

You should be looking at the startup’s:

  1. Value Proposition: What unique value does the product or service provide? Does it solve a real problem or meet a market need?
  2. Market Fit: Does the product or service meet the needs of its target market? Has the startup received positive feedback from customers?
  3. Competitive Advantage: How does the product or service compare to competitors? Does it have unique features or benefits that set it apart?
  4. Scalability: Can the product or service be scaled to meet growing demand? Does the startup have plans for future development or expansion?
  5. Intellectual Property: If the product involves unique technology or intellectual property, does the startup have appropriate protections in place?

A great product or service is often at the heart of a successful startup. So be sure you give this step the time it deserves.

Exit Strategy Evaluation

An exit strategy is a startup’s plan for allowing investors to realize a return on their investment. It’s an important consideration for investors, as it provides a potential pathway to profitability.

When evaluating a startup’s exit strategy, consider the following aspects:

  1. Exit Options: What exit options has the startup identified? Common options include an acquisition, an initial public offering (IPO), or a buyout.
  2. Timeframe: What is the expected timeframe for the exit? While this can be uncertain, a general estimate can help you understand when you might expect a return on your investment.
  3. Valuation: What exit valuation is the startup targeting? This can indicate the potential return on your investment.
  4. Industry Trends: Are there trends in the startup’s industry that might influence the likelihood or success of an exit? For example, is the industry seeing a lot of M&A activity?
  5. Previous Exits: Has the startup’s team successfully exited other startups in the past? Past success can be a positive indicator, although it’s not a guarantee of future results.

An exit strategy is one of the most uncertain aspects of startup investing. Consider multiple potential outcomes and not base your investment decision solely on the proposed exit strategy.


While due diligence can be a complex and time-consuming process, it’s a crucial investment of time and effort that can significantly mitigate risks and enhance the potential for a successful investment.

Every investment comes with risks, and startup investing is no exception. However, with thorough due diligence, you can navigate these risks, uncover opportunities, and make informed decisions that align with your investment goals.

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