Due Diligence Diaries: What Investors Are Really Looking For

26/06/2025

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Introduction

For many startups, getting an investor’s attention is hard enough. But keeping it through due diligence? That’s the real test. Due diligence is the process where investors dive deep into your company’s financials, operations, legal structure, team, and strategy before writing a cheque. It’s not just about ticking boxes—it’s about confirming whether your business is truly worth the risk.

Founders often prepare pitch decks and growth stories but forget that due diligence reveals what’s beneath the surface. It’s the stage where assumptions are tested, and claims are verified. This article explores what investors are really looking for during due diligence—and how founders can be better prepared to pass with flying colours.

 

1. What Is Due Diligence in the Investment Process?

Due diligence is a thorough evaluation process that investors undertake before finalising a funding deal. It involves assessing the business from multiple lenses: financial, legal, operational, commercial, and even cultural. The aim is to identify potential risks, verify representations, and gauge whether the startup aligns with the investor’s goals.

 

There are generally two types:

 Business Due Diligence: Focused on validating the company’s operations, scalability, and market potential.

 

Legal and Financial Due Diligence: Concentrated on compliance, contracts, liabilities, and financial integrity.

 

 Depending on the stage of funding, due diligence can be light or extensive. For early-stage startups, the focus may be on the team and market validation. For later-stage rounds, deeper scrutiny of data and governance becomes essential.

 

2. Why Due Diligence Matters to Investors

 From the investor’s standpoint, due diligence is not about mistrust—it’s about making informed decisions. Here’s why it matters:

 

Risk Assessment: Startups inherently involve risk. Due diligence helps investors understand how much risk they’re taking and where it lies—legal, financial, or operational.

 

Valuation Validation: Investors want to ensure the valuation is justified. If forecasts are aggressive, they want to know what assumptions back them.

 

Governance Standards: Founders who maintain clear records, comply with regulations, and manage their cap table well signal maturity and transparency.

 

Strategic Fit: The process also helps investors decide if the startup’s vision and trajectory align with their portfolio strategy or industry outlook.

 

3. What Investors Are Really Looking For

 Beyond documents and numbers, investors look for patterns and principles. Here are some key areas of interest:

 

a) Financial Health and Projections

 Investors will scrutinise:

• Revenue streams and customer concentration
• Burn rate and runway
• Historical financial statements
• Forecast models and underlying assumptions

 

 What they want: Clean, realistic, and justifiable financial data. Wild projections without a clear path to execution are a red flag.

 

b) Founding Team and Cap Table

 Investors evaluate the competence, integrity, and cohesion of the team. They’ll also look at:

• Founder equity and dilution history
• ESOP pool management
• Key team members and hiring plans

 

 What they want: A balanced, committed team with skin in the game and clear roles.

 

c) Product-Market Fit and Customer Validation

 Startups that have paying users, strong feedback, or repeat customers are more likely to get investor confidence.

•  Is the product solving a real problem? 

• Are users engaged and satisfied? 

• Is there a scalable demand?

 

What they want: Evidence that your product works, and people want it—today and tomorrow.

 

d) Legal and Compliance Hygiene

 This includes checks on:

 

• Company registration and corporate structure 

• Intellectual property rights 

• Contracts with vendors, clients, and employees 

• Past or ongoing litigation

 

 What they want: A company that plays by the rules and doesn’t carry hidden liabilities.

 

e) Competitive Advantage and Moat

 Investors want to know:

•  What makes your offering defensible?
• Can competitors easily replicate it?
• How fast can you lose customers if someone else enters?

 

 What they want: A differentiator—be it tech, data, brand, or customer experience—that keeps the company ahead.

 

 4. Common Red Flags During Due Diligence

 Even promising startups can lose investor interest due to avoidable missteps:

 

Inconsistent Financials: Discrepancies between pitch data and actuals can erode trust.

 

Hidden Legal Disputes: Undisclosed litigation or regulatory issues make investors nervous.

 

Overcomplicated Cap Tables: Multiple classes of shares, unresolved ESOPs, or unclear founder equity make decision-making murky.

 

Lack of Documentation: Missing contracts, absence of NDAs, or unclear IP ownership signals poor governance.

 

 Red flags don’t always mean the deal is off—but they do invite difficult conversations, renegotiations, or delays.

 

 5. How Startups Can Prepare for Due Diligence

 Preparation is key. Founders should think of due diligence as an ongoing responsibility, not a last-minute scramble.

 

a) Maintain a Data Room

 Prepare a central repository of:

•  Financial statements
• Cap table details
• Legal documents (MoA, AoA, agreements)
• IP registrations
• Employment contracts

 

 This speeds up the process and reflects professionalism.

 

b) Get Your Books in Order

 Even at the seed stage, clean accounting and reconciled books are essential. It shows that you take your financial responsibilities seriously.

 

c) Seek Legal Review

 Have your contracts and compliances reviewed by professionals. This helps identify and address risks before investors do.

 

d) Communicate Honestly

 If there are gaps or unresolved issues, it’s better to flag them upfront with context than have them discovered later.

 

6. India-Specific Considerations in Investor Due Diligence

 In India, some regulatory specifics can influence the process:

 

FEMA and FDI Compliance: Foreign investments need to adhere to RBI guidelines.

 

Section 56(2)(viib): Valuation of shares can trigger tax implications if not properly documented.

 

DPIIT Recognition: Startups registered under DPIIT enjoy some regulatory relaxations and are viewed favourably.

 

 Indian startups should also ensure ROC filings, GST returns, and tax payments are in order before due diligence begins.

 

 Conclusion

Due diligence is not an obstacle—it’s an opportunity. It allows you to demonstrate the depth of your business, the integrity of your team, and the potential for growth. Investors aren’t looking for perfection; they’re looking for preparedness, transparency, and a credible path forward.

Founders who treat due diligence seriously, even before it’s required, build the kind of reputation that attracts not just funding—but long-term, value-aligned partners.

At A’countable Partners, we help startups get due diligence-ready, so they can walk into investor meetings with clarity and confidence.