Investment Due Diligence Checklist: Complete Guide for Investors in 2025
Inadequate due diligence causes 60% of failed investments, with average losses of $2.4M per missed red flag, according to CB Insights research. Meanwhile, First Round data shows thorough diligence takes 4-8 weeks on average—creating tension between speed and rigor.
Peony streamlines investment diligence: organized data rooms provide complete materials, track which documents reviewers examine, identify concern areas quickly, and maintain audit trails for IC (Investment Committee) decisions. Purpose-built for investor due diligence.
Here's your complete investment due diligence checklist for 2025.
What is Investment Due Diligence?
Definition: Comprehensive process of evaluating investment opportunities to verify facts, assess risks, validate assumptions, and make informed investment decisions.
Core objectives:
- Verify company claims and metrics
- Identify material risks and liabilities
- Validate market opportunity
- Assess management team
- Confirm deal terms accuracy
- Support valuation analysis
Timeline: 2-4 weeks (seed), 4-8 weeks (Series A+), 8-12 weeks (M&A)
Types of Investment Due Diligence
Financial Due Diligence
Focus: Verify financial health and projections accuracy
Key areas:
Historical performance:
- Revenue recognition policies
- Margin trends and sustainability
- Working capital requirements
- Cash flow patterns
- Burn rate and runway
Quality of earnings:
- Recurring vs. one-time revenue
- Customer concentration risk
- Revenue retention rates
- Hidden liabilities
- Accounting practices
Projections analysis:
- Assumption reasonableness
- Sensitivity analysis
- Downside scenarios
- Achievability assessment
Red flags:
- Revenue recognition irregularities
- Greater than 50% revenue from top 3 customers
- Declining margins
- Negative cash flow trends
- Undisclosed liabilities
Legal Due Diligence
Focus: Identify legal risks and compliance issues
Key areas:
Corporate structure:
- Clean cap table
- Proper authorization
- Board composition
- Shareholder rights
Contracts:
- Material agreements review
- Change of control clauses
- Key customer contracts
- Vendor dependencies
IP ownership:
- Patents and applications
- Trademark registrations
- IP assignment agreements
- Open source compliance
Litigation:
- Pending lawsuits
- Threatened claims
- Settlement history
- Insurance coverage
Red flags:
- IP not properly assigned
- Material litigation pending
- Customer contract issues
- Regulatory violations
Operational Due Diligence
Focus: Assess business operations and scalability
Key areas:
Processes:
- Sales methodology
- Customer onboarding
- Service delivery
- Quality control
Key dependencies:
- Key person risk
- Single vendor reliance
- Technology dependencies
- Geographic concentration
Scalability:
- Process documentation
- Automation level
- Growth infrastructure
- Constraint identification
Red flags:
- Key person dependencies (greater than 50% revenue)
- Manual, non-scalable processes
- Critical single vendor
- Inadequate infrastructure
Market and Commercial Diligence
Focus: Validate market opportunity and competitive position
Key areas:
Market sizing:
- TAM/SAM/SOM validation
- Growth rate verification
- Addressable opportunity
- Market timing
Competitive landscape:
- Competitor assessment
- Differentiation validation
- Competitive advantages sustainability
- Win/loss analysis
Customer validation:
- Reference calls (3-5 customers)
- Satisfaction surveys
- Churn analysis
- Net Promoter Score
Red flags:
- Market size overstated
- Weak competitive differentiation
- High customer dissatisfaction
- Increasing churn rates
Technical Due Diligence
Focus: Evaluate technology capabilities and risks
Key areas:
Architecture:
- Scalability assessment
- Technology stack review
- Technical debt evaluation
- Security practices
Development:
- Code quality
- Development velocity
- Product roadmap
- Engineering team capabilities
Data and security:
- Data architecture
- Security measures
- Privacy compliance
- Incident history
Red flags:
- Significant technical debt
- Security vulnerabilities
- Scalability limitations
- Outdated technology stack
Due Diligence Checklist
Financial Documents
Essential:
- Audited financials (3 years minimum)
- Monthly management accounts (24+ months)
- Financial projections (3-5 years)
- Cap table (current and fully diluted)
- Revenue by customer/segment
- Unit economics analysis
- Cash flow actuals and forecast
- Bank statements (6 months)
Analysis required:
- Revenue quality assessment
- Margin trend analysis
- Working capital calculation
- Burn multiple calculation
- Scenario modeling
- Comparable company analysis
Legal and Compliance
Corporate:
- Certificate of incorporation
- Bylaws/operating agreement
- Board minutes (all)
- Shareholder agreements
- Prior financing documents
Contracts:
- Top 10 customer contracts
- Material vendor agreements
- Partner agreements
- Real estate leases
IP:
- Patent portfolio
- Trademark registrations
- Employee IP assignments
- Contractor IP assignments
Litigation:
- Pending litigation
- Threatened claims
- Settlement agreements
- Insurance policies
Team and Organization
Leadership:
- Executive bios and resumes
- Employment agreements
- Compensation structure
- Equity holdings
Organization:
- Current org chart
- Headcount plan
- Key employee retention
- Option pool details
Culture:
- Employee satisfaction data
- Turnover statistics
- Glassdoor reviews
- Employer brand strength
Commercial and Market
Customer data:
- Customer list with ARR/revenue
- Top customer contracts
- Customer cohort analysis
- Sales pipeline detail
Market analysis:
- TAM/SAM/SOM calculation
- Market research citations
- Competitive positioning
- Win/loss data
Reference calls:
- 3-5 customer references completed
- Feedback documented
- Satisfaction validated
- Concerns identified
Product and Technology
Product:
- Product demo completed
- Feature list reviewed
- Roadmap assessed
- Technical architecture evaluated
Technology:
- Code review completed (sample)
- Security audit reviewed
- Technical debt assessed
- Infrastructure evaluated
Due Diligence Process
Week 1-2: Initial Review
Kick-off:
- Access data room
- Review provided materials
- Identify initial questions
- Assign workstream owners
Quick assessment:
- Financial health check
- Legal risk scan
- Market validation start
- Customer reference outreach
Deliverable: Initial red flags list, deep-dive priorities
Week 3-4: Deep Dive
Detailed analysis:
- Financial model review
- Contract deep-dive
- Customer calls
- Competitive assessment
- Technical evaluation
Management presentations:
- Finance deep-dive
- Product roadmap
- Sales strategy
- Technology architecture
Deliverable: Comprehensive findings report
Week 5-6: Validation and Reporting
Verification:
- Cross-check claims
- Validate assumptions
- Test scenarios
- Benchmark performance
IC preparation:
- Investment memo drafting
- Risk analysis
- Valuation justification
- Terms recommendation
Deliverable: Investment Committee recommendation
Red Flags by Category
Financial Red Flags
Critical (deal-killers):
- Revenue recognition fraud
- Fictitious customers
- Hidden liabilities (greater than 20% of valuation)
- Insolvency risk
Serious (require adjustment):
- Customer concentration greater than 50%
- Declining margins
- Negative cash flow acceleration
- Working capital crisis
Legal Red Flags
Critical:
- IP not owned/assigned
- Material litigation with significant exposure
- Regulatory violations
- Shareholder disputes
Serious:
- Customer contract issues
- Employment violations
- Compliance gaps
- Undisclosed agreements
Market Red Flags
Critical:
- Market size significantly overstated
- No differentiation from competitors
- Customer dissatisfaction
- Technology obsolescence
Serious:
- Slowing market growth
- Intensifying competition
- Losing key customers
- Weak pipeline
Team Red Flags
Critical:
- Founder departures planned
- Key employee exodus
- Management capability gaps
- Cultural toxicity
Serious:
- High employee turnover
- Compensation misalignment
- Weak bench strength
- Geographic dispersion challenges
How Peony Streamlines Diligence
Peony accelerates investment due diligence:
Organized materials:
- Complete document checklist
- AI-powered organization
- Easy navigation
- Version control
Complete visibility:
- Track reviewer activity
- See which documents examined
- Identify concern areas
- Monitor diligence progress
Efficient collaboration:
- Internal team notes
- Q&A management
- Workstream coordination
- Secure sharing
Audit trail:
- Complete access logs
- Document IC decisions
- Compliance documentation
- Legal defensibility
Result: Complete diligence faster with better documentation.
Conclusion
Investment due diligence requires systematic evaluation across financial, legal, operational, market, and technical dimensions. While shortcuts create risk, overly lengthy processes lose deals to faster competitors. Effective diligence balances thoroughness with efficiency—focusing on material risks while leveraging technology to accelerate.
Platforms like Peony enable more efficient diligence by organizing materials, tracking review progress, facilitating collaboration, and maintaining complete audit trails—helping investors make better decisions faster.
Streamline your investment diligence: Try Peony