Startup Due Diligence: Complete Step-by-Step Checklist for 2025
Inadequate due diligence causes 60% of failed startup investments, with investors missing critical red flags that emerge within 12 months, according to CB Insights failure analysis. Meanwhile, First Round research shows well-prepared founders close rounds 35% faster and achieve 15-20% higher valuations.
Peony streamlines startup diligence: complete checklists ensure nothing's missing, AI organization structures materials automatically, track investor review patterns, and maintain audit trails. Purpose-built for startup fundraising.
Here's your complete startup due diligence guide for 2025.
Startup Due Diligence Definition
What it is: Systematic process of verifying startup claims, assessing risks, and validating assumptions before investment or acquisition.
Why it differs from corporate DD:
- Limited historical data
- Rapidly evolving business models
- Founder-centric evaluation
- Future potential vs. current performance
- Less formal structures
- Higher uncertainty
Timeline: 2-4 weeks (seed), 4-8 weeks (Series A+)
Startup Due Diligence Phases
Phase 1: Preliminary Review (Week 1)
Initial assessment:
- Review pitch deck and exec summary
- Examine basic financials
- Research market and competitors
- Assess team backgrounds
- Identify obvious red flags
Deliverable: Go/no-go decision on deep dive
Phase 2: In-Depth Analysis (Week 2-4)
Detailed examination:
- Financial deep-dive
- Legal document review
- Customer reference calls
- Technical assessment
- Market validation
- Competitive analysis
Deliverable: Comprehensive findings report
Phase 3: Final Validation (Week 4-6)
Verification:
- Cross-check claims
- Validate assumptions
- Scenario modeling
- Final risk assessment
- Term sheet preparation
Deliverable: Investment recommendation
Founder Due Diligence Prep
Build Investor-Ready Data Room
Essential documents:
- Complete checklist
- Financial statements (all available)
- Pitch deck (latest)
- Cap table (current)
- Corporate documents
- Key contracts
Organization:
- Logical folder structure
- Clear naming conventions
- Current versions only
- Indexed comprehensively
Timing: Prepare 2-3 months before fundraising
Anticipate Investor Questions
Common due diligence questions:
Financial:
- Revenue recognition methodology?
- Customer concentration risk?
- Unit economics sustainability?
- Cash runway and burn rate?
Product:
- Technical differentiation?
- Product roadmap prioritization?
- Development velocity?
- Technical debt level?
Market:
- TAM calculation methodology?
- Competitive advantages sustainability?
- Go-to-market effectiveness?
- Customer acquisition scalability?
Team:
- Founder equity vesting?
- Key employee retention plans?
- Organizational gaps?
- Compensation market competitiveness?
Legal:
- IP ownership clarity?
- Prior investor rights?
- Regulatory risks?
- Litigation exposure?
Prepare answers: Document responses, have supporting data ready
Clean Up Issues Proactively
Common startup issues:
- Messy cap table → Clean up before fundraising
- IP not assigned → Get assignments signed
- No vesting → Implement for all
- Missing contracts → Document agreements
- Unclear metrics → Establish standards
Timing: Fix 3-6 months before fundraising (some issues take time)
Investor Due Diligence Checklist
Financial Diligence
Metrics verification:
- Validate reported ARR/MRR
- Confirm customer numbers
- Verify retention rates
- Check unit economics
- Analyze cohort performance
Quality of revenue:
- Recurring vs. one-time
- Customer concentration (top 10)
- Payment terms
- Revenue recognition policies
Projections review:
- Assumption reasonableness
- Growth rate sustainability
- Expense scaling logic
- Hiring plan feasibility
Red flags:
- Revenue declining or growth slowing
- Customer concentration greater than 50%
- Unit economics not improving
- Burn rate accelerating faster than revenue
Legal Diligence
Corporate structure:
- Delaware C-Corp (or equivalent)
- Clean cap table
- Founder vesting in place
- Board properly structured
IP ownership:
- Founder IP assignments
- Employee IP assignments
- Contractor agreements
- No prior employer issues
Material contracts:
- Top customer agreements reviewed
- No unusual terms
- Standard SaaS agreements
- Partner contracts understood
Red flags:
- IP not fully assigned
- Founder unvested equity
- Pending litigation
- Unusual contract terms
Customer Diligence
Reference calls (3-5):
- Product satisfaction
- Value realization
- Expansion plans
- Competitive evaluation
Questions to ask:
- Why did you choose them?
- What value are you getting?
- What could be better?
- Would you recommend them?
- Expansion plans?
Red flags:
- Customers wouldn't recommend
- Limited value realization
- Considering competitors
- No expansion plans
Technical Diligence
Architecture review:
- Scalability assessment
- Security practices
- Technical debt level
- Development practices
Code review (sample):
- Code quality
- Test coverage
- Documentation
- Development velocity
Red flags:
- Significant technical debt
- Security vulnerabilities
- Scalability limitations
- Poor code quality
Red Flags by Category
Financial red flags:
- Revenue quality issues
- Deteriorating unit economics
- Cash crisis imminent
- Accounting irregularities
Team red flags:
- Founder conflicts
- Key employee departures
- Inexperienced management
- Cultural issues
Market red flags:
- Market size overstated
- Competition intensifying
- Customer churn increasing
- No clear differentiation
Legal red flags:
- IP disputes
- Regulatory violations
- Pending litigation
- Shareholder conflicts
How Peony Facilitates Diligence
Peony streamlines startup due diligence:
For founders:
- Organize materials professionally
- Update metrics easily
- Track investor activity
- Demonstrate preparedness
For investors:
- Access organized materials
- Identify gaps quickly
- Collaborate with team
- Document review process
Benefits:
- Faster diligence (save 2-4 weeks)
- Better organization
- Complete audit trails
- Professional presentation
Result: More efficient, thorough due diligence process.
Conclusion
Startup due diligence requires systematic evaluation of limited historical data while assessing significant future potential. Success requires founders preparing comprehensive materials and investors balancing speed with thoroughness.
Peony enables better diligence by organizing materials professionally, tracking reviewer activity, and maintaining complete documentation.
Streamline startup diligence: Try Peony