Due Diligence
Also known as DD, VC Due Diligence, Investment Diligence
Due diligence is the pre-investment investigation a VC runs on a target company. It covers commercial, financial, legal, technical, and reference workstreams, and the findings determine whether the firm signs the term sheet, renegotiates, or walks away.
In depth
Due diligence is the work that converts a thesis into a defensible underwriting. The firm splits the company into workstreams, assigns owners, and runs them in parallel under a deadline driven by the term sheet's no-shop. Each workstream is a specific question: do customers actually use this, do the financials reconcile to the bank, is the IP clean, does the team check out. The deliverable is an IC memo that names each workstream's verdict and lists any unresolved risks.
Early-stage diligence is lighter on numbers because there are few. The firm leans on team references, product use, and the partner's view of the category. Growth-stage diligence is heavier on data: quality of earnings, cohort retention rebuilt from raw event logs, customer NPS surveys, and a technical audit. The shape of the work scales with check size and the proportion of value attributed to existing revenue versus future option value.
Worked example
A typical Series A diligence checklist:
| Workstream | Typical work | Common kill signal |
|---|---|---|
| Commercial | 5-10 customer calls, win/loss interviews, cohort retention review | Reference contradicts deck growth claim |
| Financial | Bank statement tie-out, revenue cut by cohort, gross margin reconstruction | ARR includes non-recurring services revenue |
| Legal | Cap table, IP assignment, prior financings, side letters | Undisclosed founder side letter on vesting |
| Technical | Architecture review, code sample inspection, security posture | Hard dependency on a single open-source LP |
| Reference | 8-12 backdoor references on founders, board observers, prior employers | Pattern of departures citing the same cause |
| Background | Third-party background and litigation check on key principals | Undisclosed prior fraud or violent felony |
After three weeks the partner writes the memo. The commercial workstream surfaced two customers whose stated usage was below the dashboard's reported active accounts. The team reissues the term sheet with revised ARR of $3.8M instead of $4.4M, and the round closes at a lower pre-money. The deal still happens, but it priced honestly.
Frequently asked
How long does VC due diligence take?
Seed deals close on diligence of one to three weeks, often compressed to days in competitive rounds. Series A typically runs three to six weeks. Growth-stage diligence can take two to three months because it adds QoE accounting work, customer surveys, and a vendor-of-record technical audit.
What is commercial due diligence?
Commercial diligence tests the market size, competitive position, and unit economics. Common workstreams are customer reference calls, cohort analyses pulled from the company's analytics stack, win/loss interviews, and an independent view of TAM. It is the workstream where most deals actually die.
What is the difference between confirmatory and pre-term-sheet diligence?
Pre-term-sheet diligence is enough work to underwrite a price and structure. Confirmatory diligence runs after the term sheet is signed and is mostly legal, financial close items, and verification of facts the founders represented earlier. New material facts surfaced in confirmatory diligence can reopen terms or kill the deal.
Do founders run reverse diligence on VCs?
Yes, and they should. Calling other founders in a fund's portfolio, especially those whose companies struggled, is the single highest-value diligence a founder can run. It reveals how the partner behaves at board meetings, on bridge rounds, and in down rounds.
What kills deals in due diligence most often?
Customer references that contradict the founder's growth narrative, cohort data that shows retention decay the deck did not, and cap-table surprises like undocumented option grants or side letters. Less often, but more terminally, a background check that surfaces material founder issues.
Sources & further reading
- Cooley GO: Sample VC Due Diligence Request List, the canonical document set a VC requests before closing a financing— Cooley LLP
- Cooley GO: Definition of Due Diligence, glossary entry covering the review of legal and financial documents prior to closing— Cooley LLP
- Y Combinator Library: Series A Diligence Checklist, founder-facing list of the documents and data a lead investor will request— Y Combinator