For private market investors, conducting thorough due diligence is an important step of the investment process. By researching a startup to gain a holistic understanding of the company’s past performance, current position, and future plans, an investor can make an informed decision on if this startup might be suitable for their portfolio. In this blog, learn more about startup due diligence and a checklist for VC due diligence that investors may want to use as a starting point for their due diligence research efforts.

Checklist for VC Due Diligence

Comprehensive due diligence should encompass several areas of a startup. It’s important to note that the earlier stage a startup is, the availability of information may be lessened due to limited operating history and lack of information requirements. Investors should use the resources available to them to gain a holistic view of a startup while also understanding that they may not be able to know everything about a startup.

The following is a checklist investors can use to help assess some aspects of a startup during due diligence efforts:

Founding Team and Management

Assessing a startup’s founding team may be a good place for investors to start, especially in early-stage startups where tangible metrics may not be available.

Investors should assess the professional backgrounds of the founders and key team members. By understanding their previous experiences, understanding if they have scaled or exited a startup, or if that startup failed, investors can understand if this team has knowledge and experience suited to scale and grow their current startup. Problem-solving capabilities, resilience, and ability to pivot are qualities investors may want to assess. Additionally, dynamics between co-founders can provide insight as to the strength of the team as a whole.

Market Opportunity and Competitive Landscape

Understanding the market in which the startup operates is important to gain insight into the competitors the startup has and the growth opportunities available.

Investors can assess the Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) to understand growth opportunities. Additionally, a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can provide insight into the startup’s overall position in the market. Additionally, assessing the defensibility of the startup can also be beneficial.

Financials and Unit Economics

Conducting a thorough review of a startup’s financials can provide a base understanding of the company’s financial picture. However, many early-stage startups may not have begun generating revenue yet, or if they have, there may not be an extensive period of historical financials to assess.

For all stages of startups, examine historical financial statements, cash flow, and burn rate. Take a look at financial projections with a grain of salt for a realistic view of potential growth. Additionally, analyze metrics like Customer Acquisition Cost (CAC), Lifetime Value (LTV), and gross margins. For later-stage companies, also look at revenue diversification, customer concentration, and capital allocation efficiency.

Legal and Corporate Structure

Taking a look at how the startup is incorporated, its bylaws, and current cap table can provide insights for investors. Look at debt obligations, previous funding, and existing shareholder agreements to understand the current position of the startup. Additionally, taking a look at existing contracts, whether customer, partner, or supplier agreements, can provide insight into obligations and the length of agreements.

Product, Technology, and Intellectual Property

Investors can evaluate the product’s current state, technology stack, and development roadmap to gain insight into the startup’s product. Conducting a thorough intellectual property (IP) review may also be beneficial. Understanding the status of patents, trademarks, and company property can help due diligence efforts.

Sales, Marketing, and Traction

Investors should review the current sales process, marketing strategy, and key performance indicators. Analyze sales cycles, lead conversion rates, user engagement metrics, and customers testimonials or case studies to understand how a startup is received in the marketplace and what brand image the startup may have thus far. Efficient marketing and ensuring product-market fit has been achieved are some metrics for investors to understand.

Due Diligence by Company Stage

While the due diligence checklist items discussed so far have been a high-level view, due diligence efforts will look different depending on the startup’s stage of growth due to length of operating history and financial metrics. The following outlines how due diligence efforts may differ depending on company stage:

• Pre-Seed/Seed: At this stage, due diligence is typically weighted towards qualitative factors like founding team, market size, and the core product idea or minimum viable product (MVP). Financial diligence may be centered on the use of funds, but extensive financial history should not be expected.
• Series A: At this company stage, due diligence may be weighted more towards product-market fit and scalability. Additional financial metrics may be available to help assess the management team and the ability to recruit and retain talent.
• Series B and Beyond: Once a startup has grown to Series B, there are typically additional financial metrics that investors can assess during due diligence. Focus may shift to scaling efficiently and the path to profitability.

Final Thoughts

Comprehensive due diligence is important for any private market investor when determining if a startup is right for their portfolio. By assessing the founding team, market, financials, legal structure, product, and operations, investors can gain a holistic view of a startup’s opportunities and limitations.

Are you ready to invest in startups? Sign up for a MicroVentures account to start investing!

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Early-Stage Investing: SAFEs Explained
• Assessing a Startup’s Defensibility
• The AI Talent War: AI Acquisitions
• Assessing Overemphasized Startup Metrics

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.