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Due Diligence Basics for Startup Investors

Due Diligence Basics for Startup Investors

As a startup investor, conducting basic due diligence prior to investing in a company is paramount. While we do provide our own due diligence in each investment offering summary, savvy investors should also be performing their own due diligence before making an investment.

What is due diligence?

Due diligence is the process of evaluating a potential investment opportunity before making an investment. Investing in startups is risky by nature, but due diligence can help give investors a holistic view of the company.

As a registered broker-dealer, MicroVenture Marketplace already has a thorough due diligence process in place to evaluate the companies we list on our platform. We evaluate each company’s product or service offering, business model, intellectual property, product roadmap, leadership team, addressable market, competitive landscape, regulatory environment, user traction, historical and projected financials, and more. We encourage our investors to take advantage of that information and review the offering documentation in its entirety before making an investment. We also urge our investors to conduct their own basic due diligence on a company before ever making an investment.

Due diligence for investors

Know the risk

We’ve said it many times, but it bears repeating. Startup investing is risky. In fact, according to 2021 report by Failory, 90% fail. The top three reasons why, according to an often-cited CBInsights piece, are “no market need,” “ran out of cash,” and “not the right team.” There are a lot of moving pieces at play that make startups very risky investments. Before investing, it’s critical to understand that.

In addition to understanding the inherent risk of startup investments, startup investors should know their own risk profile to better assess potential startup investment opportunities. A “risk profile” consists of an investor’s risk tolerance and time horizon:

  • Risk tolerance describes an investor’s attitude toward risk. Startup investments are an alternative asset and carry a high likelihood of failure, making them very risky. Traditional asset classes, including blue-chip stocks or government and high-quality corporate bonds, carry far less relative risk. Startup investments generally are not well suited for investors who have a low risk tolerance.
  • Time horizon is the time an investor should expect to hold an investment before selling their securities or realizing a profit depending on the type of security. Early-stage startup investments have a lengthy time horizon and are illiquid. It’s possible that they never generate returns, and in some cases, the investment may never be sold. Early-stage startup investments are not well suited for investors seeking a return on their investment within a handful years. Later-stage startup investments, however, may have a shorter time horizon if a liquidity event occurs, such as an IPO or acquisition.

Focus on what you know

While it’s not necessarily a must, it can be helpful from a due diligence perspective to focus on investing in companies within your area of expertise. As you’re better positioned to analyze and predict the company’s growth potential and performance, this can mitigate some risk.

Assess the product

When it comes to evaluating a startup’s product, some things we like to look at are:

  • Does it solve a big problem?
  • Is the solution original, innovative, or thoughtful?
  • What is the unique value proposition?

Ideally, a product should solve a real problem (with a large market), offer an innovative approach that actually solves the problem, and has some kind of unique competitive advantage.

Consider the market

A good potential investment opportunity should have market potential and room for growth. A company’s market potential is the population that could be served by the startup’s product. If the company’s market potential is small, it has a lower chance of success since as it will exhaust its potential customer base more quickly. Competitors can also reduce the size of a company’s potential market. A company that has a unique advantage over the competition typically stands a better chance at gaining market share.

Evaluate the team

Having the right team at the helm is critical. It’s not just about who the CEO is, but the team as a whole and how they work together. A well-rounded team with a track record of past successes is a good sign. Look into each member and their past companies to get an idea of where their expertise lies and what kind of reputation they have. Check out this blog for more tips on assessing a startup’s leadership team before investing.

Ready to get started? Head to the offering page to browse our current investment opportunities.


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.