Startup Due Diligence Checklist: How to Avoid Losing Investments and Pass the Audit in 5 Steps

Why Due Diligence is the Foundation of Investor Trust

You are confident in your product, team, and forecasts. But instead of the long-awaited $1 million check, you receive a rejection. The reason? Hidden legal risks you weren’t even aware of. According to PwC, 47% of startup failures are connected to precisely such situations – the absence of Due Diligence (DD) turns the dream of attracting investments into a collapse.

Due diligence consulting is a service that helps startups and companies prepare for investors, partners, or M&A deals. Consultants review financial statements, legal documents, ownership structure, intellectual property, and the overall business model. The main goal is to identify weak points, reduce risks, and increase trust in the project. This type of audit gives investors confidence—they see a mature and well-prepared business rather than a raw startup. As a result, it boosts the chances of raising capital successfully and speeds up negotiations.

Due Diligence for startups is not a formality, but a tool that identifies threats even before meeting with investors. It doesn’t just verify numbers, but also strengthens the business model, increasing trust in your project. That’s where due diligence consulting comes in—ensuring your financials, legal structure, and market assumptions are bulletproof before stepping into the pitch room.

For example, a FinTech startup from California lost 500K due to discrepancies between financial forecasts and actual data. After implementing DueDiligence, the team corrected the errors and secured $2M in a funding round.

Do you know what “landmines” are hidden in your startup? Without proper vetting, investors see risks rather than potential. This article will teach you how to prepare for an audit, avoid fatal mistakes, and turn Due Diligence into your competitive edge. You’ll learn not only about financial and legal aspects but also how to present your project in a way that makes investors say “yes.”

What is Startup Due Diligence: Types and Goals

Due Diligence means a comprehensive business review that reveals its strengths and weaknesses. For a startup, it’s not just an audit but an opportunity to prove reliability to investors. Let’s look at three key types of checks that can save your project from failure.

Financial Due Diligence: Where Are the Budget “Holes”?

This stage focuses on numbers: revenue, expenses, debts, and unit economics (LTV, CAC, profitability). Investors check how well forecasts align with reality.

Example: An EdTech startup from New York lost $1 million in investments due to discrepancies in financial reports. In their pitch deck, the team promised a 20% monthly revenue growth, but actual data showed only 5%. After the audit, the investor backed out, citing unrealistic forecasts.

Tip: Compare your forecasts with historical data. If CAC exceeds LTV by 30%, it’s a red flag for venture capital. Thorough venture capital due diligence will uncover such issues early, helping you adjust your model before the pitch and avoid instant rejection.

Legal Due Diligence: How to Protect Intellectual Property?

Here, contracts, patents, licenses, and compliance with laws (e.g., GDPR) are reviewed during Legal Due Diligence. Oversights in this area can lead to product blocking or lawsuits. A fitness mobile app was blocked in the EU due to GDPR violations. The team failed to account for personal data processing requirements, resulting in a €200,000 fine and loss of market access, highlighting the importance of thorough due diligence.

What to check:

• All agreements with partners, employees, and clients.
• Registered intellectual property (trademarks, patents).

Technical Due Diligence: How a Code Can Become Your Enemy?

Even a brilliant idea will fail if the product is technically vulnerable. At this stage, auditors analyze code, infrastructure, and data security during Investor due diligence. A SaaS startup from Silicon Valley couldn’t secure investments due to critical API vulnerabilities. Investors noted that fixing the errors would cost $300,000 and six months of work. Technical due diligence would have identified these issues in advance and improved investor confidence, ultimately helping secure funding.

What’s important:

• Code documentation.
• Data backups.
• Compliance with security standards (e.g., ISO 27001).

Why can Startup Due Diligence take 1–2 months? It depends on the startup’s complexity. For example, auditing a project with an international client base and dozens of patents takes time. Investors review not only documents but also founders’ reputations, negotiation history, and even the team’s social media. Technical due diligence plays a key role in this process, assessing the product’s scalability, code quality, and security gaps.

Due Diligence isn’t about “catching you in a mistake” but about making your startup stronger. The earlier you start preparing, the higher your chances of securing investments. Engaging in professional due diligence consulting allows you to identify red flags, validate assumptions, and build investor confidence before the first pitch meeting.

The Due Diligence checklist Process: 5 Steps  

The Due Diligence process is like a medical check-up for your business: it diagnoses the startup before the investor administers the “vaccine” of investment. Let’s break down these 5 steps to turn a potential rejection into a green light. Investor due diligence ensures your business is ready for funding by highlighting strengths and addressing weaknesses.

1. Preparation: Assemble the “Rescue Team”

Preparation for Due Diligence starts with forming a working group. It includes:

• A lawyer: to review contracts, patents, and licenses.
• A financial expert: to analyze reports, forecasts, and unit economics.
• A CTO: to assess code and infrastructure.

Example: HealthTech startup CheckEye assembled a team of a CFO and an external lawyer before their investment round. This helped avoid errors in agreements with clinics.

Clearly define why you need DD. For example:

• Securing investments from venture funds.
• Entering the EU market with GDPR compliance checks.

2. Document Collection: What Will Investors Check First?

Venture investors will request two types of documents:

Financials

• 3-year reports (P&L, cash flow).
• Growth forecasts for 2-5 years.
• Customer data (LTV, retention rate).

Legal Documents

• All agreements (with partners, employees, clients).
• Licenses, patents, compliance certificates.

A mistake 80% of startups make: forgetting to include contracts with freelancers. In 2023, 12% of deals fell through due to this (Crunchbase data).

3. Risk Analysis: How to Find “Landmines” Before Stepping on Them? 

This stage identifies what could derail the deal. Examples of risks:

Example: An e-commerce startup from Miami lost $700,000 due to undisclosed founder debts. Due Diligence identified the issue, but too late.

4. Report Preparation: How to Turn Findings into a Roadmap?

The report is the investor’s “navigator.” Its structure:

1. Summary: Key findings (1-2 pages).
2. Financial section: Profitability analysis, burn rate.
3. Legal section: Risk map by priority.
4. Recommendations: How to fix issues in 1-3 months.

Example: A SaaS startup from Berlin included a data leak remediation plan in their report. This reduced deal risk by 40%.

5. Investor Presentation: How to Answer Tough Questions?

The Due Diligence checklist is your shield at this stage. Prepare answers to:

• “Why do you forecast 300% growth?”
• “Who owns the code rights?”

Don’t hide problems. If asked about debts, explain how you plan to refinance them.

Example: An EdTech startup from Toronto openly discussed a co-founder conflict. Investors appreciated the honesty and allocated $1.5 million.

Due Diligence is not an exam but a dialogue. The more detailed your document and report preparation, the higher the chances venture investors will say “yes.” Investor due diligence involves transparency and thoroughness, ensuring that your startup aligns with investor expectations and risks are minimized.

What Should a Starup Due Diligence Report Include?

A Due Diligence report is a “survival map” for your startup. It not only identifies problems but also provides a clear plan to address them. Let’s break down how to structure the document to convince venture investors of your business’s reliability.

Financial Section: Where Are the Budget “Holes”?

This section analyzes key metrics:

• LTV (Lifetime Value of a Customer) and CAC (Customer Acquisition Cost).
• Burn rate (monthly cash expenditure).
• Debt load (if it exceeds 30% of capital, it’s a red flag).

Example Table:

A SaaS startup from Texas corrected its LTV/CAC imbalance from 1.2 to 3.0 in a quarter, helping them secure $1.2 million in funding.

Legal Section: How to Avoid Lawsuits?

The risk map in this section highlights what could derail the deal:

• High risks: Unregistered patents, ongoing lawsuits.
• Medium risks: Contracts without force majeure clauses.
• Low risks: Minor documentation errors.

One startup lost $500,000 due to a patent dispute. After registering the rights, the deal went through.

Recommendation:

• File patents for technologies within 4 weeks.
• Add confidentiality clauses to agreements.

Technical Section: Why Can Code Become Your Enemy?

Even minor software vulnerabilities can scare off investors. The report should highlight:

• Outdated libraries (e.g., AngularJS instead of React).
• Lack of data encryption.
• Risks of data leaks (as in the case of the EU app block).

Tip: Conduct a code audit before the review. Fixing errors will take 2-3 weeks.

Recommendations: How to Close “Holes” in 1-3 Months?

• Financials: Refinance debts, optimize CAC (reduce targeted ad spending).
• Legal Risks: Register patents, review agreements with a lawyer.
• Technical Issues: Update software, implement two-factor authentication.

A HealthTech startup from Seattle resolved 90% of vulnerabilities in 6 weeks and closed a $3 million funding round.

What Risks Does Due Diligence Reveal? 7 Key Threats

Due Diligence is a “lie detector” for your startup. It uncovers hidden problems that could destroy a deal with investors. Let’s examine the 7 key risks that turn startup failures into reality.

1. Financial Risks: When CAC “Eats” LTV

A Chicago startup spent 200 to acquire a customer (CAC), but the customer’s lifetime value (LTV) was only 200 to acquire a customer (CAC),but the customer’s lifetime value (LTV) was only 150. Investors backed out, calling the unit economics “unviable.”

Solution: Optimize marketing and increase retention rate.

2. Legal Risks: Unregistered Intellectual Property

An AI startup developed a unique algorithm but didn’t patent it. Six months later, competitors copied the technology, and the team lost $2 million in investments.

What to do: Verify all patents, trademarks, and licenses before the audit.

3. Reputational Risks: Conflicts Between Founders

Social media revealed disputes among founders of a HealthTech project in Los Angeles over equity splits. The investor suspected instability and withdrew from the deal.

Tip: Sign a conflict resolution agreement before starting Due Diligence.

4. Operational Risks: Unpreparedness for Scaling

An e-commerce startup from Miami couldn’t handle 10,000 daily orders due to weak logistics. Investors demanded a business model review.

Solution: Conduct stress tests on your infrastructure.

5. Compliance Risks: GDPR and Other Legal Violations

A mobile app was fined €300,000 for a user data leak. Investors refused to fund the project until encryption was implemented.

How to avoid: Implement privacy policies and conduct data audits.

6. Market Risks: Misjudging TAM

An AgriTech startup overestimated its market size (TAM) by 3 times. Due Diligence revealed the error, and the deal fell through.

Verify: Market research data and the realism of forecasts.

7. Technical Risks: Vulnerabilities in the Product or Service

A FinTech startup didn’t check its code for vulnerabilities. Hackers breached the API, stealing $150,000—investors froze negotiations.

Recommendations: Conduct code audits and penetration tests.

Why Do Startups Fail Due to These Risks?

• Founders often ignore “boring” steps like patent checks.
• The product or service may seem perfect, but Due Diligence reveals fatal flaws.

Remember: Risks are not a death sentence but growth opportunities. Address them before the audit, and investors will see you as a partner, not a liability.

Who Should Conduct Due Diligence: In-House Team or Experts?

Conducting Due Diligence is like choosing between DIY repairs and hiring professionals: you might save money, but the risk of mistakes is high. Let’s explore when it’s better to handle it internally and when to rely on experts.

Self-Conducted Due Diligence: Saving Money or Playing Roulette?

Pros:

• Deep business knowledge: You understand the nuances of your product and team better.
• Cost savings: No need to pay for lawyers or auditors.

Cons:

• Subjectivity: 68% of startups miss risks when conducting Due Diligence themselves (Deloitte data).
• Limited expertise: For example, lack of knowledge about venture capital or international law.

Example: An e-commerce startup from Texas conducted Due Diligence on its own but overlooked tax risks. The investor discovered the error during the deal stage, and negotiations fell apart.

Hiring Experts: When Can’t You Do Without Them?

Advantages:

• Objectivity: External auditors are not emotionally tied to the project.
• Specialized knowledge: Lawyers check patents, financial experts review unit economics.
• Investor trust: Reports from reputable firms increase the chances of closing a deal.

When is it necessary:

• Deals over $500,000: Mistakes here can cost millions.
• Entering international markets: For example, GDPR compliance checks for the EU.
• Venture capital Due Diligence: Funds like Sequoia or Y Combinator require flawless reports.

Example: A FinTech startup from the EU hired lawyers to review agreements before entering the US market. Experts identified a jurisdictional conflict—helping the team avoid a $1.2 million fine.

VC Investors: Why Do They Trust Only Experts?

Venture capital (VC) investors rarely accept reports from in-house teams. They prefer independent, professional VC due diligence to ensure an objective, thorough evaluation of potential investments, mitigating risks and providing greater clarity for decision-making.

Reasons include:

• Conflict of interest risk: Founders might hide problems.
• Industry standards: For example, HealthTech or FinTech require specialized auditors.

Tip: If your startup is planning a VC funding round, budget for expert services from the start.

Self-Conducted checks are suitable for early stages and small deals. But when it comes to attracting VC investments or entering global markets, experts are indispensable. Remember: being penny-wise can end up being pound-foolish. Professional VC due diligence ensures your startup meets investor standards, reduces risks, and highlights long-term scalability, boosting investor confidence.

How to Prepare for Due Diligence: A Guide for Founders

Preparing for startup Due Diligence is like packing for a long trip: forgotten documents or errors in reports can derail the entire journey. Let’s break down how to pack your “luggage” so investors say, “You’re ready.”

Step 1: Create a “Document Library”

What to include:

• Financials:
  • 3-year reports (P&L, cash flow, balance sheet).
  • Growth forecasts for 2-5 years.
  • Customer data (LTV, churn rate).
• Legal documents:
  • All agreements (with partners, employees, clients).
  • Patents, licenses, compliance certificates.

Example: A FinTech startup prepared a document package in 2 weeks. Investors noted the transparency and approved a $1.8 million deal.

Instruments: Use Google Drive or Notion for storage and management. 

Step 2. Organize a Data Room for Due Diligence

Folder structure:

• /Financials:
  • /Reports
  • /Forecasts
• /Legal:
  • /Contracts
  • /Patents
• /Product:
  • /Technical documentation
  • /Roadmap

Tip: Set access permissions. For example, investors can view files but not delete them.

Mistake 60% of startups make: Dumping files into a single folder. Avoid names like “Documents_final_revision2.”

Step 3: Conduct an Internal Audit: Checklist

Startup due diligence checklist:

• Do financial reports align with the business plan?
• Are there expired licenses or patents?
• Do contracts include penalties for missed deadlines?

Audit table example:

Step 4. Address Weaknesses

What to do if risks are found:

• Debts: Refinance at a lower interest rate.
• Legal gaps: Amend contracts, add force majeure clauses.
• Technical vulnerabilities: Conduct a code audit.

Use Due Diligence checklist templates for startups to ensure nothing is missed.

Real Cases: How Due Diligence Saves or Dooms Startups

Due Diligence for startups is not abstract theory—it’s a tool that determines the fate of deals. Let’s examine two real cases: one shows how Due Diligence paved the way for $2 million in investments, while the other demonstrates how its absence destroyed months of negotiations.

Case 1: FinTech Startup Raised $2 Million Thanks to Patent Checks

Startup: The team developed an algorithm for automating credit scoring.

Problem: Founders didn’t verify the patent purity of the technology. During negotiations with VC investors, it turned out that part of the code overlapped with a competitor’s patented solution in the US.

Solution:

• Conducted Due Diligence with patent lawyers.
• Revised the algorithm, eliminating contentious elements.
• Registered their own patents in the EU and US.

Outcome: After corrections, the startup raised $2 million from a Silicon Valley fund. Investors noted that thorough preparation for Due Diligence was a key factor.

Lesson: Even a unique product can fail without an intellectual property audit.

Case 2: EdTech Project Lost a Deal Due to Founder’s Hidden Debts

Startup: Miami-based online education platform with $1.5 million in annual revenue.

Problem: Founder hid $300,000 in personal debts that were listed on his other business. Due Diligence uncovered this through credit history and court records.

Consequences:

• Investors suspected dishonesty and walked away.
• The startup’s reputation was ruined: other funds also refused to negotiate.

The startup’s failure became inevitable: it shut down after 8 months.

Долги основателей — не личное дело. Они влияют на доверие венчурных инвесторов и устойчивость компании. 

Why Are These Cases Important?

1. For FinTech: Patent checks are not bureaucracy but protection against lawsuits.
2. For EdTech: Financial transparency of founders is as important as unit economics.

Statistics: According to PitchBook, 23% of startup failures are linked to unidentified legal and financial risks.

Key Takeaways:

• Successful Due Diligence turns weaknesses into growth opportunities.
• Ignoring Due Diligence is like playing Russian roulette—with your reputation and millions of dollars at stake.

Startup Due Diligence Checklist — Your Pass to the World of Investments

Due Diligence checklist is not just a needed tool for an audit—it’s a strategy that turns risks into opportunities. In an era where investors scrutinize every document, a well-executed audit becomes your competitive advantage. Best practices for startup Due Diligence—from analyzing unit economics to patent registration—are not just “checkboxes” but the foundation for long-term growth.

Every unidentified risk is a potential failure. Financial errors, legal conflicts, or technical vulnerabilities can destroy even the most promising project. But there’s good news: preparing for an audit can be done quickly and systematically.

Startups that implement Due Diligence at early stages increase their chances of attracting investments by 65% (Crunchbase data).

Don’t wait for investors to request an audit. Start acting now:

• Review financial reports.
• Ensure patent purity.
• Organize a data room.

And if you want to save time and avoid mistakes—trust the professionals. The Camel Expert team will conduct an audit of your startup according to international standards and prepare it for a deal in 2 weeks.

Appendix: 

Due Diligence Checklist 1: Preparing Documents in 7 Days
(For startup founders at the pre-audit stage)

Day 1–2: Finances

1. Gather financial reports

• P&L (Profit and Loss): Income and expense reports for the last 3 years.
• Cash Flow: Quarterly cash flow statements.
• Balance Sheet: Assets, liabilities, equity.

Example: If your startup has been operating for 2 years, prepare a forecast for the 3rd year.

2. Prepare growth forecasts

• LTV (Lifetime Value): Calculations with justification (e.g., customer retention data).
• CAC (Customer Acquisition Cost): Breakdown of marketing expenses.
• Revenue forecast for 2–5 years: Scenarios (optimistic, base, pessimistic).

Tools: Use Excel or Google Sheets templates.

3. Customer data:

• Retention Rate: Customer retention percentage over the last year.
• Average Check: Monthly/quarterly trends.

Day 3–4: Legal Documents

1. Contracts

• With partners: Joint ventures, suppliers.
• With employees: Employment contracts, NDAs.
• With clients: Terms of service, SLAs.

Tip: Check if contracts include force majeure clauses and penalties.

2. Intellectual property

• Patents: Applications, certificates confirming rights.
• Trademarks: Registration certificates.
• Licenses: For example, software licenses (Microsoft, AWS).

3. Regulatory compliance

• GDPR: Privacy policy, data processing consent forms.
• ISO certificates: For example, ISO 27001 for data security.

Day 5–6: Product

1. Code documentation

• API documentation: Endpoints, methods, request examples.
• System architecture: Flowcharts, module descriptions.
• Developer instructions: How to launch/test the product.

Tools: Use Swagger for APIs, draw.io for diagrams.

2. 12-month roadmap

• Development stages: Release dates for new features.
• Goals: For example, entering the EU market in Q3.
• R&D budget: Research and development expenses.

Day 7: Finalization

• Document review: Ensure no discrepancies between financial reports and the business plan.
• Create a Data Room:
  • Upload files to Dropbox/Google Drive.
  • Set access permissions (view-only for investors).
• Test for “usability”: Ask a colleague to find any document in 30 seconds.

Tips to avoid mistakes:

• Name files clearly: For example, “P&L_2023,” not “Report_final_revision.”
• Avoid region-specific details: Use USD for all amounts, international certificates (GDPR, ISO).
• Check dates: Ensure licenses and patents are not expired.

Done! Your startup is now ready for Due Diligence.
If you need help—order an audit from Camel Expert to avoid mistakes.

Due Diligence Checklist 2: Top 7 Risks and How to Address Them
(For teams conducting internal audits)

1. Financial risks: CAC > LTV

Problem: Customer acquisition cost exceeds lifetime value.
Solution:

• Optimize marketing: Cut spending on ineffective channels.
• Increase retention rate: Implement loyalty programs (discounts, subscriptions).

Timeline: 2 months.
Tools: Google Analytics, HubSpot.

2. Legal risks: Unregistered intellectual property

Problem: Technology can be copied by competitors.
Solution:

• File patent and trademark applications.
• Conduct a patent search for code/design purity.

Timeline: 4–6 weeks.
Resources: World Intellectual Property Organization (WIPO).

3. Technical risks: Product vulnerabilities

Problem: Hacker attacks, data leaks.
Solution:

• Conduct a security audit (e.g., via Snyk).
• Implement two-factor authentication.

Timeline: 3–4 weeks.
Tools: Snyk, Veracode.

4. Reputational risks: Founder conflicts

Problem: Public scandals scare off investors.

Solution:

• Sign a founder agreement on equity and responsibilities.
• Use services like Carta for transparency.

Timeline: 1 week.

Template: Capbase agreement.

5. Compliance risks: GDPR/other legal violations

Problem: Fines and product blocking.
Solution:

• Implement data encryption (e.g., AWS KMS).
• Update the privacy policy.

Timeline: 2–3 weeks.

Tools: OneTrust, Termly.

6. Operational risks: Unpreparedness for scaling

Problem: System crashes under increased load.
Solution:

• Conduct stress tests (10,000 requests/sec).
• Migrate to cloud solutions (AWS, Google Cloud).

Timeline: 1 month.

Tools: LoadRunner, BlazeMeter.

7. Market risks: Overestimated TAM

Problem: The actual market is smaller than stated in the pitch deck.
Solution:

• Recheck data via Statista or Gartner.
• Adjust forecasts based on reality.

Timeline: 2 weeks.
Sources: Statista, CB Insights.

Bonus: Risk Prioritization Table

Tip: Start with risks that could derail investor deals (e.g., legal risks).

Done! Your startup is now protected from major threats.

If you need help—order a consultation with Camel Expert.