17 Startup Investment Due Diligence Checklist

investment due diligence checklist

You may have been investing in a company for years or you may want to start investing or you may want to buy a business but before investing and buying, stop for while to make a right judgment while choosing the potential company. Make sure to research about the company, the relevant market, the management team of the company, and their products.

Here we are listing out some areas that every business buyer and investor should investigate before signing a deal with a particular company/business.

Your Financial Situation

Before signing a deal, you must review your financial situation carefully. If the total amount of investment requires more than five percent of your current net worth, or if you have limited potential income from a job, spouse, or other sources, or if you do not have enough liquid assets to cover all your expenses in case the investment fails, then you may want to hold off from making investment for now.

Your Risk Tolerance

Who invests in a business with an expectation to lose all their money? No one does! But it can happen at any time and you also consider some risk and that’s why you might have fear of what if this business does poorly. This fear can give sleepless nights to you and to your loved ones. This has nothing to do with your net worth or your long-term earning potential, but it is really more a matter of personality. If worrying about your mutual fund portfolio keeps you awake till late night, you should probably avoid private equity investments altogether.

Business Model

Do you have enough knowledge to understand the business model of the company in which you are going to invest? You should sure about your understanding capabilities to evaluate how the company makes money. If something seems suspicious, then you should dig deeper and deeper till you do not understand everything and till all of your doubts do not get clarified. If even after so many efforts, the answers do not make sense, just walk away and look for another portfolio.

Market Size and Trends

You should inspect and analyze that how large is the potential market for the business in which you are investing and for this, you may seek the help of the third party. You can get the potentials of the business verified using the third party data. You need to do some research on the Internet or in the library to get a handle on the size of the potential market. Usually, the bigger the market size is, the better it results.

What are the market trends?

There are regulatory, demographic, economic, and other trends that affect a business. But the question arises do the positive factors outweigh the negative ones or can the negative factors be ignored for a while because of more positive factors? Most of the venture capitalists usually invest in businesses where the market is growing rapidly due to outside influences (ex-population is getting older, etc.). This way they are better off even in the worst situation because even if their investments do not become market leaders, at least they are not swimming against the tide.

Think twice before you invest because you earn money after a lot of hard work. If the market is small, or the market is large but shrinking for the business in which you are thinking to invest, or the company doesn’t have a plan for gaining its market share, you should drop your plan to invest in this business.


You should check how does the company rank among competitors in terms of quality, pricing, growth rate, cost structure, and market share.

Who are the top competitors? If there are only a few competitors for the enterprise, you can list them but if there are many competitors, you should categorize them.

Don’t restrict your thinking and think dynamically. For example, if there is not much competition right now, try to imagine what the scenario will look like in a few years. Competitors come from almost anywhere and at any time; do not think that if there are not many competitors at this moment, competitors will never grow in the future. In fact, there is more tendency that the particular business will face tough competition from new competitors in the market in near future. Don’t you remember Sears and Home Depot ten years ago? Or have you forgotten Schwinn and Cannondale?

Are there market leaders with strong brands and huge amounts of cash in the same market in which the company (in which you are investing) is dealing? If yes, check how will the company compete against these giants? If the management of the company can’t give you a convincing answer to this question, don’t even dare to invest in such a company because it may cause all your investment to lose.

Management Team

We all know that weak management teams lead to weak results. So, before investing in a company, make sure to interview top management people at the company. Look for signs of indecisiveness, bitterness, in-fighting, grudges, and other serious issues. If you see potential problems, try to dig a little deeper and if you do not see any sensible solutions, opt out of this option of investment.


Hire a finance expert to review the financials of the potential company for at least the past five years or from the beginning if the company is less than 5 years old. Financial reviews include the balance sheet (position statement), profit and loss account (income statement), and the cash-flow statement. This is not an era of trusting people merely by their words as they can make a fool of you by presenting you a strong balance sheet or paper profits; do not commit a mistake to be fooled by the Balance sheet and paper profits because it has been evident that even many “profitable” companies go bankrupt.

Find answers to some critical questions regarding the financials of the company like does the company have any outstanding short or long-term debt, when these debts were incurred, for what purpose, and what the terms are? Don’t forget to check whether the company has enough cash, liquid assets, and positive cash-flow to pay off the short-term debts and whether the future cash-flows will be sufficient to pay off the long-term debt.

To reach a more reliable conclusion, you can also check and analyze Credit Rating of the company done by a trustworthy Credit Rating Agency.

Internal Processes

Investigate key internal processes to see how efficient, or inefficient, the company is in performing its internal processes. Remember to ask for the procedure manuals of the company.

Customer Satisfaction

Check what is the status of customer satisfaction with the company and categorize it in three scales like, are the customers happy, less than happy, or just plain disgusted. Go beyond customer satisfaction surveys conducted and word of mouth: the key here is customer retention. This means if the customers are coming back to deal with the company again and again, this is a clear signal for you to consider that the company is doing something right. On the other side, if most of the people are one-time buyers, or if there is a consistent long-term pattern of complaints about the products and services of the company’s, this is an indication to say a big NO to the company for making an investment in it.

To check customer satisfaction, start with the internal reports of the company and word of mouth. Supplement this research with checks to the local Better Business Bureau, the Secretary of State’s office, Internet blogs, third-party reviews like Consumer Reports. It never hurts to speak directly with some actual customers and you get to know the true level of customer satisfaction because of the initial experience of the customer with the desired company.

Sales and Marketing

Ask for the statement that discloses the amount of capital spent by the company on its sales and marketing each year? To obtain an average customer acquisition cost, divide this by the number of customers gained during the year. Calculate the ratio of marketing plus sales costs divided by the total revenue. Compare these numbers to others in the industry to see if they are high or low; if they are high, you need to find out what the problem is and where it is.

Legal Issues

Ask the management or dealing authority to disclose to you the most important legal documents for the company like articles of incorporation, operating agreement, etc. Do not forget to check the office of Secretary of State, and any other relevant certification or compliance agencies to make sure the company follows state rules and regulations.

Check whether there are any pending lawsuits, liens, or judgments against the company or its officers. You can also look if there have been any in the past? If yes, were these legitimate and do they reveal major problems inside and outside the company?

Cash Management

Figure out how is cash managed on a daily basis? Check whether there are reasonable policies and procedures in place to make sure cash is handled properly.

Human Resources

Check how the human resources are dealt in the company like whether the company take employee issues seriously or are the equal opportunities are available to every employee. Make sure no discrimination on any ground is done by the employers. Check what are their policies on hiring, firing, compensation, and promotions. The number of employees does not matter because even if they are few in number the company should have some sort of policies regarding these issues. Find out what they are, and dig a little deeper to see if the policies and procedures are actually followed in the company or are they just printed on the papers.

Risks and Insurance

If a company has salaried employees or annual revenues of at least a million dollars, they should have some insurance, so when you think of investing in such a company, dig a little to know about the liability issues for this company and their industry. Try to find out what insurance and other risk mitigation procedures they have adopted, and then decide whether they are adequately protected or not.


Check how do the prices of the products and services of the company rank in the marketplace? Investigate whether the pricing fit the marketing of the company and the sales messages, or is there any mismatch?


Technology plays a vital role in the progress o business. To become the market leader, companies spend on high-tech processes rationally to take their business to newer heights. However, losers do not spend rationally on technology, either they spend too much or less on technology. Compare the spending on technology of the potential company and if they are very different from the set norms, then ask for the reason for such a difference.

Strategic Planning

Get a copy of the strategic plan of the company. Read it and decide whether it actually makes any sense or not. If you find anything impractical or senseless, address this issue in the stage of negotiation.

Exit Strategy

Before making an investment in the company, make sure that you have a viable exit strategy because at some point of time, you need to get your investment back along with a positive return.


You need to hire an expert to conduct a valuation of the potential company. A professional valuation ranges in between $5,000 to $100,000.


You can earn a large sum of money by investing in private companies but there are significant risks too. Though most of the entrepreneurs are honest in their dealings but a small percentage of them might turn out to be a fraud as they may hide problems in their business from the buyers and investors intentionally. Some entrepreneurs ignore to tackle the issues arising in the business because they are so engrossed in growing their business as quickly as possible. So be a smart investor and analyze every aspect, ask good questions and get them clarified before making an investment. We have listed only the surface areas upon which you need to think a little deeper for making a safe and secure investment. So, make sure that you do your homework properly before signing any deal to purchase or invest in a private business.