Introduction
Due diligence is one of the most critical stages in a startup’s fundraising journey. It is the process where investors verify everything you have claimed during pitching, including financials, compliance, operations, technology, and team credibility.
Many startups lose funding deals not because of poor ideas, but due to weak documentation, non-compliance, or lack of preparedness. This Saving Mantra guide explains a clear, step by step due diligence process to help startups pass investor scrutiny smoothly.
Step 1: Understand the Purpose of Due Diligence
Investor due diligence aims to:
- Validate business claims
- Identify financial, legal, and operational risks
- Assess scalability and governance
- Confirm founder credibility
Due diligence builds trust and protects both founders and investors.
Step 2: Identify the Types of Due Diligence
Startups usually face multiple layers of due diligence:
Common Types
- Legal due diligence
- Financial due diligence
- Compliance due diligence
- Business & operational due diligence
- Technical & IP due diligence
- Founder & background checks
Preparation must cover all areas, not just finances.
Step 3: Prepare Corporate & Legal Documents
Keep these documents ready:
- Certificate of Incorporation
- Memorandum & Articles of Association
- Shareholding pattern & cap table
- Share certificates and registers
- Board and shareholder resolutions
- Past investment agreements
Incomplete corporate records raise red flags immediately.
Step 4: Organize Financial & Tax Records
Investors closely review:
- Audited financial statements
- Bank statements
- Revenue and expense details
- GST, TDS, and income tax filings
- Outstanding liabilities and dues
Clean financial records reflect strong governance.
Step 5: Verify Compliance & Regulatory Filings
Ensure compliance with:
- Company law filings
- Startup registrations and licenses
- Labor law compliances
- Industry-specific approvals
- Foreign investment regulations, if applicable
Non-compliance can delay or cancel funding.
Step 6: Review Contracts & Agreements
Prepare:
- Customer and vendor contracts
- Employment agreements
- Founder agreements
- NDA and confidentiality agreements
- Lease and asset contracts
Clear, enforceable contracts reduce legal risk.
Step 7: Validate Intellectual Property & Technology
Investors check:
- IP ownership and assignments
- Trademarks, copyrights, patents
- Source code ownership
- Open-source software usage
- Technology scalability and security
IP clarity is critical for valuation and exits.
Step 8: Evaluate Business Model & Operations
This includes:
- Revenue model validation
- Unit economics
- Customer acquisition strategy
- Operational processes
- Scalability readiness
Strong execution capability increases investor confidence.
Step 9: Assess Team & Founder Credentials
Investors evaluate:
- Founder background and experience
- Key management roles
- ESOP structure
- Employee retention
- Dependency on single individuals
Teams matter as much as ideas.
Step 10: Identify Risks & Red Flags Early
Common red flags:
- Unclear shareholding
- Pending litigations
- Tax defaults
- Weak internal controls
- Founder disputes
Early disclosure is better than late discovery.
Step 11: Create a Data Room
A structured data room should include:
- Categorized folders
- Clear file naming
- Updated documents
- Controlled access for investors
A professional data room speeds up due diligence.
Step 12: Respond to Investor Queries Professionally
During due diligence:
- Share accurate information
- Avoid delays
- Clarify assumptions
- Maintain transparency
Professional responses build long-term trust.
Step 13: Resolve Issues Before Final Agreements
Before closing funding:
- Rectify compliance gaps
- Clear pending filings
- Update documentation
- Align records with term sheet terms
Issue resolution prevents renegotiation.
Common Due Diligence Mistakes by Startups
- Poor documentation
- Ignoring compliance until funding
- Misrepresentation of numbers
- No data room structure
- Delayed responses
Avoiding these increases deal closure probability.
Why Choose Saving Mantra for Startup Due Diligence
Saving Mantra helps startups with:
- End-to-end due diligence preparation
- Compliance cleanup and structuring
- Financial and legal readiness checks
- Investor data room setup
- Fundraising documentation support
We ensure startups are investor-ready, compliant, and confident.
Conclusion
Due diligence is not a hurdle. It is a validation process that strengthens your startup’s foundation. Well-prepared startups close funding faster, negotiate better terms, and build long-term investor relationships.
Follow this step by step due diligence process to move from pitch to funding with clarity and confidence.
Disclaimer
This blog is for informational and educational purposes only and does not constitute legal, financial, or investment advice. Due diligence requirements may vary based on investor type, jurisdiction, and business model. Readers are advised to consult qualified professionals before sharing sensitive information or entering investment agreements.