Due diligence is where a verbal yes either becomes a wire transfer or quietly disappears.
Blake Aber · Predicate Ventures · 2026
Most founders treat the term sheet as the finish line. It is closer to the starting gun. The due diligence process is the period between interest and money, and it is where deals slow down, get repriced, or fall apart.
Understanding the sequence helps on both sides of the table. Investors run it to confirm the story they were told. Founders survive it by knowing what is coming.
What Due Diligence Actually Tests
Diligence is verification, not discovery. By the time a firm starts, it already believes the company could be a good investment. The work that follows checks whether the claims behind that belief hold up.
Three questions sit underneath everything:
- Is the business what the founder said it is?
- Are the risks the ones the firm already priced in?
- Will anything found later embarrass the partner who championed the deal?
That last question drives more behavior than founders expect. Diligence protects the investor's standing with their own partnership.
The Stages
The process moves from cheap checks to expensive ones. Firms front-load the work that can kill a deal fast.
Initial screening
This happens before any formal diligence. The partner forms a view from the pitch, the deck, and a few reference calls. Most companies are passed on here, and the founder never sees the deeper machinery.
A deal that clears screening gets a term sheet or a strong signal of intent. Diligence proper begins after.
Commercial diligence
The firm tests the market and the company's position in it. They look at customer demand, competition, pricing, and how the product is actually used.
This often means calling customers directly. A founder who lists references is signaling which conversations they are comfortable with. Sharp investors also find customers the founder did not name.
Churn gets examined closely. Logo retention, net revenue retention, and the reasons behind cancellations tell a clearer story than top-line growth.
Financial diligence
The numbers in the deck get reconciled against source data. Bank statements, accounting records, and revenue recognition all get reviewed.
Common snags surface here. Bookings counted as revenue. One-time deals presented as recurring. A burn rate that assumed funding already in hand.
For earlier-stage companies the financial review is lighter, because there is less to examine. For growth-stage rounds it can involve outside accountants and weeks of work.
Technical and product diligence
The firm assesses whether the product works and whether it can scale. This may include code review, infrastructure review, or a technical advisor speaking with the engineering team.
The deeper question is dependency. How much of the technology relies on one engineer, one vendor, or one model provider? Concentration risk shows up more often than outright failure.
Legal diligence
Lawyers review the cap table, the incorporation documents, IP assignments, and existing contracts. They confirm the company owns what it claims to own.
Problems here are usually fixable but slow. A founder who never signed an IP assignment, a former co-founder with unclear equity, an outstanding SAFE no one remembered. Each one adds days.
Reference and background checks
The firm calls people who have worked with the founder. Former colleagues, prior investors, and people not on the reference list.
These calls matter more at early stage than founders assume. With little business history to examine, the team is most of the asset. Investors are checking how the founder behaves under pressure and whether their account of past events matches other accounts.
How Long It Takes
Timing varies with stage and round size.
- Pre-seed and seed: days to two weeks. Diligence is light; the bet is on the people.
- Series A: two to four weeks. Commercial and financial review become real work.
- Series B and later: four to eight weeks, sometimes longer. Outside firms get involved, and the document requests grow.
Speed is itself a signal. A firm that drags diligence is often hesitant and looking for a reason to walk. A firm that moves fast has usually decided and is confirming.
Why Deals Die in Diligence
Most failures trace to one of a few patterns.
The story did not survive contact with data. Growth that looked steady in the deck turns out to be two large customers. The reference calls reveal complaints the founder downplayed.
A new risk appeared. A legal issue, a key employee leaving, a customer concentration the firm had not priced.
The market shifted. A competitor raised, a buyer changed direction, the firm's own thesis moved. Diligence gives a polite exit.
Trust broke. A founder who was evasive, who hid bad news, or whose account kept changing. Investors rarely fund people they have caught being careless with the truth.
The last one is the most damaging because it is hard to recover from. A bad metric can be explained. A pattern of selective disclosure cannot.
How Founders Should Prepare
The founders who clear diligence smoothly do the work before the term sheet, not after.
Keep a data room ready. Financials, cap table, key contracts, and customer metrics should be assembled and current. Scrambling to produce documents reads as disorganization at best.
Disclose problems early. Every company has them. Surfacing a known issue at the start lets the investor price it. Letting them find it later looks like concealment, even when it was only an oversight.
Line up references who will speak honestly and well. Then accept that the firm will go past your list.
Know your own numbers cold. A founder who fumbles their churn rate or burn during a diligence call invites deeper scrutiny of everything else.
The Underlying Point
Diligence is the moment a firm decides whether to stand behind a deal in front of its partners. Founders who treat it as an adversarial audit tend to perform worse than those who treat it as the last step of a shared decision.
The goal on both sides is the same: confirm the company is what everyone hopes it is, and find the surprises while they are still cheap to address.
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