Introduction

Building a startup is hard. Convincing someone to back it is even harder, especially when it's time for you to take action on due diligence. The due diligence process involves examining a potential acquisition’s financial, operational, legal, and other aspects to identify risks and make informed decisions.
You can have the best product or service with the biggest vision, but if your startup fails to meet the due diligence requirements, the funding process might just risk missing out on the investment altogether.

At Marwari Catalysts, we’ve worked with 100+ startup founders through various fundraising rounds. One thing we know for sure is that the due diligence process is not just about the paperwork; it’s proof that your business is in order and up to the mark in terms of legalities.
So, let’s understand what due diligence is and how it can save you and your business from future troubles.

What is Due Diligence?

Due diligence is a deep review and verification process that investors carry out before they invest in a startup. This process helps investors evaluate the financial, legal, operational, and market risks that are involved in investing in your startup.

The process of due diligence is performed for investors to ensure they’re betting on a company that is transparent, stable, and has solid fundamentals. Here are a few reasons to understand why due diligence is important:

• Build Investor Trust– It shows that you’re running a legitimate and scalable business.
• Identifies Red Flags– Legal issues, financial inconsistencies, or IP complications can be spotted at the time of diligence.
• Smoothens Investment Process– The cleaner your records are, the faster you’ll get your funding.
• Increases Valuation– Startups with strong documentation and clarity are often eligible to pitch higher valuations.

What Does the Due Diligence Process Involve?

Every investor might have different approaches, but most due diligence compliance processes cover these six areas:

1. Financial Due Diligence

Your business’s past financial statements, revenue model and projections, cash flow statements, cap table, and fundraising records are scrutinised beforehand.

2. Legal Due Diligence

The founders’ agreements, company registration documents, intellectual property ownership, employees' contracts, and ESOP structures are verified legally.

3. Business & Market Due Diligence

The business models, competitor mapping, customer acquisition strategy, and your product or service map are analysed for verification purposes.

4. Operational Due Diligence

Your team’s structure, tech stack, internal processes, and workflow systems play an important part in your business's day-to-day operations.

5. Compliance Due Diligence

You have to scrutinise your business’s regulatory licenses, such as GST, income tax, and ROC filings, with the government bodies. Compliance with employment laws is also a part of this scrutiny.

6. Technology Due Diligence

If you have a tech startup, then you have to codebase audit, tech scalability & architecture, and cybersecurity practices that involve higher levels of technology.

What is a Due Diligence Report?

Once the due diligence process is completed, the investor or a third-party advisor prepares a due diligence report. A clean and well-documented due diligence report often helps to speed up the signing of the term sheet and raising of funds. This report contains the following information:

• The findings of the review
• Identified risks or concerns
• Recommendations, if any
• A summary of your startup’s investment readiness

Pro Tips that Founders Must Know

• You must start early; don’t wait for the investor to ask for documentation work. Keep your financials, legal documents, and compliance reports ready from day one.
• Create a digital folder ready with all your documents aligned and handy. This will create a better understanding and impression of your business.
• Be transparent about your business, as investors appreciate honesty. If something’s not perfect, be straightforward.
• Work with a professional body like CA, a legal expert, or a startup accelerator to make sure your business is in order.

Conclusion

As India’s fastest-growing startup accelerator, Marwari Catalysts prepares you to grow to your full potential by providing you with investment networks, mentorship, and structural compliances. From mentoring on pitch decks to setting up your compliance structure, we support founders through every step of their fundraising journey. We’ve helped startups pass the due diligence process, and they have come out even stronger from it.

We guide fresh founders like you and help them build investor-ready businesses with confidence. Because when you’re prepared and confident, due diligence isn’t a hurdle; it’s your green light to move forward.

Also Read : How Angel Investors Work: Everything You Need to Know