How to Survive Investor Due Diligence: A Complete Guide for Startups

The Founder’s Survival Guide to Investor Due Diligence

The “Handshake Deal” is a myth. In the world of venture capital, the journey from a signed Term Sheet to money in the bank is paved with spreadsheets, legal audits, and late-night Slack messages. This is Investor Due Diligence (DD).

For a startup, DD is the ultimate “fitness test.” It is where your narrative meets your numbers. To help you navigate this, we have broken down the process into five critical pillars, complete with examples of what “good” and “bad” look like.

1. Unit Economics: The Science of CAC and LTV

This is often where the most rigorous questioning happens. Investors want to know if you have a “leaky bucket” or a “money printer.”

Customer Acquisition Cost (CAC)

CAC (Customer Acquisition Cost) is the total money a business spends to get one new customer. It is calculated by dividing all your Sales & Marketing expenses for a period by the number of new customers acquired in that same time frame.

Investors don’t just look at your total marketing spend; they look at Blended vs. Paid CAC.

The Nuance: If you spend INR 100,000 on ads to get 100 customers, your Paid CAC is INR 1,000. But if you also got 100 customers through “organic word of mouth,” your Blended CAC is INR 500.

Example: A SaaS startup claims a CAC of INR 200. During DD, the investor realizes the founder didn’t include the salaries of the three sales reps in the calculation. Once those salaries are added, the “fully loaded” CAC jumps to INR 300. This changes the entire valuation of the company.

Lifetime Value (LTV)

Customer Lifetime Value (CLV or LTV) is the total revenue or profit a business expects to earn from a single customer over the entire duration of their relationship.

The LTV: CAC Ratio

The gold standard for a healthy startup is an LTV: CAC ratio of 3:1.

Example: If it costs you INR 1,000 to acquire a customer, that customer must bring in at least INR 3,000 in net profit over their lifetime. If your ratio is 1:1, you aren’t a business; you’re a charity for Google and Meta Ads.

2. Legal & Corporate Governance: The Foundation

Legal DD is binary: you are either compliant, or you aren’t. Investors look for “clean titles.”

The Cap Table Audit

A startup cap table (Capitalization Table) is a detailed spreadsheet tracking who owns what percentage of a company’s equity, detailing share types (common, preferred, options, warrants), ownership stakes, and how they change with funding, grants, and exits.

Example: Early in the journey, you promised 5% of the company to a friend for helping with the branding. It was written in an email but never formalized. During DD, the investor sees this email. They will halt the deal until that friend signs a formal waiver or a specific grant, because they don’t want a “surprise shareholder” appearing when the company goes public.

Intellectual Property (IP) Assignment

As a startup, it is essential that you own all the IP rights. This is the most common reason deals are delayed.

Example: You hired a freelance developer from a popular platform to write your MVP. If you didn’t have a “Work for Hire” agreement stating that all code belongs to the company, that freelancer technically owns the IP. You must show signed IP Assignment Agreements for every person who has ever touched your product.

3. Financial Integrity: The “Paper Trail.”

You don’t need a CFO to pass DD, but you do need an “audit-ready” paper trail.

Revenue Recognition

As a startup, you need to ensure that the Revenue Recognition standards are being followed and you are not inflating the numbers to attract investors.

Example: In SaaS, you cannot count “Total Contract Value” (TCV) as immediate revenue.

You sign a customer for an INR 120,000 annual contract in December. You cannot say your December revenue was INR 120,000. It was INR 10,000 (Monthly Recurring Revenue). 

Investors will look at your bank statements to ensure the cash coming in matches the revenue you claimed in your pitch deck.

The Burn Rate and Runway

The Burn rate is the speed at which a company, especially a startup, spends its cash reserves before becoming profitable.

Investors will calculate your “Default Alive” status.

Example: If you have INR 50,00,000 in the bank and you spend INR 500,000 more than you make every month, you have 10 months of “runway.” If the investor sees your burn rate is accelerating while your growth is flattening, they may lower your valuation.

4. Commercial & Market Validation: The Reality Check

Investors will step outside your data room to talk to the real world to make sure there are no fake promises, and there is money where the mouth is.

Customer References

The VC can take the list of your customers and decide to speak to the three largest customers.

Example: An EdTech startup claims to be “integrated” into a major university. During DD, the investor calls the university’s IT head, who says, “Oh, we’re just running a free trial for one department; we haven’t decided to buy yet.” This discrepancy is a massive red flag for “Integrity Risk.”

The Sales Pipeline

They will audit your CRM (Refrens, HubSpot, Salesforce, etc.) to see the “velocity” of your deals.

Example: If you claim a pipeline of INR 1Cr, but the average deal has been sitting in the “Negotiation” stage for nine months, the investor will assume those deals are dead.

5. Technical & Product Audit: The Engine Room

For tech-heavy companies, a third party often performs a “Code Audit.”

Scalability and Technical Debt

Example: A Fintech startup built its backend on a brittle architecture that crashes whenever more than 1,000 users are active. During DD, the technical auditor will flag this as “Technical Debt.” The investor might still fund you, but they will earmark a portion of the capital specifically for “rebuilding the core” rather than marketing.

Security and Compliance

If you handle user data, you need to show your SOC2 compliance or GDPR readiness.

Example: A health-tech startup without encrypted databases is a liability. Investors will look for a security roadmap to ensure they aren’t inheriting a future data breach.

Things Startups Can Do to Prepare (The “Proactive” List)

1.  Build a “Live” Data Room: Don’t wait for a Term Sheet. Start a folder today with your Incorporation docs, Employee contracts, and Tax filings.

2.  Run a Monthly “Clean Up”: Every month, ensure your P&L is updated, and your cap table reflects any new hires.

3.  Perform “Reverse Due Diligence”: Vet your investors. Call the founders they’ve funded who failed. How did the investor act? A partnership is a two-way street.

4.  Assign a “DD Lead”: The CEO should keep selling and growing the company. Assign the COO or a Co-Founder to handle the document requests. Momentum is the best way to close a deal. If growth slows down during DD, investors get cold feet.

The Master 50-Point Startup Due Diligence Checklist

A ready-to-use checklist is given below, which can be used for building the Data room.

1. Corporate Governance & Legal (10 Points)

1.1 Certificate of Incorporation (and any amendments).

1.2 Company Bylaws or Operating Agreement.

1.3 Minutes from all Board of Directors meetings.

1.4 Minutes from all Shareholder meetings.

1.5 Current Cap Table (List of all owners, options, and warrants).

1.6 Copies of all issued Stock Certificates/SAFE/Convertible Notes.

1.7 List of all jurisdictions where the company is qualified to do business.

1.8 Certificates of Good Standing from the Secretary of State.

1.9 Evidence of any previous company names or “Doing Business As” (DBA) filings.

1.10 Documentation of any past, present, or threatened litigation.

2. Intellectual Property & Tech (8 Points)

2.1 List of all Patents (filed, pending, or issued).

2.2 List of Trademarks and Domain Names owned by the company.

2.3 Signed IP Assignment Agreements for every founder, employee, and contractor.

2.4 Documentation of any Open Source software used in the core product.

2.5 Software Architecture Diagram (How the system works).

2.6 Data Privacy Policy (GDPR, CCPA, etc.).

2.7 Cybersecurity protocols and any past penetration test results.

2.8 Inventory of hardware assets and cloud service accounts (AWS/Azure/GCP).

3. Financial Records (10 Points)

3.1 Audited (or certified) Financial Statements for the last 3 years.

3.2 Current Year-to-Date P&L, Balance Sheet, and Cash Flow Statement.

3.3 Monthly “Burn Rate” calculation for the last 12 months.

3.4 Detailed Budget vs. Actuals for the current fiscal year.

3.5 Copies of all Tax Returns.

3.6 Accounts Receivable (Aging Report) – who owes you money and for how long.

3.7 Accounts Payable – list of all outstanding debts to vendors.

3.8 Schedule of all company debt (loans, lines of credit).

3.9 Valuation reports (if applicable).

3.10 Bank Statements for the last 6 months.

4. Sales & Unit Economics (8 Points)

4.1 List of Top 10 Customers by Revenue.

4.2 CAC Calculation: Detailed breakdown of marketing spend vs. new users.

4.3 LTV Calculation: Average revenue per user over their expected lifespan.

4.4 Cohort Analysis: Retention data showing how long users stay active.

4.5 Copies of standard Customer Terms of Service and Master Service Agreements (MSA).

4.6 Current Sales Pipeline (Leads, stages, and expected deal sizes).

4.7 Churn Rate analysis (Monthly and Annual).

4.8 List of any strategic partnerships or Joint Venture agreements.

5. Human Resources & Team (7 Points)

5.1 Organizational Chart (Reporting lines).

5.2 Roster of all current employees (Title, Salary, Start Date).

5.3 Standard Employment Agreement template.

5.4 Employee Handbook and HR Policies.

5.5 Documentation of all Employee Benefits (Health, 401k, etc.).

5.6 List of all independent contractors and their active agreements.

5.7 Summary of the Equity Incentive Plan (Option Pool details).

6. Operations & Miscellaneous (7 Points)

6.1 Copies of Real Estate Leases (Office space).

6.2 List of major vendors (Software, Logistics, etc.) and annual spend.

6.3 Insurance Policies (D&O, General Liability, Cyber Insurance).

6.4 List of all Board Members and Advisors.

6.5 Press coverage or major media mentions.

6.6 Customer Testimonials or Case Studies.

6.7 Regulatory permits or licenses required to operate in your industry.

About the Author
Kajal Agarwal is a qualified Chartered Accountant and Assistant Vice President – Finance at a U.S.-based multinational corporation, where she manages financial operations for clients generating over $100 million in revenue. A mentor to aspiring CAs and author of a widely acclaimed book on Company Law, she has also appeared live on DD News as a Budget 2025 expert, sharing insights on national fiscal policy. Outside her professional life, Kajal is deeply committed to holistic living as a long-time practitioner of Iyengar Yoga and a certified Pranic Healer, finding balance through yoga, meditation, and mindful leadership.