TL;DR: Due diligence is the investigation an investor or lender carries out before completing a deal, to verify a company's finances, legal standing, and commercial position. It is how a funder confirms that what was presented holds up under scrutiny.
Due diligence is the review process that follows initial interest and precedes a final commitment. The funder examines the company in detail to confirm the opportunity and surface any risks. It typically spans financial diligence (revenue, margins, burn, projections), legal diligence (corporate structure, contracts, intellectual property, litigation), and commercial diligence (market, customers, retention, competition).
For the company, diligence is a chance to demonstrate that the business is as strong and well-run as the pitch suggested. Being organized, with clean financials and accessible records, tends to make the process faster and smoother.
A venture debt provider’s diligence centres on revenue quality and the company’s ability to service and repay the facility within the life of the loan. That means close attention to recurring revenue, retention and churn, customer concentration, unit economics, liquidity, capital history, covenant headroom, and the credibility of the plan for the capital.
This differs from equity underwriting. An equity investor may be willing to accept a longer and less certain investment horizon in exchange for ownership upside at an eventual exit. A lender’s return is more fixed, so its diligence is more focused on downside protection, forecast operating performance during the loan term, and whether the company can repay principal, interest, and fees on schedule.
How long does due diligence take? It varies with deal size and complexity, from a couple of weeks to a couple of months. Preparation on the company's side is the biggest factor in speed.
How can a company prepare? Keep financials current, organise a data room with key contracts and records, and be ready to explain metrics such as retention, CAC, and unit economics.
Related terms: Pitch Deck · Unit Economics · Term Sheet · Covenant
