Unveiling the Due Diligence Process for Early-Stage Startups

Isabel Russ
Mar 15, 2019 · 6 min read

As with almost everything in early stage investing, it’s difficult to standardize what happens after the first introduction call between a founder and an investor. Generally, a Due Diligence process from early stage investors will involve some degree of understanding better the market you’re in (i.e. market research), the current stage of your business (i.e. analyzing your traction, checking your contracts) and you as founders (i.e. personal interactions), plus reference checks which give insights into all three of these areas.

Proof of traction and market research

Having established a basic interest after the initial call, the first thing we ask for from founders is for proof of traction. Here we expect a detailed spreadsheet showing the development of your company over the past couple of months (not only three bullet points). You can find great templates for a cohort analysis and financial plans (incl. projections) online. Have these financial docs ready — we expect you to be tracking your metrics already, so why would it take you 2 weeks to come back to us on this?

We might ask you for some insights, studies or other information on the market you’re operating in, but we have our own tools and services for this and will do our own research work anyways. Apart from that, we’ll ask for you specific information that we need in terms of your business, e.g. about your go to market strategy, the technical framework you’re operating on or how you view your competition.

Reference Checks

Once we’ve reviewed all the materials you’ve sent and done some more analysis of your business and market on our side, the most important step in determining whether we want to invest in your business is conducting reference checks. That means we’ll want to speak to people that have worked with you, have used your product or service or that would potentially be interested in doing so. While we always tap into our own network for potential customers, we expect you to also be able to provide two to three names of customers (and for marketplaces: both from the demand and the supply side). I would hence advise you to already pre-select a few contacts that are willing to spend some time talking to your potential investors and, obviously, that will have something good to say about you. We realize that you won’t choose customers who don’t appreciate your business, but make sure that these are people who are actually using your product (I’ve had reference calls with people who were obviously good friends with the founder and didn’t really have a clue about the business — of course they had great things to say about the founder, but it made me wonder whether they had real customers at all). Generally, these reference checks are quite basic: we’ll ask them about their view of the market, how they used to solve the problem they’re now solving with your product and for some feedback on your team, product and company. We realize that it’s important for you to keep good customer relations, so we make sure to always be respectful and positive in these conversations. Often times we’ll be able to provide valuable insights to you afterwards that the customers didn’t tell you themselves.

Meeting face-to-face

Either before, during or after these reference checks, we’ll want to invite you to a face-to-face meeting, which we call “workshop”. We live in a digitally connected world, and as an investor in digital businesses, we conduct most of our meetings online. However, we make a point of meeting every founder team also in person, as it still makes a difference to meet someone face-to-face (at least until AR tools have become sophisticated enough). These workshops happen either in our office or in yours, depending on how the fewest amount of people have to travel. Basically speaking, you will be presenting your business and vision again, maybe going into more details in some areas, but it will be a lot of repetition. You’ll also meet more people from our investment team so you get a better understanding of who we are. The aim of this workshop on a high-level is to see whether we can work together constructively for three to four hours. Even if we end up not doing the investment, these workshops are often a great opportunity for you to review your strategy and vision, and for us to get interesting market insights.

Doing our “homework”

If we both come out of this workshop more confident in a future where we develop your company and make it big together, we’ve technically already reached the end of the investment process. From here on, we’ll do a financial due diligence, but we’re in seed stage, so in most cases this simply means that we’ll take a look at a subset of your contracts, ask for your last few months’ commercial evaluations (“BWAs”) and take a deeper look at the technical framework and code behind your product.

At some point during this process we’ll also have to agree on an investment case, but it has rarely happened that we did not do an investment because we couldn’t find a solution with the founders. In the end, “valuation is a price”, and of course it’s an important factor for both sides, but don’t forget that it’s even more important to optimize for the future and not just for this investment round. So, contrary to what many founders believe, both sides actually do have the same interest even in terms of company valuation: setting a price that reflects your business’ current stage accurately.

The last step from our side is to get the internal OK from our investment committee and we’re ready to send you a signed term sheet.

Getting the money on your account

So how long does this process usually take? At Speedinvest we’ve had anything between one week and nine months, depending on the stage of the company (the earlier, the less exists that can be due diligenced), the time constraint due to either lots of investors being interested or the company running out of money (try to avoid this situation at any cost during your fundraising process) and of course expected or unexpected complications (e.g. discussion on IP rights). Most of the investment processes we’ve done have taken two to three months. However, I would tell every founder about to start fundraising for their seed round to expect this to take around six months — as a rule, not an exception! Don’t underestimate the many possibilities how your fundraising round could fail or be extended due to some unforeseen reasons (from investors leaving their fund to some KPI not meeting the target).

Once the initial contract, i.e. the term sheet, is signed, you will be connected to our legal team who will together with your lawyer be supporting you in the process of completing and signing the long form agreements. We define all our key terms together with you already in our term sheet, so there should not be any substantial discussions after this stage anymore. But especially for investors that give out very short term sheets, expect the long form stage to entail some negotiations on the legal as well as commercial side. Only after these contracts are signed is the investment official: don’t forget that term sheets are non-binding by nature. Some founders even say that nothing is certain before they see the money from the investors on their account.

This post is part of a 4-part-series on the investment process for early stage startups. Stay tuned for the last part :)

At an investors’ dinner a couple of months ago the host called investors “the dark side” of the startup scene. I hope I was able to bring some light to our side with this blog post. We at Speedinvest see ourselves as a partner to our portfolio companies and startups generally. So, if you have questions on the DD process at Speedinvest or you want to start the process with us, reach out to us at office@speedinvest.com or upload your pitch deck at www.speedinvest.com.


5 focused investment teams. 20 in-house, operational experts. 100% committed to your success.

Isabel Russ

Written by

Passionate about understanding things and changing them for the better. Here: writing about my experiences in the European VC/start-up world


5 focused investment teams. 20 in-house, operational experts. 100% committed to your success.

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