Due diligence may be one stage of the venture capital investment process—but fast-moving VCs are asking good questions long before there is a deal to consider. The average VC firm will close 1% of deals by the end of the due diligence process, so it’s important to vet companies as quickly and efficiently as possible.
In the due diligence process, VCs scrutinize an investment opportunity to determine if it’s a good fit for funding. In addition to requesting legal documents from the target company, smart VCs also ask in-depth questions to mitigate investment risks by getting all the facts on the startup under consideration.
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What questions do top VCs ask during due diligence?
In this article, you’ll learn what information top VCs are asking about potential investments, so you can make well-educated investment decisions quickly.
The VC due diligence process explained
Fundraising and investing in a startup takes time and resources—and it’s a venture capitalist’s job to make sure the time and resources of their firm are not wasted as they pursue new portfolio companies.
When a VC originates a deal, whether it’s submitted by the startup founder or sourced through referrals—from brokers, investment bankers, limited partners, or other founders the VC firm has worked with—the proposal must go through an initial screening process. This screening process is the first part of due diligence. In this initial screening, VCs eliminate investments that don’t fit with the VC fund’s investment thesis, or that send up red flags.
If the proposal makes it through the first round of screening, it is passed on to other members of the firm—the deal team—for deeper analysis. At this point, the deal team examines the target company more closely to identify any possible issues around product, market, business model, or management. At this stage of due diligence, the deal team will also meet with the startup founders for early discussions.
The deal team will assess:
- The projected growth of the company and its target market
- The quality and potential of the management team
- Potential risks
- The probability of liquidating the investment within a few years
This assessment is documented and sent to the investment committee and the fund’s supervisory board. Now the committee and board have the opportunity to weigh in on the investment and determine if it’s worthwhile to commence with the rest of the due diligence process.
If the investment gets the green light, the deal team drafts a questionnaire to send to the founders or managers of the startup. The deal team summarizes these findings in a deal qualification memorandum. Only when this is complete will the VC firm start talking to the company about deal terms.
Should the company get this far in the VC due diligence process, they will be presented with a term sheet. If the company approves the VC deal team’s terms and signs the term sheet, yet another phase of due diligence comes next: external due diligence.
In the external due diligence phase, the VC firm audits the company’s accounting, legal, assets, agreements, and environmental factors.
Quick pass/fail screening questions
That is a lot of information for venture capital firms to gather on a company they may or may not fund. So top VCs use a set of quick screening questions to weed out potential bad investments before too much time is spent on due diligence.
Be sure you have a strong understanding of your VC fund’s focus areas. For example, is the fund focused on early-stage companies? Startups that have already received Series A funding, or are backed by angel investors? Companies in specific geographies, with certain cash flow profiles, or with specific plans for IPO?
These screening questions can act as an early due diligence checklist and can give you a quick answer about whether or not you should move on to due diligence. The answers may also highlight the right questions VCs should ask during due diligence, so you’ll know where to dive deeper to get the insight you need.
- Does this company fit with the areas of focus for your VC fund?
- Does this company address problems in the fund’s target industries or sectors?
- Does the company stage align with the fund’s target stages?
- Does this company’s target geography align with the fund’s target geography?
- What is the quality of the referral?
- How strong are the company’s partnerships, customer traction, and suppliers?
- Does the company’s market size align with the fund’s target market size?
Venture capital firms using Affinity can get to these answers faster with features like Industry Insights and Employee Growth Insights. From Affinity company profiles, Industry Insights displays AI-driven information about competing and related companies while Employee Growth Insights shows data on prospect company headcount growth and churn.
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Top questions leading VCs ask during due diligence
If the startup passes the first, quick round of screening, it’s time to get more information.
The questions the best VCs ask during due diligence fall into eight major categories. Ask these questions and request this information during venture capital due diligence to get all the facts about the company.
General company information
- Full name, date, and place of incorporation
- Registration number and registered office
- Copy of the certificate of incorporation
- If applicable, certificate of name change and articles of association
- Copies of resolutions passed by shareholders
- Copies of statutory books, meeting minute books, the list of registered members, and bylaws
- Copies of any agreements where third-party consent is required for any transaction
- Have there been any repurchases or redemptions of the company’s shares? If so, provide details.
- List of anyone who has representation rights, along with contact details.
- Are there currently any agreements pertaining to disposal, voting, or acquisition of the company’s shares or securities?
- Complete information about the total authorized and issued share capital. Include classes, number of shares, and whether the shares are paid in full or in part.
- Have there been any intra-group transactions that were not arm’s length transactions? If so, provide details.
- Have there been any capital changes in the company from the date of incorporation? If so, provide details.
- Copies of the following documents: options, warrants, and securities.
- Are there any charges or debentures that affect the company’s assets? If so, provide details.
- An outline of the company’s business plan
Detailed company activity
- List the company’s main activities
- Does the company conduct any additional activities? If so, provide details.
- What countries does the company operate in?
- What activities are conducted outside the country of incorporation?
- List of all partnerships, associations, or companies the company holds shares in. Also, provide details of capital and copies of all documents pertaining to these agreements.
- List of any trade associations memberships the company has.
Contracts and commitments
- Copies of all sales contracts for any product or service that will take more than six months to deliver
- Copies of the following agreements:
- Any credit agreements the company has with clients
- Agreements that cannot be terminated without notice of 30 days or more
- Agreements that require third-party validation to execute.
- Licenses and distribution agreements
- Copies of the following arrangements:
- Arrangements that can change control of the company when terminated
- Arrangements that can cause a significant monetary impact to the company when terminated
- Copies of material contracts that are currently being negotiated that are of material nature
- Are there any contracts, written or unwritten, that could restrict the activities of the company? If so, provide details.
- A copy of the company’s standard contract or terms and conditions.
- Detailed list of the customers that accounted for more than 5% of the company’s total revenue in the preceding year, with copies of contracts
- Detailed list of suppliers that accounted for more than 5% of the company’s goods in the preceding year, with copies of contracts
- List of supplier or customer contracts that will end within the next year
- Copies of any material contracts not mentioned above
Competitor information
- Detailed list of competitors
- Have there been any formal complaints or investigations with any office regulating fair competition? If so, provide details.
- Are there any arrangements or agreements with dealers, suppliers, or intermediaries regarding the allocation of customer territory or restrictions on resale? If so, provide details.
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Accounting and finance
- Copies of all management accounts since the day the company began operating
- What accounting standard is currently being used? Has there been any change in the standard since the company began operating?
- Copies of income statements and the last audited company accounts
- Detailed contact information for the company’s bankers
- Details of all company accounts, including any overdraft or borrowing
- Detailed list and copies of contracts or certificates for the following:
- Debt securities, mortgages, and any property that has been used as a collateral
- Any third-party loans given to the company
- Any grants received or applied for in the past five years
- All credit sales, purchase agreements, or leasing or rental contracts
- Off-balance sheet company commitments
- Guarantees, indemnities, or sureties
- List of all distributions paid and declared since the date of last accounting audit
- Copies of budgets and financial forecasts for the last five years
- Details of the following:
- Capital commitments and capital expenditure
- Debt schedule
- Any liabilities or potential liabilities from any acquisition or divestment agreement
- Any reorganizations that have happened in the past, and any reorganization that will be carried out in the next twelve months
- Copies of any contracts to acquire or divest using company shares in the last five years
Asset information
- Detailed list of all machinery, plants, and equipment owned by the company
- Copies of annual maintenance contracts or arrangements for machinery, plants, and equipment
- Are there any owned assets that are not currently in the company’s possession? If so, provide details.
- Detailed list of goods that are damaged or obsolete
- Detailed list of assets that were acquired and disposed of in the past five years
- Are there any assets in use by the company that are not owned by the company? If so, provide details.
- Are there any properties owned, used, or occupied by the company which could be a liability? If so, provide details and copies of contracts.
- Detail any changes in the company’s real estate ownership or usage
- Detail all rent, service charges, or monetary sums paid for real estate leases or licenses
- List of all property permission or planning notices
- List all of the company’s intellectual property rights (IPR), and provide copies of documents, chains of titles, copyright protection.
- Are there any open applications or registrations for new IPR?
- Provide a breakdown of IPR revenue earned by percentage in the past five years
- Copies of any IPR licensing agreements
- How are decisions made regarding IPR?
- Detailed list of all patents, trademarks, registered designs, and property rights owned or used by the company other than the IPR disclosed
- List the contact details for the people within the company responsible for IPR
- Have there been any disputes regarding the company’s IPR? If so, provide details.
- Is the company using any confidential know-how which may be subject to third-party denial of rights to use? If so, provide details.
Employment information
- Organizational chart and list of all employees with contact and compensation details
- Copies of all employment agreements, nondisclosure agreements, and contracts with employees, directors, and shareholders
- Are employees part of any trade union, staff association, or worker’s representation body? If yes, provide copies of agreements.
- Contact information and compensation details for all contractors, consultants, and independent agents. Provide copies of all contracts and agreements.
- Has the company had to take any disciplinary actions against any employee? If yes, provide details.
- Copy of the standard employment contract and the disciplinary rules or procedures
- Copies of any employee stock option plans, profit sharing plans, bonus programs, commission programs, or any other benefits or perks the company is providing to employees and directors
- Are there any loans or guarantees made for or on behalf of any of the company’s employees? If so, provide details.
- Detail any compensation payments or redundancy payments that have been made or that the company has the provision to make to former employees or their next of kin. List any payments of this type that have been made in the past twelve months.
- Detail any agreements with directors or employees where they get paid if they lose their job in the event of an acquisition
- Has the termination or resignation of any former employee led to losing customer or supplier contracts, or led to a decrease in revenue? If so, provide details
- List any offers of employment that have currently not been accepted
- List all notices of termination sent to employees, contractors, and consultants
- Have there been any employment disputes involving the directors or senior management of the company in the past twelve months? If so, provide details.
- Details and copies of pension policies, including:
- Pension booklets given to employees
- Trust deeds and rules
- Names of present trustees and actuary
- Current rate of employer contribution and employee contribution
- Insurance premiums, taxes, and expenses paid
- Details of the company pension scheme, including:
- Contracting certificate
- Names of all members of the pension scheme, and members joining in the next six months
- Unapproved pension arrangements granted to employees
- List of all employees that are not participating in the pension scheme
- Whether or not the company has provided access to an alternate scheme
- Confirmation that company trustees are in compliance with the relevant pension scheme acts
- Any whistleblowing reports submitted to the pension regulator
- Any former pension scheme provided to employees
- Any liability regarding financial support or any contribution notices received
- Any disputes, claims, or litigation regarding payment or provision of pension
- Copies of all employment contracts and agreements with directors, including any changes in contract terms
- Have any directors ever filed for bankruptcy, have outstanding convictions, or ever held a government position? If yes, provide details.
- Do any directors have material interest in any business that filed for bankruptcy or has been under investigation in the past twelve months? If yes, provide details.
- Have any directors, employees, or majority shareholders taken an interest in a business that is in direct competition with the company? If yes, provide details.
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Risk and compliance
- Are there any events, acts, or circumstances that might make the company non-compliant with any law or regulation pertaining to the health and safety of workers, the environment, or any asset that the company uses? If so, provide details.
- Provide copies of registration per the relevant Companies Registration Act of the country in which the company is registered
- Has any officer or employee ever failed to perform any statutory duty with respect to the company? If so, provide details.
- Are there any current or past disputes or potential disputes with current employees, customers, or suppliers? If yes, provide details. For past disputes, also detail the remedial action.
- Is there any pending, actual, or threatened litigation, arbitration, or an assertion that any employees or the company itself is non-compliant with any of the laws or regulations it is subject to? If so, provide details. For past incidents, also detail the remedial action.
- Are there any judgements that can affect the company or its assets? If so, provide details.
- Detail all regulatory bodies the company is subject to
- In what situations would any of the company’s permits or licenses be suspended, revoked, or not renewed?
- Copies of all licenses, approvals, permits, certificates, authorizations, applications of registration, or declarations obtained or applied for by the company
- Copies of any documents regarding non-compliance conditions pertaining to permits
- Details of insurance policies and plans, including:
- Copies of all insurance policies and receipts of paid premiums
- History of any insurance claims
- Any outstanding claims
- Any withdrawal or refusal of insurance coverage in the past five years
- Any claims that may be made in the next twelve months that the insurer does not already know about
- Confirmation that the company processes personal data according to the applicable data protection laws and copies of data protection certificates
- Does the company use any data belonging to or pertaining to minors? If so, provide details.
- Confirmation that the company is compliant with the latest data protection acts
- Does the company employ any third parties to process personal data? If yes, provide copies of contracts that confirm compliance with applicable data protection acts.
- Detailed list of all computer software and hardware used by the company. Include copies of all software and equipment licenses and hardware maintenance contracts.
- Detailed information on information backup and security plans and disaster recovery plans in the event of a system shutdown or breach
- Detailed information on copyrights owned by the company regarding software, source code, and websites
- Are there circumstances in which the company might lose access to any software or hardware? If so, provide details.
- Have there been any past disputes or are there ongoing disputes with any third party in regard to the company’s use of IT infrastructure? If so, provide details.
- Detailed list of domain names registered in the name of the company, including the company’s email provider. Include copies of agreements regarding website hosting, maintenance, and operation.
- Copies of all environmental, health, and safety policies and procedures
- Does the company carry out any health and safety risk assessments? If so, provide details, including copies of all permits, logbooks, and records.
- Copies of any assessments or reports regarding environmental liability. Include health and safety compliance documents, and any environmental audits carried out on or on behalf of the company in the last five years.
- Has there been any communication between the company and any health and safety authority in the past? If so, provide details and a copy of the communications.
- Has the company received any non-compliance notice from any regulating environmental agency regarding the sites and properties currently and formerly used by the company? If yes, provide details.
- Details of any construction work currently being done on any of the company properties. Provide copies of documentation, approvals, and provisions.
Due diligence doesn't end here
This list is comprehensive, and a good place for potential investors to start—but it’s not all-inclusive. Consider things like your VC fund’s focus, what value the startup provides in the marketplace, how competent and transparent the leadership team is—and ask any additional questions that can help you eliminate poor fits before anyone is too invested in the deal.
And don’t forget, there is no real beginning or end of due diligence when it comes to a potential investment. At every step of the way, your deal team members should be asking questions. Leading VC firms also support their pre-diligence workflows using a CRM purpose-built for venture capital investing. Storing all of your answers to these questions, relevant documents, and every detail related to an individual contact or stage of a deal in a single location helps keep your team aligned.
Relationship intelligence CRM platforms take this support a step further. Platforms like Affinity provide your team with insights into their collective network, business connections, and client interaction that help you find, manage, and close more deals faster—from pre-diligence, through your due diligence process, and through to portfolio management. Find out how Affinity can help your team today.
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