For many startups, due diligence is the most nerve-wracking stage of fundraising. While pitching and negotiating terms can be exciting, the moment investors start reviewing contracts, financial records, and shareholder agreements, the heat is ON. It’s a stage where deals can fall apart – or where founders can prove they are worth the investment.
At sTARTUp Day, where Dealum organized a seminar, “How to Survive Due Diligence,” Marti Soosaar, startup founder and investor, and Alexandra Balkova, partner at Startup Wise Guys, shared practical advice and real-life examples of due diligence done right – or horribly wrong. The key message? Preparation and transparency can make or break your chances of securing investment.
Due diligence is often seen as a legal formality, but in reality, it’s one of the biggest trust tests in the fundraising process. Investors don’t just want to check the numbers; they want to understand if the company is structured properly, legally sound, and managed by reliable founders.
Startups that treat this phase as an obstacle often struggle, while those who use it as an opportunity to demonstrate competence and preparedness have a much higher chance of closing the deal.
One common mistake is underestimating how thorough investors will be. They don’t just review financial statements – they look at contracts, intellectual property ownership, team agreements, customer commitments, and potential legal risks. If any of these elements are weak or poorly structured, it raises red flags.
Common pitfalls that can kill a deal
1. Legal and financial mistakes that surface too late
Many startups only realize during due diligence that something wasn’t set up correctly years ago, and by then, it’s too late to fix it quickly. A badly structured shareholder agreement, unclear intellectual property ownership, or unpaid tax liabilities can all cause delays – or worse, make investors walk away altogether.
A real-life example shared during the seminar involved a startup that had been operating successfully for years but only during an acquisition process discovered that an old investor contract contained an error that wrongly prioritized payouts. This mistake cost the company and its investors a significant amount of money simply because it wasn’t caught earlier.
The lesson? Even if everything looks good on the surface, reviewing legal documents before fundraising is critical.
2. Investors who keep asking for more but never commit
Another common scenario is when investors seem interested but keep requesting additional documents, reports, and explanations – without ever making a decision. This can sometimes be a genuine part of the process, but in some cases, it’s a sign that the investor isn’t actually serious.
Startups that get stuck in endless back-and-forth with potential investors risk wasting time that could be spent securing funding elsewhere. Setting clear deadlines for investor decisions is essential.
“If an investor keeps asking for more but won’t commit, it’s time to move on,” was one of the key takeaways from the seminar. Dragging out the process benefits no one, and in many cases, a delayed investor decision is simply a way of saying “no” without actually saying it.
3. Not understanding your own weaknesses
One of the worst things a startup can do is try to hide potential risks. Investors know that no company is perfect, but they expect founders to acknowledge weaknesses and have a plan for addressing them.
A common mistake is assuming that pointing out a risk will scare investors away. In reality, the opposite is true. A founder who openly discusses challenges and how they plan to mitigate them is seen as more competent and trustworthy than one who insists everything is flawless.
One startup in the Startup Wise Guys portfolio nearly lost an investment round because they downplayed their dependency on a single key supplier. When investors found out on their own, it damaged trust. Had the founders proactively mentioned it and explained their plan to diversify suppliers, the situation could have been handled much better.
How to prepare like a pro
1. Set up a proper data room
The fastest way to build trust is to have well-organized documents ready before investors even ask for them. A structured data room (organized folders with financials, contracts, cap tables, team agreements, etc.) makes the process smooth and shows professionalism.
Many deals get delayed simply because startups struggle to provide the necessary documents on time. Having everything ready in advance reduces stress and speeds up decision-making.
2. Keep investor agreements standardized
One of the biggest rookie mistakes is offering different investors different terms. This can lead to legal complications, investor conflicts, and a lack of transparency. Instead, startups should use a single standardized agreement and negotiate once – preferably with a lead investor who sets the terms for others.
This avoids the nightmare scenario of needing to renegotiate multiple agreements with different investors just to finalize the deal.
3. Control the narrative
During due diligence, investors don’t just look at documents – they talk to people. They will reach out to customers, former employees, suppliers, and even competitors to get a full picture of the company.
This means that startup founders must ensure that their story is consistent. If investors hear conflicting information from different sources, it can create doubt and slow down – or even stop – the deal.
Aligning the company’s messaging across all stakeholders ensures that investors get a clear and coherent understanding of the business.
4. Create urgency without being desperate
Investors move faster when they know others are interested. Creating a sense of urgency – by mentioning other potential investors or competing offers – can help speed up decision-making.
However, this should be done strategically. Desperation can be a turn-off, but showing momentum can work in a startup’s favor.
Due diligence is a test, not a trap
Many startups fear due diligence because they see it as a potential roadblock to funding. In reality, it’s a test of trust and competence.
Investors aren’t just looking at numbers – they are assessing how well a startup is managed, how prepared the founders are, and how they handle tough questions. Those who approach due diligence with honesty, preparation, and confidence are far more likely to succeed than those who try to fake their way through it.
At the end of the day, due diligence isn’t about proving you’re perfect – it’s about proving you’re prepared.
Key takeaways
- Due diligence is a trust test, not just a legal check. Investors want to see well-structured businesses, not just exciting ideas.
- Legal and financial errors from years ago can kill a deal. Fix them before fundraising, not during.
- If an investor keeps delaying, move on. Time is a startup’s most valuable asset.
- Acknowledge weaknesses instead of hiding them. Investors prefer transparency over surprises.
- Prepare a structured data room. Having documents ready makes the process faster and smoother.
- Create urgency, but don’t appear desperate. Momentum matters in fundraising.
By treating due diligence as an opportunity rather than an obstacle, startups can turn it into a powerful step toward securing investment – and ultimately, building a stronger, more resilient company.
