Why Due Diligence Matters, Especially When Investing in Early-Stage Startups

Read this before even considering writing a check.

Investing = investigating

In the frothy world of startup investing, enthusiasm often arrives ahead of caution. Nowhere is this more evident than in the early-stage ecosystem, where investor excitement tends to outweigh investor skepticism. After all, what could be more tempting than the promise of getting in early, before the VCs, before the press, before the valuation goes parabolic?

But as any experienced investor will tell you, early bets are often the riskiest. Not because the ideas are weak or the ambition is lacking, but because so little has been proven, and even less is visible to the naked eye. In this blindfolded environment, due diligence isn’t a formality, it is the main event.

In fact, the earlier the investment, the more critical the diligence. And yet paradoxically, this is when it is least often done well.

At the seed stage and before, the majority of startups have little in the way of traction, revenue, or even a coherent go-to-market strategy. What they do have is a pitch deck, an idea, and a founding team, usually in that order. Investors who commit at this point aren’t evaluating a business so much as betting on the ability of two or three individuals to navigate chaos and emerge with something the market wants.

Which is why, according to the authors of Venture Deals, the most important diligence at this stage is on the team itself. Not just their LinkedIn credentials or past job titles, but their motivations, their capacity to handle pressure, and their alignment with each other. Have they worked together before? Have they failed before? Have they demonstrated grit when things inevitably went off-script? These are not questions easily answered in a pitch meeting.

But they must be answered.

Beyond the founders, the next layer of diligence involves interrogating the problem, not the solution. Far too many investors fall for the elegance of the product, overlooking the fact that it may be built for a market that either doesn’t exist or doesn’t care. “Large TAM” slides are a staple of modern decks, but they’re often more fiction than finance. Investors must ask whether the market is addressable in practice, not just in theory, and whether the problem being solved is one that customers genuinely feel, rather than one that simply fits a tech trend.

And then there is the cap table: rarely glamorous, often overlooked, but quietly capable of derailing a company’s future. A cap table bloated with early advisors, aggressive SAFEs, or founders already significantly diluted before Series A is a ticking time bomb. For investors, it’s essential to review not only who owns what today, but what happens post-raise and beyond. Are there convertible notes stacking up with uncapped valuations or “most favored nation” clauses? Will future institutional investors balk at the structure? What might seem like a paper formality today can become the reason a great business never sees a follow-on round.

It is equally important to understand the company’s regulatory posture, particularly in verticals like healthtech, fintech, or any business touching user data. Early-stage startups often operate in a grey zone, moving fast and worrying about compliance later. That may be fine for shipping code, but less so for investor confidence. Are there clear ownership rights on IP? Have early freelancers/contractors signed the necessary agreements? Is the business model legally viable in its target markets? Many founders haven’t thought through these questions. Investors must.

Financial diligence, too, demands a sharper eye than one might assume. There may be no financial statements in the conventional sense, but a founder should be able to articulate their burn rate, runway, hiring plans, and revenue assumptions with clarity and consistency. A founder who says they plan to raise again in six months but has no idea what milestones they need to reach by then is not planning: they’re hoping. Hope is not a strategy.

Finally, there is the founder’s reputation. This, perhaps more than any other dimension, is subject to social signaling and gloss. Many first-time investors assume that if other respected angels are involved, the deal must be legitimate. But groupthink is as common in angel rounds as it is in public markets. Investors should independently verify claims, check references that weren’t offered, and, when possible, talk to people who have worked with the founders in less flattering contexts.

It bears repeating: due diligence at the early stage isn’t just about protecting capital. It’s about increasing signal in an environment defined by noise. The irony is that the most compelling founders tend to welcome scrutiny. They see it as a reflection of professionalism, not mistrust. It’s often the ones who wave away questions, dodge documentation, or invoke secrecy clauses a little too quickly that warrant the deepest pause.

In a funding ecosystem increasingly shaped by hype, velocity, and FOMO, early-stage diligence remains one of the last remaining disciplines that reward patience over impulse. And like most disciplines, it pays dividends not just in returns, but in regret avoided.

Appendix: A Practical Checklist for Early-Stage Investors

Diligence doesn’t need to be exhaustive — but it must be intentional. The following checklist provides a structured approach for angel investors and early-stage funds conducting a first round of review before deciding whether to proceed with deeper analysis or term sheet negotiation.

Documents to Request from the Startup

• Pitch Deck & Executive Summary: Confirm alignment between narrative and numbers.
• Product Roadmap & Go-to-Market Plan: Understand what’s been built, what’s coming, and how they plan to reach customers.
• Monthly Financials: Review current burn rate, historical P&L (if any), and 12–24 month projections.
• Sales & Customer Data: Pipeline, signed contracts, pilot agreements, churn rates, and customer onboarding flow.
• Cap Table (Pro Forma): Identify current ownership, future dilution risk, and unconverted SAFEs or notes.
• Key Metrics: Segment by cohort if available: revenue per user, CAC, LTV, retention, etc.

Founder & Team Insights

• Founders’ Backgrounds: Look beyond CVs — speak to former co-founders, managers, or employees (a must!).
• Equity Vesting: Ensure all team members have long-term skin in the game.
• IP Ownership: Confirm all IP is assigned to the company, not individuals or contractors.
• Org Chart & Hiring Plans: Check current structure and hiring intentions post-fundraise.

Market & Product Fit

• Who is the customer, and how painful is the problem being solved?
• Is there validation: paying users, signed pilots, waitlists?
• Is the market growing? What alternatives do customers have today?
• How fast can this product scale with available capital?

Fundraising & Financial Alignment

• What are the terms of the current round (valuation cap, discount, instrument)?
• How will the funds be used: team, product, acquisition, runway?
• What metrics or milestones will unlock the next round?
• Are there prior investors, and what’s their involvement going forward?

Red Flags to Watch For

• Unclear founder commitment (e.g., part-time involvement)
• Uncapped or poorly structured convertible notes
• Excessive advisor or early investor dilution
• Unverifiable traction claims or missing documentation
• IP disputes or lack of formal assignment
• “Black box” financial models without sources or logic

(Feel free to follow me on LinkedIn and reach out to me if you need help with your Due Diligence: https://www.linkedin.com/in/yvancgoudard/)