Due Diligence

Due diligence is the process of in-depth auditing and investigation carried out by investors before they formalize the signing of an investment agreement. The objective is to validate all information presented by the startup during the pitch and initial negotiations, aiming to mitigate risks. The process covers four main areas: Legal (client contracts, corporate compliance, trademarks and patents); Financial (bank statements, debts, cash flow, and tax obligations); Technological (intellectual property of the code, data security, and infrastructure scalability); and Operational (analysis of the team and internal processes). Due Diligence can last from a few weeks to months and is the final step before the capital transfer.

Practical Example: A Venture Capital fund sent a Term Sheet to a HealthTech startup. Before transferring the money, the fund hires lawyers and accountants to verify if the startup has the necessary health licenses to operate, if the software truly belongs to the company, and if there are no hidden labor lawsuits. If any serious irregularity is found, the investor may withdraw from the deal or renegotiate the valuation.

Read the book Bad Blood, by John Carreyrou.