Due Diligence is the process by which investors dig deep into our startup to understand the details of how it works and whether there are any red flags they should be aware of.

There are typically 3 categories of Due Diligence:

1. Financials. Reviewing what assumptions are driving the revenue and business model, as well as ensuring costs are in line. If the business has existing operational history, it will involve combing through the previous financials and perhaps bank statements.
2. Business Diligence. This involves getting a good feel for the business itself, interviewing customers, using the product, and calling in experts where needed to do some further investigation on complicated matters.
3. Background Checks. This is fairly standard to do a criminal background check, sometimes a credit check, and a legal check to make sure there are not outstanding liabilities attached.

The amount of due diligence an investor will do ranges dramatically. There are some investors (typically larger venture capital firms) that will perform more exhaustive diligence because they are writing larger checks while other folks (typically individual angel investors) may do next to no due diligence.

The key to due diligence is having as much information prepared up front as possible so as to reduce the amount of time it takes to close your deal.