Due diligence: a glossary guide for investors

Why due diligence matters in investing

Due diligence matters because it protects your capital. You can’t eliminate risk, but you can avoid unnecessary risk.

Here’s what solid due diligence does for you:

• Helps you assess risk.
  You look at revenue, cash flow, runway, competition, and regulation so you understand what could realistically go wrong.
  
  
• Reduces the chance of fraud or misrepresentation.
  By cross‑checking claims against documents, filings, and third‑party data, you’re less likely to fall for inflated numbers or fake traction.
  
  
• Increases confidence and transparency.
  When you’ve gone through a clear due diligence process, your decision (yes or no) feels less emotional and more grounded in evidence.
  
  
• Aligns investments with your strategy.
  Even a great company can be a bad investment for you if it doesn’t match your risk tolerance, time horizon, or liquidity needs.

Simple examples of due diligence include:

• Reading the pitch deck and the financials
  
  
• Checking the founding team’s bios and LinkedIn histories
  
  
• Looking at past performance, customer reviews, and market trends

Common types of due diligence

In practice, “due diligence” is actually a bundle of different checks. Understanding the main types of due diligence helps you avoid blind spots.

Financial due diligence

Financial due diligence focuses on the numbers behind the story.

Key things to look at:

• Revenue and revenue quality – Is it recurring or one‑off? Concentrated in a few customers?
  
  
• Cash flow and burn rate – How much cash is going out each month, and how long is the runway at the current burn?
  
  
• Margins – Gross and operating margins reveal how efficiently the business operates.
  
  
• Capital structure – Existing debt, preferred equity, and investor rights can all impact your returns.

For early‑stage companies, the numbers are often messy or limited. That’s okay. You’re mainly asking, “Do these numbers make sense given the story?”

Legal due diligence

Legal due diligence checks that the company actually owns what it claims to own and is operating within the rules.

Things to review:

• Corporate docs – Incorporation, cap table, board minutes, major shareholder agreements
  
  
• Intellectual property (IP) – Patents, trademarks, copyrights, licensing agreements
  
  
• Contracts – Key customer, vendor, and partnership contracts
  
  
• Compliance and regulatory exposure – Industry‑specific rules, past or pending lawsuits, regulatory investigations

You don’t need to be a lawyer to spot red flags like ongoing lawsuits, unclear IP ownership, or missing key contracts. Those are all signals to slow down or get professional help.

Operational due diligence

Operational due diligence examines how the business actually operates day‑to‑day. Great ideas can still fail if operations are chaotic.

Consider:

• Product development – How fast can the team ship and iterate?
  
  
• Supply chain and vendors – Are there single points of failure?
  
  
• Internal systems – Finance, HR, security, customer support
  
  
• Processes and documentation – Is knowledge stuck in a few brains, or is it systematized?

You’re asking: “Can this team deliver on its promises at scale?”

Market / commercial due diligence

This is about the outside world: customers, competitors, and trends.

Focus on:

• Total addressable market (TAM) – Is this a niche or a huge opportunity?
  
  
• Customer demand – Evidence of real pain and real willingness to pay
  
  
• Competitive landscape – Existing players, emerging startups, and incumbents who could crush or acquire this company
  
  
• Growth trends – Is the market expanding, flat, or shrinking?

Market or commercial due diligence helps you sanity‑check whether the opportunity is actually big enough to matter, even if everything goes right.

Human resources (people) due diligence

People due diligence is often underrated, especially by new investors. But in the early stages, the team is the asset.

Look at:

• Founders’ experience and track record – Have they shipped products, built teams, or exited companies before?
  
  
• Org structure – Is the team balanced, or are they missing critical functions?
  
  
• Culture and incentives – Are people aligned around the mission, and do they have real ownership?
  
  
• Turnover – High churn at a small scale can be a warning sign.
  
  

You’re assessing whether this is a team you’d trust to navigate uncertainty for years.

The due diligence process: step by step

Every investor develops their own style, but most due diligence processes follow a similar flow.

1. Initial research

You start with the basics:

• Read the pitch deck or deal memo
  
  
• Scan the website, press coverage, and public interviews
  
  
• Look at comparable companies and valuations
  
  

If the opportunity doesn’t pass this first sniff test, you can stop here and save your time.

2. Document review

If it’s still interesting, ask for or review:

• Financial statements (historical and projections)
  
  
• Cap table and terms of the round
  
  
• Key contracts and customer metrics
  
  
• Product demos and technical documentation (if relevant)
  
  

This is where you start building your mental model of how the business makes money and what could break.

3. Conversations with the team

Talk to the founders and key leaders. Good questions:

• How did you get your first customers?
  
  
• What’s the hardest problem you still haven’t solved?
  
  
• If you had to cut burn by 30% tomorrow, what would you do?
  
  
• What does success look like in 3–5 years?
  
  

You’re listening for clarity, honesty, and a realistic view of risks, not just hype.

4. Third‑party validation

Use external sources to verify claims and fill gaps:

• Company databases like AngelList, Crunchbase, or PitchBook
  
  
• Regulatory filings in databases like SEC EDGAR (for public or certain private filings)
  
  
• Professional networks, such as LinkedI,n to confirm team backgrounds
  
  
• Customer reviews or user communities on platforms, forums, or social media
  
  

If what you find externally doesn’t match the story you’re being told, dig deeper. Understand how secondary market activity can act as an additional validation signal in key benefits of investing in secondary markets.

5. Final Analysis and Decision

Finally, summarize your findings:

• Key strengths
  
  
• Key risks
  
  
• Biggest open questions
  
  
• How the deal fits your personal strategy

At this point, “no” is as valuable as “yes.” The goal of due diligence is not to justify every investment; it’s to build the confidence to walk away when something doesn’t add up.

What due diligence means for individual investors

You don’t need to be a professional VC to practice due diligence. Any accredited investor can apply a lightweight, repeatable framework across deals; whether they’re on a crowdfunding site, an alts platform, or a private markets marketplace like Augment’s. If you’re unsure whether you qualify, review Regulation D: accredited investors — who qualifies and why it matters.

Focus on a few essentials:

• Review the team: Look up founders on LinkedIn, read past projects, and see if their skills actually match the problem they’re solving.
  
  
• Understand product‑market fit: Is there proof of demand? Revenue, waitlists, partnerships, or engaged users? Or is it still just a concept?
  
  
• Check valuation vs. traction: High valuations with very little traction can still work, but the bar should be higher during your due diligence process.
  
  
• Watch for red flags: Inconsistent numbers, vague or defensive answers to reasonable questions, lack of basic documentation, or overly optimistic projections are all signs to slow down.
  
  

The more systematically you do this, the better your intuition gets. Over time, you’ll recognize patterns faster and spend more time on the few great opportunities that fit your strategy.

Tools & resources for doing due diligence

No one does due diligence in a vacuum. Here are tools and resources that can support your work:

• AngelList – To explore startups, syndicates, and track founder histories.
  
  
• Crunchbase – For funding histories, investors, and basic company metrics.
  
  
• PitchBook – More advanced private market data (typically for professional or institutional users).
  
  
• SEC EDGAR – To search regulatory filings for public companies and certain private offerings.
  
  
• Company websites and pitch decks – Primary sources for strategy, product, and roadmap.
  
  
• Community forums and investor content – Reddit threads, Twitter/X, Substack investors, and other communities can surface both bull and bear cases you hadn’t considered.
  
  

You don’t need to use every tool for every deal. Choose the mix that matches your check size, risk level, and the level of conviction you need.

Due diligence checklist for investors

Here’s a simple investment due diligence checklist you can adapt and use repeatedly.

Founding Team & People

• Review the founder and key team’s backgrounds
  
  
• Confirm relevant industry or startup experience
  
  
• Understand how equity and incentives are structured

Business Model & Product

• Clarify how the company makes money
  
  
• Identify the target customer and problem
  
  
• Evaluate differentiation vs. competitors

Financials & Runway

• Check revenue, burn rate, and runway
  
  
• Understand existing investors and capital structure
  
  
• Sanity‑check projections against market reality

Market & Competition

• Assess market size (TAM, SAM, SOM where available)
  
  
• Map key competitors and substitutes
  
  
• Note major tailwinds or headwinds (regulation, tech shifts)

Legal & Regulatory

• Identify any lawsuits or regulatory actions
  
  
• Confirm IP ownership or key licenses
  
  
• Note sector‑specific regulatory risk

Exit or Liquidity

• Understand potential exit paths (acquisition, IPO, secondary markets)
  
  
• Check whether and how you might eventually sell your position
  
  
• Align expectations with your time horizon and liquidity needs
  
  

Use this investment due diligence checklist as a starting point, not a rigid rulebook. As you gain experience, you’ll add your own questions and shortcuts.

Final thoughts

Due diligence is not about eliminating all risk. It’s about avoiding obvious mistakes, protecting your capital, and making decisions you can live with.

Even small investors should ask questions, request clarity, and walk away when something feels off. A consistent due diligence process turns investing from guesswork into a disciplined practice.

Make it a habit, not an afterthought. Use platforms, tools, and communities (including Augment’s marketplace, Collective, and Power 20 insights) to help you see what others might miss. Learn how to evaluate these platforms as part of your diligence process by better understanding how to find the best pre-IPO investment platform.