Alea Consulting – Risk Mitigation | Due Diligence

From 8 unicorns a decade ago, India has 118 as of 2025, reflecting a 13x growth in high-value startups. The spread is geographical too, as in 2016, only four India States had dedicated startup policies, but today, 31 States / Union Territories have implemented their own dedicated startup policies, largely spurred by the Startup India initiative. This rapid growth underscores the importance of startup due diligence for investors and corporate partners looking to navigate India’s growing startup ecosystem.

Despite this remarkable growth, the expansion has not been without significant challenges. High-profile cases in recent years highlight how corporate governance lapses and alleged unethical practices by founders or promoters have led to the downfall of promising ventures, even those that had built strong customer loyalty and massive valuations.

What is Startup Due Diligence?

Startup due diligence is a critical, in-depth investigation and evaluation process that investors, such as venture capitalists and angel investors conduct before committing funds to a startup.

This rigorous scrutiny examines every facet of the business, including financial health, legal compliance, operational efficiency, market potential, and founder backgrounds. The primary goal is to verify the startup’s claims, uncover hidden risks or liabilities, and ensure the investment opportunity is sound and sustainable.

A successful due diligence process can pave the way for a smooth and confident investment decision, while the discovery of red flags such as financial discrepancies, governance issues, legal disputes, or unethical conduct can lead to prolonged negotiations, significant deal delays, valuation reductions, or even complete derailment of the investment.

Types of Due Diligence

Integrity Due Diligence– Integrity due diligence is a comprehensive assessment aimed at understanding the reputation of an individual, organisation, or entity, particularly in the context of a business transaction, investment, or partnership. It involves a multi-faceted approach, focusing on various elements that impact perception and stakeholder trust.
Legal and Compliance Due Diligence– Legal and compliance due diligence is a thorough investigation and assessment process typically conducted during investments or partnerships. The aim is to identify any legal or regulatory risks associated with a target company or transaction.
Regulatory Due Diligence– Regulatory due diligence involves assessing a company’s compliance with applicable laws, regulations, and industry standards. This process is more crucial when entering new markets, or making strategic investments, to identify potential regulatory risks and liabilities.
Financial Due Diligence– Financial due diligence focuses on examining the numbers provided of a company or investment. Typically conducted before major transactions such as acquisitions, mergers, or investments, this process assesses the accuracy of financial information and helps evaluate financial health and projections sanity.
Operational Due Diligence– focused on an in-depth investigative process to evaluate internal and external factors that could potentially harm ongoing operations. It involves identifying, analysing, and managing on ground risks related to business operations, processes, systems, and external factors that may impact the organisation’s ability to grow

Stages of Due Diligence

Due diligence in investments typically divides into pre-investment and post-investment stages to assess and monitor risks:

Pre-Investment Due Diligence: Pre-investment due diligence comprises of two key phases: exploratory and confirmatory. The exploratory phase involves high-level reviews of market potential, financials, management, and legal basics to spot deal-breakers. Confirmatory due diligence follows a letter of intent, with deep dives into financial audits, customer validations, operations, technology, and reputation risks via experts and relevant site visits.
Post-Investment Due Diligence: Post-investment due diligence focuses on ongoing monitoring rather than initial scrutiny. It includes regular performance reviews, compliance checks, financial tracking, and value-creation initiatives like operational improvements. Investors also conduct periodic audits for risks such as market changes or execution issues to support exit planning.

Importance of Rigorous Due Diligence

Fast-paced startups and disruptors demand rigorous startup due diligence due to their elevated risks from rapid scaling, unproven models, and volatile markets. Lapses in ethics or founder integrity have historically led to the downfall of high potential ventures, making background checks on startup founder(s) a critical part of the due diligence process.

These organisations often operate in uncharted territories, facing high failure rates from market misjudgements or execution flaws. They exhibit unpredictable financials like high burn rates and speculative projections, amplifying chances of cash shortages, while immature teams, weak IP protection, regulatory hurdles, and founder integrity issues such as criminal records, past failures, litigation, or unexplained wealth, heighten operational, legal, and ethical vulnerabilities.

Thorough due diligence checks validate financial health, team capabilities, market fit, and founder backgrounds through reference verification, adverse media scans, and transparency assessments to uncover hidden issues early. Investors scrutinise scalability, competitive edges, risk mitigations, and ethical alignment via deep dives into operations, tech, and background checks. This comprehensive process, covering financial audits, legal reviews, and integrity probes, protects capital in high-stakes environments.

Conclusion

The intensity of due diligence should scale with the startup’s stage – lighter for seed rounds but increasingly rigorous for later stages where stakes are higher. Ultimately, while no process eliminates all risks, skipping or rushing due diligence in favour of speed often leads to avoidable failures, as seen in high-profile collapses during market downturns.

For investors, it’s a critical tool to balance innovation’s upside with disciplined risk management, turning potential pitfalls into informed opportunities.

Ensure Your Investment is Protected