Startup Financial Due Diligence: What VCs Check and How To Prepare

A founder once told me, "Our model is in my head, but the numbers are easy." Two days later, their round was stuck because the investor could not reconcile three basic facts: revenue, cash, and headcount.

Financial diligence is rarely about perfect GAAP statements at seed. It is about trust, consistency, and clarity. VCs want to know two things: do you understand the economics of the business, and can you plan cash realistically enough to hit the next milestone without surprises?

This guide walks through what investors validate, what founders should prepare, and the red flags that commonly slow down a round.

The VC Mindset: Finance as a Risk Detector

Most investors do not do financial diligence to catch founders in a lie. They do it to identify hidden risk:

• Revenue quality risk (one-time services disguised as recurring revenue).
• Margin risk (costs that scale with revenue faster than expected).
• Cash risk (runway assumptions that depend on perfect hiring and perfect sales).
• Concentration risk (one customer, one channel, or one contract clause).

What Investors Typically Ask For

The exact list varies by stage, but a clean baseline package speeds things up.

Seed and Pre-Seed (Baseline)

• 12 month historical P&L (even if it is simple).
• Current cash balance and a monthly burn view.
• Revenue detail: customers, pricing, contract length, and start dates.
• Headcount list: role, start date, comp, and contractor vs employee.
• Pipeline overview: top deals, stage, and expected close timing.

Series A and Beyond (More Depth)

• Monthly cohorts: retention, expansion, churn, and payback by segment.
• Bookings vs revenue, plus any revenue recognition policies.
• Gross margin bridge: what drives COGS and how it scales.
• Budget vs actuals and explanation for variance.
• Working capital items (if relevant): AR aging and collections.

The Metrics That Matter (By Business Model)

SaaS

• Net revenue retention (and drivers: price, usage, seat expansion).
• Gross margin and support costs.
• CAC and payback by channel and segment.
• Churn: logo churn and revenue churn, plus top reasons.

Usage-Based and API Businesses

• Revenue concentration across top customers.
• Unit costs tied to usage (compute, third-party fees).
• Expansion mechanics: what increases usage and what caps it.

Marketplace

• Take rate and how it varies by category.
• Supply acquisition costs vs demand acquisition costs.
• Liquidity dynamics: repeat rates and time-to-match.

Financial Model Diligence: What Gets Stress Tested

Most models fail not because the math is wrong, but because assumptions are not tied to real constraints. Investors typically stress test:

• Hiring plan. What happens if key roles take 60 to 90 days longer?
• Sales cycle. What happens if deals slip one quarter?
• Gross margin. What happens if infrastructure and support costs rise with growth?
• Working capital. What happens if customers pay late?

Common Red Flags (And How To Fix Them)

• Numbers change between conversations. Fix: keep one source of truth and document updates.
• Revenue is not reconciled to bank statements. Fix: tie cash receipts to invoices and contracts.
• Burn is understated. Fix: include real payroll, taxes, tooling, and contractor costs.
• Models assume perfect execution. Fix: add a downside case and show how you respond.

A Founder Prep Checklist (Fast)

• One clean spreadsheet with monthly actuals: revenue, COGS, opex, and cash.
• A customer list with contract basics and renewal expectations.
• A pipeline list with stage definitions and close criteria.
• A model that ties hiring, pipeline, and margin assumptions to reality.
• Two scenarios: base case and downside case.

When financial diligence is clean, it becomes a speed advantage. Investors stop asking you to explain the same numbers and start spending time on what actually matters: whether the business can win.