You’ve gotten a term sheet. Congratulations. Now comes the part where deals actually die: financial due diligence. Here’s exactly what VCs and their diligence teams examine — and what makes them walk away.
Revenue Quality
This is where 70% of diligence time is spent. They want to verify: Is revenue real and properly recognized? What’s the mix of recurring vs. one-time? How concentrated is revenue across customers? What’s the trend in net revenue retention? Are there side letters or unusual contract terms that affect future revenue?
Unit Economics Verification
They’ll recalculate your CAC, LTV, and payback period using their own methodology. If your numbers don’t hold up under scrutiny, it erodes trust in everything else you’ve presented.
Cash Flow Reconciliation
Your P&L profitability should reconcile to cash flow. If you’re showing $500K in profit but burning $300K in cash, they need to understand why. Working capital changes, capital expenditures, and financing activities should explain the gap cleanly.
The Speed Test
How quickly you respond to diligence requests signals operational maturity. If you can produce any requested document within 24-48 hours, it builds confidence. If every request takes a week of digging, investors start wondering what else is disorganized.
Do This Monday
- Build a data room now. Don’t wait for the term sheet. Include: 3 years of financial statements, tax returns, cap table, key contracts, and your financial model.
- Recalculate your unit economics from scratch. Do the numbers hold up if someone challenges your methodology?
- Time how long it takes to produce a clean P&L, balance sheet, and cash flow statement. If it’s more than a few hours, your systems need work.
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