Meaning
Comprehensive investigation by an organization before investment. Institutional due diligence involves a rigorous review of a company’s financials, legal standing and market position by a professional firm or venture capital fund. This process aims to verify the claims made by the founders and identify potential risks.
It is a standard requirement for any significant capital injection.
Inquiry Depth
Analysts examine every aspect of the business, from customer contracts to employee backgrounds. During institutional due diligence, the investigating party will look for red flags such as pending lawsuits or intellectual property gaps. This level of scrutiny goes far beyond a casual review of a pitch deck.
The process can take several weeks or even months to complete.
Risk Assessment
Identification of potential failure points is the primary goal of the investigation. If institutional due diligence reveals that the company does not own its core technology, the deal will likely collapse. The investors are looking for a reason to say no, so the founders must be prepared with a complete data room.
This assessment determines the final terms and the valuation of the deal.
Approval Basis
Final decision to invest rests on the findings of the review team. Successful institutional due diligence provides the green light for the transfer of funds. It also sets the baseline for the future relationship between the founders and the new investors.
A clean report is a major milestone in the life of a startup.