Understanding Startup Due Diligence and Why Deals Get Delayed

At Arkam, we believe that a successful fundraising process is driven not only by investor interest but also by the founder’s level of preparedness. After a term sheet is signed, financial and legal due diligence, transaction documentation, and compliance reviews often reveal issues that were not identified during fundraising discussions.

In this article, Vishnuhari Pareek explores the reasons venture capital transactions often experience delays after the initial agreement and outlines how founders can make the startup due diligence process more efficient through better documentation, early preparation, and clear communication.

Startup Due Diligence Process and Deal Delays

Day 0:

Investment Committee (IC) approval completed → Term sheet executed → Financial and legal due diligence commences → Legal teams begin drafting and negotiating transaction documents.

Founder:

“Our data room is fully prepared, so the diligence process should be smooth. Is it realistic to expect the funds within a month?”

Due diligence team:

“We’ve recently completed diligence for a similar business, so we anticipate a quick review.”

Day 100:

• The fifth version of the SHA/SSA is still under negotiation.
• The fourth due diligence checklist remains incomplete.
• “Can we shift three Conditions Precedent (CP) to Conditions Subsequent (CS) so they can be completed after the funds are disbursed?”
• “We didn’t realize regulatory approval would be required.

Does this sound familiar?

This is a common scenario in venture capital transactions. While both founders and investors may begin with optimistic expectations, the realities of due diligence often extend timelines. Most delays stem from gaps in preparation, documentation, or communication during the process.

1. Inadequate data room readiness

Founders may believe their data room is complete, but venture capitalist in Bangalore often find that missing documents, inconsistent records, or incomplete information come to light during diligence, slowing the review.

Solution:

Conduct a comprehensive review of the data room before providing investor access. If internal finance or legal resources are limited, engage experienced external advisors to ensure the documentation is accurate, complete, and well organized.

2. Increasing due diligence requests

As financial diligence progresses, reviewers often identify additional information gaps, resulting in new document requests and extended timelines.

Solution:

Agree on a detailed due diligence scope at the outset. Finalize the checklist jointly with the investor and introduce additional requests only when material issues are discovered.

3. Lengthy transaction document negotiations

Repeated revisions to the SHA/SSA usually arise from differing expectations between founders and investors. Even discussions around relatively minor provisions can significantly delay deal completion.

Solution:

Address key commercial terms during the term sheet stage wherever possible. Minimize negotiations on non-essential clauses, rely on standard market documentation, and establish a structured review process for comments and revisions.

4. Poor coordination and delayed communication

Slow responses, inconsistent updates, and a lack of alignment among stakeholders often create unnecessary bottlenecks throughout the diligence process.

Solution:

Implement a clear communication plan with regular progress meetings, defined escalation procedures, and agreed milestones to keep everyone aligned and maintain momentum.

5. Regulatory and compliance hurdles

Unexpected regulatory approvals or compliance requirements can delay — or in some cases temporarily halt — the transaction.

Solution:

Assess potential regulatory obligations early in the process by involving the appropriate advisors. For instance, determine whether approval from the Competition Commission of India (CCI) is required. Early planning helps reduce last-minute compliance issues.

6. Unanticipated diligence observations

Differences may emerge between the Management Information System (MIS) figures presented before signing the term sheet and the financial information available in the data room. Such inconsistencies can reduce investor confidence and may put the transaction at risk.

Solution:

Prepare a detailed reconciliation explaining any variances between the reported MIS figures and the supporting financial statements. Sharing a reconciliation between audited financial statements and MIS reports promotes transparency and reinforces trust throughout the due diligence process.