You've nailed the pitch, the VC is excited, and they want to proceed. Then comes due diligence—and suddenly your messy financial records become the thing standing between you and that term sheet. We've seen promising deals fall apart because founders couldn't produce clean financials.
The good news: preparing for due diligence doesn't require heroic effort if you start early. Here's what VCs actually look at and how to make sure you pass with flying colors.
What VCs Actually Check
Financial due diligence isn't just about verifying your numbers match what you said in the pitch. Investors are looking for patterns that reveal how you run the business:
Revenue Recognition
VCs want to understand how you book revenue. Do you recognize it when the contract is signed, when the service is delivered, or when cash is collected? Is it consistent month over month? Startups sometimes accidentally inflate numbers by recognizing revenue too early—investors will catch this.
Unit Economics
They'll calculate your true customer acquisition cost (CAC) and lifetime value (LTV). This means they need clean data on:
- Marketing spend by channel
- Sales team costs
- Customer churn rates
- Revenue per customer over time
Burn Rate & Runway
How fast are you spending? How many months until you run out? Investors want to see that you understand these numbers and that they're consistent with what you told them.
Cap Table Cleanliness
Is your cap table accurate? Are there any unusual arrangements, undisclosed shareholders, or messy convertible notes? A complicated cap table can delay or kill a deal.
The Trust Factor
Due diligence isn't just about the numbers. It's about whether the VC can trust you. If your books are messy, they'll wonder what else is messy. Clean books signal professional management.
Red Flags That Kill Deals
These issues don't just slow down due diligence—they can kill deals entirely:
6-Month Preparation Timeline
If you're planning to raise, start preparation at least six months in advance:
Months 6-5: Foundation
- Get on proper accounting software (Xero/QuickBooks) if not already
- Clean up historical transactions and categorization
- Set up monthly close process
- Engage an accountant if you don't have one
Months 4-3: Documentation
- Collect and organize all customer contracts
- Gather employment agreements and option grants
- Compile corporate documents (Form 9, Form 24, constitution)
- Create cap table in proper software (Carta, Pulley, or spreadsheet)
Months 2-1: Polish
- Run a mock due diligence with your accountant
- Create a financial model with projections
- Prepare monthly management reporting package
- Resolve any outstanding compliance issues
Set Up a Data Room Early
Create a secure folder (Google Drive, Dropbox) with all your key documents organized by category. When a VC asks for due diligence materials, you can share access immediately.
Documents to Have Ready
Financial Documents
- Monthly P&L statements (last 24 months)
- Balance sheet (current and historical)
- Cash flow statement
- Bank statements (last 12 months)
- Accounts receivable aging report
- Accounts payable aging report
- Revenue by customer breakdown
- Monthly recurring revenue (MRR) history
Corporate Documents
- Certificate of incorporation (Form 9)
- Company constitution
- Shareholder list (Form 24)
- Board resolutions
- Previous investment agreements (if any)
- Cap table with all option grants
HR & Contracts
- Employment agreements for key staff
- ESOP scheme documentation
- Contractor agreements
- Key customer contracts
- Key vendor/supplier contracts
Compliance
- Tax filings (Form C, Form E)
- SST registration and filings (if applicable)
- EPF, SOCSO, EIS compliance records
- Annual returns filed with SSM
- Any licenses or permits
Pro Tips from the Trenches
- Consistency is key: Make sure the numbers in your pitch deck, financial model, and accounting records all match. VCs will cross-reference.
- Explain anomalies proactively: Had a weird quarter? Lost a big customer? Explain it in a memo before they ask. This shows self-awareness.
- Don't hide bad news: VCs will find it. Better they hear it from you with context than discover it themselves.
- Have a financial narrative: Be able to walk through your financials and explain the story. Why did revenue spike in March? Why did burn increase in Q3?
- Know your numbers cold: If you can't answer basic questions about your financials without looking them up, investors worry about how closely you're managing the business.
"The due diligence process doesn't start when the VC says they're interested. It starts the day you incorporate."
Investor-ready books aren't just about passing due diligence—they're about running a better business. The discipline required to maintain clean financial records is the same discipline required to build a successful company. Start early, stay consistent, and when that term sheet comes, you'll be ready.