At Arkam, we believe that a fundraise is shaped not only by investor interest but also by the discipline with which founders prepare for the process. Once a term sheet is signed, financial diligence, legal diligence, transaction documents and compliance checks can quickly expose gaps that were not visible during the pitch stage.
This piece from Vishnuhari Pareek looks at why venture capital deals often slow down after initial alignment, and how founders can make the startup due diligence process smoother through better documentation, clearer communication and early preparation.
“Startup Due Diligence Process and Deal Delays
Day0:
IC done > Term sheet signed > Financial and legal DD starts > Lawyers engage in transaction documents.
Founder: “We have the dataroom ready; DD should be smooth. Can we have money in the bank in 1 month?”
DD team: “Our team has done diligence in the same industry in a recent deal; we will move fast.”
Lawyers: “We have the context of the deal. We will use standard documents.”
Day100:
5th version of the SHA / SSA document markup is getting circulated.
4th checklist of diligence data requirements is pending.
“Can we pls move 3 conditions to be satisfied post-wiring, from CP to CS?”
“Ohh! We didn’t know we needed regulatory approval?”
Sounds Familiar?
This reflects a common challenge in deal-making and the disconnect between expectations of timeline and process. Prolonged negotiations and diligence are a reality in many venture capital deals, especially when preparation, documentation and communication are not aligned early.
Below are key reasons for such delays I have seen in the startup due diligence process, along with solutions to address them:
1. Insufficient preparation of the dataroom: Despite the founder's confidence, the dataroom may lack completeness and consistency in documents.
Solution: Conduct an internal check before opening the data room. Engage external consultants if you do not have a finance or legal head to ensure it is well-organised.
2. Evolving DD checklists: Financial DD teams often uncover gaps that require additional documentation, prolonging the process.
Solution: Align on a comprehensive scope upfront. Ensure the checklist is frozen after mutual agreement unless critical gaps are discovered.
3. Complexities in transaction documents: SHA / SSA markups often reflect differing priorities between founders and investors. Repeated back-and-forth over minor points leads to significant delays in the startup fundraising process.
Solution: Freeze key deal terms early at the term sheet stage itself. Avoid unnecessary negotiation on minor clauses. Use standard, market-accepted templates for SHA / SSA. Use a streamlined markup and comment process.
4. Poor communication and not running parallel processes: Lack of clear updates, misaligned priorities and slow responses create inefficiencies across investment due diligence.
Solution: Establish a clear communication protocol, with weekly status updates, escalation points and defined milestones.
5. Regulatory and compliance hurdles: Unanticipated requirements or compliance gaps can stall the process.
Solution: Engage experts early to identify and address potential regulatory issues during the planning phase. For example, CCI approval. Early planning around regulatory approvals and startup compliance can help reduce last-minute surprises.
6. Unexpected discoveries: For example, a mismatch in revenue. MIS numbers reported before the term sheet may not match what has been shared in the dataroom. This could become a deal breaker.
Solution: A proper reconciliation should be provided with justification to iron out the mistrust it could create. A reconciliation of audited financials and MIS should also be provided.
Proactively addressing these fundraising challenges can transform a chaotic process into a smoother, more predictable journey to deal closure.”
For us, the larger lesson is that deal closure is rarely only about momentum. It depends on preparedness, transparency and the ability to anticipate diligence, documentation and regulatory requirements before they become bottlenecks.
A well-prepared dataroom, aligned transaction scope, clear communication cadence and early compliance review can help founders reduce avoidable delays and build investor confidence through the process. For founders navigating venture capital fundraising, readiness before the term sheet is often as important as speed after it.
