Due Diligence Checklist for Industry Investment

Due diligence is the disciplined process of verifying that an investment thesis holds up under scrutiny. For industry-level investments — whether entering a new market, acquiring a company, or funding a startup — the stakes are high and the checklist is long.

This guide provides a structured due diligence framework organized by category, with specific questions and red flags for each.

1. Market Due Diligence

Market Size and Growth

• What is the TAM, SAM, and SOM? (Top-down and bottom-up estimates)
• What is the historical growth rate (3–5 years)?
• What is the projected growth rate (3–5 years)?
• Is the market growing, plateauing, or declining?
• What drives growth? (Demographics, regulation, technology, economics)

Red flag: Market size estimates that rely on a single source or use "percentage of a huge market" logic without justification.

Market Structure

• Is the market fragmented (many small players) or consolidated (few dominant)?
• What are the barriers to entry? (Capital, regulation, technology, brand)
• What are the barriers to exit? (Switching costs, contracts, sunk costs)
• Are there network effects that favor incumbents?

Customer Analysis

• Who are the customers? (Segments, personas, buying behavior)
• What is the customer acquisition cost (CAC)?
• What is the customer lifetime value (LTV)?
• What is the churn rate? Is it improving or worsening?
• How concentrated is the customer base? (Top 10 customers as % of revenue)

Red flag: Customer concentration above 40% without long-term contracts.

2. Competitive Due Diligence

Direct Competitors

• Who are the top 5 direct competitors?
• What are their market shares?
• How do they differentiate? (Price, features, service, geography)
• What are their growth rates relative to the market?
• Are any competitors well-funded or backed by strategic investors?

Indirect Competitors

• What alternatives do customers have? (DIY, substitute products, outsourcing)
• Are there adjacent industries that could enter this market?
• What technologies could make this market obsolete?

Competitive Response

• How have incumbents responded to new entrants historically?
• Do they compete on price, features, or legal/regulatory action?
• Could a competitor acquire the target if you don't?

Red flag: A market where incumbents have never been challenged — either it's truly hard to enter, or no one has tried hard enough.

3. Regulatory and Legal Due Diligence

Current Regulatory Environment

• What regulations govern this industry? (Federal, state, international)
• Are there pending regulatory changes that could impact the business?
• What licenses or permits are required to operate?
• Are there data protection/privacy requirements (GDPR, CCPA, HIPAA)?

Litigation and Compliance

• Is there pending or threatened litigation?
• Have there been regulatory enforcement actions in the past 5 years?
• What is the compliance track record of the target company?
• Are there environmental, social, or governance (ESG) risks?

Intellectual Property

• Does the company own its core IP? (Patents, trademarks, trade secrets)
• Are there IP infringement risks?
• Are key employees under non-compete and IP assignment agreements?
• Is the IP portfolio defensible?

Red flag: Regulatory changes that would make the business model illegal or significantly more expensive.

4. Financial Due Diligence

Revenue Quality

• What is the revenue mix? (Recurring vs. one-time, product vs. service)
• What is the gross margin? Is it stable, improving, or declining?
• Are revenue figures audited? By whom?
• Are there any one-time revenue events that inflate the numbers?

Cost Structure

• What are the fixed vs. variable costs?
• What is the burn rate? (For startups)
• What is the path to profitability?
• Are there off-balance-sheet liabilities?

Cash Flow and Capital

• What is the free cash flow?
• How much capital has been raised to date?
• What is the capital efficiency? (Revenue per dollar invested)
• What is the runway at current burn rate?

Red flag: Revenue growth that outpaces cash collection (accounts receivable growing faster than revenue).

5. Technology Due Diligence

Technology Stack

• Is the technology proprietary or built on commodity components?
• Is the architecture scalable? (10x, 100x current volume)
• What is the technical debt? (Legacy systems, maintenance burden)
• Is the team capable of maintaining and extending the technology?

Data and AI

• Does the company have proprietary data assets?
• Are there AI/ML capabilities that create a moat?
• Is the data infrastructure compliant with privacy regulations?
• Could AI disruption make the technology obsolete?

6. Team and Culture Due Diligence

Leadership

• Does the leadership team have relevant industry experience?
• Have they successfully scaled a business before?
• Are there gaps in the leadership team?
• What is the retention rate for key employees?

Culture

• What do employees say on Glassdoor, Blind, and in interviews?
• Is the culture aligned with the investment thesis?
• Are there cultural risks post-acquisition? (Integration challenges)

7. Strategic Fit Assessment

• Does this investment align with your strategic goals?
• What synergies exist? (Cost, revenue, technology, talent)
• What is the expected ROI and timeline?
• What is the exit strategy? (IPO, acquisition, hold)

The AI Advantage in Due Diligence

Traditional due diligence takes 4–8 weeks, with much of the time spent on data collection. AI-powered research tools compress this timeline:

• Market analysis — Generate a full market overview with cited sources in minutes
• Competitive landscape — Identify and benchmark all players automatically
• Regulatory scan — Surface relevant regulations and pending changes
• Risk identification — Cross-reference data to flag inconsistencies

The human judgment — interpreting findings, assessing strategic fit, and making the final call — remains irreplaceable. But the data collection and initial analysis that used to take weeks now takes hours.

Final Decision Framework

After completing due diligence, score each category:

Category	Weight	Score (1–5)	Weighted Score
Market	25%
Competitive	20%
Regulatory	15%
Financial	20%
Technology	10%
Team	10%
Total	100%

A total weighted score below 3.0 is a pass. Above 4.0 is a strong yes. The gray zone (3.0–4.0) requires a judgment call — and that's where experience matters most.

Due diligence doesn't eliminate risk; it ensures you're taking calculated risks with eyes open. The checklist exists to make sure you don't miss the obvious.