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What is Due Diligence?

The research process before investing - examining financials, team, market, and risks to avoid putting money into a disaster.

Due diligence is the comprehensive investigation of an investment opportunity before committing capital. It's the difference between informed investing and gambling.

Key areas of due diligence:

Financial: Revenue, burn rate, margins, runway, projections
Legal: Corporate structure, IP ownership, pending litigation
Team: Founders' track record, key hires, equity distribution
Market: TAM (total addressable market), competition, moat
Product: Technology, traction, customer feedback
Deal terms: Valuation, preferences, pro-rata rights

For crypto/presales: Add tokenomics review, smart contract audits, team doxxing, and community analysis.

Time investment: Institutional investors spend 100+ hours on due diligence. Retail investors should spend at minimum 10-20 hours per significant investment.

Due diligence for retail crypto investors: Start by verifying the team, are founders publicly identified (doxxed) with verifiable LinkedIn profiles and relevant experience? Next, review the tokenomics: examine the allocation breakdown, vesting schedules, and whether insiders hold a disproportionate share. Check whether the smart contracts have been audited by reputable firms such as CertiK, Hacken, or OpenZeppelin, and read the audit reports for critical findings. Evaluate the community by gauging organic activity on Discord, Telegram, and Twitter. Bot-filled channels with no real discussion are a warning sign. Finally, look for a working product or at least a testnet demo, review the GitHub repository for consistent development activity, and assess whether the roadmap milestones are realistic and being met on schedule.

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Examples

1.Theranos passed surface-level due diligence (famous founder, big partnerships) but deeper investigation would have revealed no working product.
2.Proper due diligence on FTX would have uncovered the commingling of customer funds and Alameda ties before the collapse.

Frequently Asked Questions

What is due diligence?

Due diligence is the research and analysis you do before investing. It means examining financials, team, market opportunity, risks, and deal terms to make an informed decision.

How do I do due diligence on a crypto project?

Check: 1) Team backgrounds and doxxing, 2) Smart contract audits, 3) Tokenomics and vesting, 4) Community activity, 5) GitHub commits, 6) Investor backing, 7) Roadmap execution.

How long should due diligence take?

For significant investments: 10-20+ hours minimum. Review all available documents, research the team, understand the market, and ideally talk to customers or users of the product.

More investing Terms

Pre-IPO Investing

Buying shares in private companies before they go public - the strategy that made early investors in Uber, Airbnb, and SpaceX millionaires.

Accredited Investor

A wealthy individual or institution that meets SEC criteria to invest in unregistered securities - the traditional gatekeeper to pre-IPO deals.

Valuation

What a company is worth on paper - the number that determines whether you're getting a deal or getting fleeced.

Equity Dilution

When new shares are issued and your ownership percentage shrinks - the silent wealth transfer from early shareholders to new investors.

Secondary Markets

Platforms where you can buy and sell pre-IPO shares from existing shareholders - your liquidity lifeline before a company goes public.

SPV

A Special Purpose Vehicle pools money from multiple investors to meet minimums for pre-IPO deals - your ticket to the table when you can't buy a whole seat.

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