Most startups do not fail at “idea stage” or even at the “MVP stage” (Minimum Viable Product). They fail when someone finally lifts the hood. “Due diligence” (DD) is that moment – and a surprising number of otherwise promising founders are not ready for it.

Where does “73% fail “Due Diligence” come from?

Surveys of VCs (Venture Capitalists) and deal lawyers consistently show that over half of potential deals collapse during due diligence, even after a term sheet is on the table. Some newer risk-intelligence studies go further: traditional VC processes only catch about 27% of the real failure-predictive risks, meaning roughly 73% of the problems that later kill startups sit in a blind spot until it is too late.

Put simply: a large proportion of startups either:

• never make it through serious investor due diligence at all, or
• “pass” on the obvious metrics but still carry hidden legal/operational landmines that explode later.

For a law‑facing audience, that blind spot is where the real work – and opportunity – lies.

Why do so many startups fail due diligence?

Global and Indian data point to the same clusters of issues:

• Regulatory and compliance gaps
  A 2025 study on fintech found 73% of failures were linked to regulatory challenges, including licensing, KYC/AML (Anti‑Money Laundering) gaps, and cross‑border compliance. Indian guides on startup DD repeatedly flag missed Companies Act filings, GST non‑compliance, and labour law violations as standard red flags.
• Messy numbers and cap tables
  Investor‑side DD reports show that more than 50% of deal failures involve due diligence issues, especially around revenue recognition, burn‑rate calculation, undocumented liabilities, and chaotic cap tables. Unclear ESOPs (Employee Stock Option Plan), back‑dated instruments, and casual SAFE (Simple Agreement for Future Equity) / CCD (Compulsorily Convertible Debenture) deals come back to haunt founders.
• Weak documentation and IP ownership
  Indian checklists emphasise that investors expect: properly stamped and executed contracts, clear assignment of IP from founders/contractors to the company, and clean register maintenance. When code, designs or brands still sit in an individual’s name, the legal DD report politely calls this what it is: a risk not worth the cheque.
• Operational and governance immaturity
  DD is no longer just a legal-financial hygiene exercise. Investors now probe governance, culture and execution ability – areas that traditional DD often missed and which explain a big chunk of post‑investment failures. No board process, no information rights, no proper MIS – all signal that the company is not “scale‑ready”.

What the 27% get right:

The minority that sail through DD are not necessarily building “perfect” companies. They are just deliberate about being investor‑ready long before the data room link is shared.

• They tend to have: A DD‑ready compliance spine
  Regular MCA, GST and basic labour law hygiene; clean share registers; signed and accessible minutes; updated statutory books. Nothing glamorous, but incredibly rare.
• Investor‑grade financials and data
  Even at seed, their numbers tie up: revenue is recognisable, contracts support invoices, burn‑rate and runway are clearly explained, and contingent liabilities are disclosed, not discovered.
• Clear IP and contract positions
  IP is assigned to the company; key customer and vendor contracts are written, not sitting in WhatsApp; NDAs, employment and consultant contracts have basic IP/NC clauses.
• A culture of papering things correctly
  Founders pick up the phone to counsel before signing that “standard” SaaS order form with a most‑favoured‑nation clause buried inside. That habit alone keeps them out of the 73%.

How to help a startup join the 27% (law‑student edition):

For law students and young lawyers who want to sit on the right side of this statistic, the playbook is surprisingly tactical.

1. Build a “pre‑DD checklist mindset”

Before the investor asks, you should already be able to ask and answer:

• Corporate & cap table: Are all issuances properly authorised, priced, filed, and reflected in Form PAS‑3 / annual returns? Any ghosts from early “friends and family” rounds?
• Contracts: Are there written contracts with all key customers, vendors, and employees? Any exclusivity, MFN (Most‑Favoured‑Nation (Clause)), or change‑of‑control clauses that could spook an investor?
• Regulatory: Is the entity correctly licensed or registered for its sector (especially fintech, health, edu, gaming, data‑heavy plays)?
• IP: Who owns the code, content, or design – the company, the founder, or a freelancer? Are assignments executed and stamped?

Turn the best public DD checklists (like 100‑plus point India‑specific frameworks and VC red‑flag lists) into your own working templates.

2. Treat compliance as product, not paperwork:

Investors increasingly treat “legal readiness” as a proxy for how the startup will handle money, risk, and regulators. Helping a founder:

• close their old non‑compliant entity and properly re‑incorporate,
• ring‑fence IP inside the company, or
• migrate from handshake deals to simple, standardised contracts,

does more to raise their valuation than one more pitch‑deck makeover.

3. Use DD to frame your career niche:

This is where the niche law student angle becomes compelling. Due‑diligence‑savvy juniors who understand:

• the Companies Act and MCA filings,
• basic tax and labour compliance,
• contract risk, and
• early‑stage funding instruments,

becomes invaluable to venture funds, startup‑focused firms, and even in‑house legal at the growth‑stage companies. The market is already moving that way. Indian startup‑facing firms and compliance platforms are publishing DD and compliance checklists explicitly aimed at early‑stage founders and investors. Someone has to do that work. It does not have to be a senior partner. It can be you.

Closing thought:

“Due diligence” sounds like a box‑ticking exercise until you watch a fund quietly walk away from a term sheet because of a cap‑table mess, a missing GST trail, or a leaked IP chain. The 73% who fail their first DD are not necessarily weaker founders; they are just legally under‑prepared.

In the Indian market, a small but growing set of boutique practices now work with founders almost from incorporation, treating “legal DD readiness” as an ongoing product, not a one‑off deliverable before a round. Instead of dropping in just before a Series A, they help put in place clean cap tables, standardised contract stacks, and sector‑specific compliance calendars that investors recognise and trust. Firms which routinely handle early‑stage and growth financings, see the same patterns repeat across clients and sectors; that pattern‑recognition lets them flag red‑flags long before a VC associate does, and to solve them in ways that still work commercially for not so good teams. For a niche community of law students who want to operate in this space, gravitating towards such work – even as interns or research collaborators – is often the fastest way to learn how real deals survive the 73% failure filter and join the 27% that actually close.

The views expressed are for informational purposes only and should not be construed as legal advice. For specific guidance on cross-border digital evidence matters, consult qualified legal counsel.