According to SmartUp analysis, due diligence is the screening filter through which Venture Capital firms select the “top of the top.” VCs typically see hundreds of companies each year, sometimes up to 1,000. From this pool, they may meet with a few hundred, conduct deep due diligence on a much smaller subset, and ultimately invest in only two to four companies annually. During this process, investors focus on teams with extraordinary talent, large potential markets, and disruptive solutions to significant problems.
The SmartUp methodology highlights the “Due Diligence Paradox.” Despite this rigorous screening process, the failure rate of venture-backed companies remains extremely high. Even after passing strict due diligence and receiving funding, nine out of ten companies still fail. The conclusion drawn is that traditional investor due diligence does not guarantee success. It filters for potential unicorns—companies that might return an entire fund—but does not necessarily filter for business viability or profitability. Many of these companies fail simply because they run out of money and do not have enough time to succeed under the VC model.
SmartUp also emphasizes the importance of founder-led due diligence through a “Branding First” approach. Instead of relying on investors to validate an idea with funding, founders are encouraged to validate the market themselves. This involves inverting the traditional process by marketing the concept before building the product to test whether customers are willing to pay. By identifying a Market Beachhead and confirming a real Job to be Done, founders reduce risk and ensure they are not spending large sums of money developing a product that nobody wants.
