10 Red Flags Growth Equity Investors Watch for During Due Diligence

 


The due diligence process is not merely a matter of checking numbers—it's a matter of spotting would-be deal-breakers that can explode a growth equity investment. Investors need to spot red flags like shaky finances and an unreliable team. Here are ten key warning signs that should raise alarm and further trigger investigation. 
 
1. Overstated or One‑Off Revenue Claims 
If the spikes in revenue are based on one-off deals and not repeat streams, it's a big risk. Investors want stable, repeatable income, particularly in SaaS companies. An analysis on Medium points out this as an all-too-often mistake in early-stage transactions. Medium  
 
2. Unrealistic Financial Projections & Unit Economics 
Overt forecasts usually have little data grounding. Weak unit economics (such as CAC without the backing of LTV) imply little profitability potential. VC veterans stress the significance of good assumptions and good KPIs 
 
3. Disharmony or Deceptive Financial Reports 
Divergence of pitch decks, internal books, and audited reports raises suspicion of manipulation or poor financial governance. Investors want harmony between documents to confirm the business narrative 
 
4. Overreliance on a Small Number of Customers & Suppliers 
Reliance on too few customers/suppliers can be a threat. Losing just one could have dire consequences for both revenues and its overall profile. Growth equity firms prefer companies with diversified revenue streams and reducing this risk. 
 
5. Complex ownership structures and cap tables  
Complexity in cap tables, lack of disclosed shareholding agreements or shareholdings in an offshore jurisdiction can be seen as a red flag by investors. They flash open blind spots in the transparency of the business vulnerability to lengthy legal action and disposition in the future. 

6. Employee turnover is excessive, particularly in critical roles 
Turnover far above industry averages -- particularly at the leadership level -- may point to internal turmoil or a toxic culture. Intermittent staff movement can amount to 1/3 of an employee's wage and damage performance consistency. 
 
7. Poor Product-Market Fit or Flawed GTM Strategy 
Unable to demonstrate actual traction, retention, or signs of customer demand indicates the product does not solve key pain points. A scalable go-to-market strategy and actual feedback are more important than forecasts alone. 
 
8. Compliance or Regulatory Issues 
Legal issues, pending lawsuits, or problems associated with claims of intellectual property or potential regulatory risk are aggravating concerns in healthcare, fintech, or consumer products. Investors almost always want a review of all things legal by an independent third party in diligence for certainty. 
 
9. Founder or Team Integrity Issues 
When there is a lack of transparency, evasiveness, or unwillingness to answer questions, it is tremendously concerning. Investors love transparency. Behavioral signals—poor responsiveness or poorly aligned capital offer—may be early indicators of cultural red flags. 
 
10. Dazzling Projections Hiding Weak Fundamentals 
Aggressive assumptions—such as 300% repeat-revenue growth—without supporting evidence are warning signs. Builders such as Builder.ai were criticized when investors supported assertions without looking deeper. In one instance, sales were inflated by 300%, and that should have triggered closer inspection 
ft.com  
 

Example: Lack of Due Diligence in Action 

In a surprising case reported by Financial Times, growth equity investors funded Builder.ai without checking their sales pipeline. Later, it was found that sales were not just over-reported, but really into the weeds with a +/-300% deviation. Which was horrible due diligence and just plain awful skepticism. 
ft.com 
 

How to Prepare as a Founder 

Avoid these errors: Keep financials clean and reconciled and have a date available that you could get an audit done. 

  • Segment revenue - especially separating recurring revenue from one-off deals. 
  • Monitor churn, CAC, and LTV metrics diligently to demonstrate a scalable model. 
  • Diversify dependence on customers and suppliers. 
  • Simplify and keep your cap table current. 
  • Achieve leadership continuity and cultural fit. 
  • Be clear, timely, and detailed with your investor engagement. 


Conclusion 

Growth equity due diligence is an exhaustive filter that investors use to identify risk, minimize capital loss, and create long-term partners. The best startups are not just high growth in nature but instead are clear, predictable, and trustworthy. 
 
If you want your startup to be characterized by diligence, start with the foundation, clean books, and a sincere commitment to integrity. 

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