Pre-Diligence: A Startup’s Best Asset in Investment Negotiations

Securing funding is more challenging than ever, and founders need every advantage. Our top advice for any startup founder entering negotiations? Invest in pre-diligence.

At Newfire, our team combines the experience of company builders and advisors who have guided clients from seed funding to successful exits. We’ve seen firsthand how a strong pre-diligence report can transform outcomes. In this article, we’ll explain why pre-diligence is one of the smartest investments you can make before mergers, acquisitions, and funding rounds—and how to maximize its impact by choosing the right partner.

Let’s start with why pre-diligence has become essential.

Due Diligence Is Riskier Than You Might Think

With recent economic turbulence, the investment landscape has rarely been more competitive. Inflation, market volatility, and uncertain exit opportunities have made investors more cautious. Technical due diligence is now standard, as investors aim to minimize risks and ensure startups are resilient enough to weather these challenges.

For example, 70% of private equity companies conduct thorough due diligence before deciding to invest. That figure is even higher in industries like digital health, where the regulatory scrutiny of care platforms and AI solutions is constantly evolving. This won’t change. Data from PitchBook reveals startups experienced a higher frequency of flat and down rounds in 2023 and 2024—a direct consequence of overly aggressive rounds and too little diligence in the “boom” years.

At Newfire, we see companies often come to the table ill-prepared. Many perceive due diligence as little more than a formality, an added layer of security that will seal the deal.

In reality, due diligence can have an impact on the valuation of a company. It can reveal pitfalls like technical debt or cybersecurity issues that impact valuation. But just as importantly, a positive report can highlight strengths that show how you exceed investors’ expectations. Done right, it’s an opportunity to showcase how prepared and resilient you are—qualities that can significantly boost your valuation.

So, unless your circumstances are unique, due diligence will be an important part of your company’s journey at every financing round. And since it can uncover both positive and negative aspects of your business, it carries risks you’ll want to mitigate and manage.

Thankfully, there is a way to protect your valuation from eroding due to issues uncovered during technical due diligence. In fact, with enough preparation, you can even increase your valuation and get a better deal for your startup. In that sense, the most powerful weapon in your arsenal as you enter negotiations is pre-diligence.

The Benefits of Pre-Diligence: From Finances to Reputation

A good way to think about technical pre-diligence is as a trial run. The process is similar to the actual diligence you will undergo, but in addition to uncovering issues and gaps, its purpose is to highlight your strengths and help you frame the narrative you will present to your investors. That can influence your valuation positively and set you up for future success, regardless of whether or not a deal is struck.

Financial Benefits: Protect Your Valuation and Build a Strong Growth Foundation

As you enter negotiations with investors, an initial valuation will be set based on factors like revenue, market potential, and growth metrics, but technical aspects matter, too.

Here’s how pre-diligence can support or even increase your initial valuation.

A pre-diligence report allows you to showcase specific technical aspects—such as a scalable infrastructure, low technical debt, and a strong security and compliance posture—that give investors confidence in your company’s growth potential.

For instance, you can use pre-diligence to showcase your compliance frameworks—showing that even if you haven’t completed formal certifications like SOC 2 or ISO 27001 (and many early-stage companies have not), you are effectively managing real security and regulatory risks.

Highlighting software architecture, strong software and product development processes, and operational control areas shows that your technology can support expansion without major technical overhauls, which could otherwise become costly. Showing that more investor resources can go to growth—rather than tech debt—supports a higher valuation.

On the defensive side, pre-diligence can help identify technical risks, such as dependencies on third-party providers or outdated architecture. By addressing these risks early, you reduce the chances of downward valuation adjustments during formal due diligence, where these issues would be scrutinized more deeply. Sometimes, a small change now can avert a tough conversation later on.

But beyond valuation, this process also strengthens your company’s financial position by reducing waste and improving scalability. Having resolved foundational issues, you minimize future disruptions and unexpected costs.

Operational Benefits: Strengthen Your Position on Your Own Terms

Your pre-diligence report allows you to pinpoint and fix potential issues. By getting ahead of these gaps, you’re building a stronger foundation for your company and enabling healthier, less risky scaling. But doesn’t due diligence do the same?

Yes. However, bear in mind that due diligence is an external process that supports the position of your investor. The process results in a roadmap with objectively positive outcomes, but these outcomes don’t necessarily need to align with your company’s values or mission. They could focus on scaling and monetization instead.

If you’re driving the process, your pre-diligence partner will focus on finding solutions while also preserving the core of your business. Even if no deal happens, you’ll have a clear way forward to deliver your services effectively and in alignment with your mission—whether through organic growth, strategic partnerships, or future funding rounds.

Reputational Benefits: Build Investor Trust and Market Appeal

The relationship you’re going to have with your investor isn’t a transaction but a long-term partnership that should be built on mutual trust and respect. You have an active role in building that partnership as soon as negotiations start.

How does pre-diligence fit here?

Due diligence is a long, complex, and expensive process. By offering a pre-diligence report, you’re communicating that you respect your investor’s resources and are serious about building a smooth and mutually beneficial relationship.

From the investor’s point of view, a pre-diligence report signals that you value transparency, efficiency, and foresight—all the qualities that make a good target for investment.

This can benefit your standing in the long term:

• It can lead to better terms of the deal, once again improving or protecting your valuation.
• A good relationship often leads to induction into the investor’s network, meaning quality partnerships and collaborations in the future.
• Future funding rounds may be a smoother process with less scrutiny.

On that last point, remember that a good word travels fast and that the investor community is tight-knit. With a track record of thorough preparation, you’ll be perceived as a low-risk, high-value target, which can set you apart in a competitive funding environment.

Of course, that holds true for your customers as well. A well-structured company runs more efficiently, leading to stronger client retention and revenue expansion.

To recap, the benefits of going through a pre-diligence process are multifaceted and long-term. That’s why you should consider it a strategic investment worth your time and budget.

Considerations When Choosing a Pre-Diligence Partner

A strong pre-diligence report should be thorough, convincing, and easy to understand for both your team and investors. It needs to highlight your strengths and offer actionable steps for improvement—all within a startup-friendly budget.

Here are some considerations to get you there.

Industry Expertise vs. Cross-Industry Skill

Should you choose a partner with deep expertise in your field or one that has experience across several industries? That really depends on your value proposition.

If you’re working in a heavily regulated industry or a sector with unique technical standards, a partner with deep roots in your field can confirm and highlight that you meet regulatory requirements and market expectations, putting investors’ minds at ease. They can also help you safeguard your company from risks by pointing out compliance and safety issues. That’s crucial in industries such as healthcare and fintech.

On the other hand, if you’re developing a solid product and innovating on the technological side, a partner with broad expertise can help you reinforce that innovation with best practices and technologies you might not be aware of. That can give your valuation a boost and accelerate your way to market prominence.

Newfire combines broad product development, software, and operations expertise with deep experience in the healthcare sector.

Reputation With Investors

Where your pre-diligence report comes from is almost as important as what it contains. Investors need to be convinced that your partner’s endorsement is legitimate and carries enough weight to influence their valuation and decision to invest.

The easiest way to accomplish this is to seek out partners trusted by, or at least familiar to, your target investors. These could be companies that have handled due diligence projects for your investors’ targets.

It could also be a company with a proven track record of bringing quality solutions to market while also offering diligence-type services, someone who knows what good looks like because they’ve been there themselves.

Cost-Efficiency and Long-Term Partnership Potential

Cost is a factor, but don’t just look for the lowest bidder. Consider the value of a partner who can grow with you, offering services that adapt as you progress through funding rounds or prepare for an exit. A good choice in this sense can include:

• Flexible, scalable pricing that fits your budget. The value gained from pre-diligence should justify its cost; otherwise, investors may view it as an unwise expenditure.
• Outstanding communication skills. A partner that communicates findings and recommendations to both you and your investor facilitates issue resolution and helps push negotiations forward.
• A suite of offerings beyond pre-diligence. A pre-diligence partner will have intimate knowledge of your company. If they offer advisory services to help you progress through funding rounds, you’ll save time and resources by aligning with them.

Remember, pre-diligence isn’t a one-time event. Chances are you’ll want to repeat the process with every round of funding, so choose a partner to grow with you throughout your life cycle.

Choose Newfire as Your Pre-Diligence Partner

While a pre-diligence report may once have been considered a “nice-to-have,” in today’s competitive investment landscape, it can provide a significant edge. By proactively addressing potential risks and showcasing readiness for scale, you give investors confidence in your company’s direction and set yourself apart during negotiations.

At Newfire, we help innovators thrive. Our leadership and advisors have been directly involved in billions of dollars worth of funding rounds, guiding startups from ideation to successful exits by leveraging their strengths and adding deep expertise. We combine broad product development experience—from Series A startups through scaled public companies—with deep industry expertise that goes beyond technology to market and product insights.

Partner with us for a streamlined, highly actionable pre-diligence process that preserves your mission, highlights your strengths, and ensures you’re compared against the right benchmarks. We’ll help you identify clear steps to improve operations and maximize your valuation.