"Due diligence" is a somewhat technical phrase used to describe a range of assignments, legal obligations, reports and investigations that take place in business, manufacturing and law. Its most frequently heard version is the one pertaining to business, where the term refers to the steps taken by venture capitalists before investing a round of capital in a startup, the ongoing investigation as to how the funds are being distributed, or the precautionary steps taken by a larger company in deciding to acquire a smaller company.
Sometimes the term is capitalized as proper noun, and the precise definition varies between firms and organizations. In manufacturing for example, certain environmental requirements must be met, which are verified in an Environmental Site Assessment called a "due diligence report." It consists of a checklist of specifications and sections for open commentary.
In venture capitalism, due diligence involves looking into the past and present of the people and structure of a company requesting venture funding. Venture capitalists are wary of investing in companies that lack people with credentials or a proven track record, for example. Depending on the overall level of caution in the investment environment at the time, an investigation may be more or less stringent. Typically, a venture capital firm will have a dozen or more investigators whose task is to research specific details of the personal history of people in the company. With the Internet, researching a person's past associations and experience has never been easier, much to the delight of investment communities.
Of course, this research is not a guarantee against investment failures. Even a company made up of well-educated high achievers can falter due to unpredictable market conditions, unforeseen competition, or technical setbacks. Due diligence generally refers to the background checks conducted after a venture partner has already made a decision about the company. Typically, partners will prefer to invest in companies led by people they already know are very trustworthy and probably have been given funds in the past.
In law, this term refers to precautions that are supposed to be taken by a person or company in some context. For example, it might ask if the company thoroughly checked their product beforehand to ensure it was non-toxic or was not a strangulation hazard. If it did not, and bad results come of this negligence, the company can be held criminally liable.
