VC term sheets provide the investors with a fixed amount of time to conduct additional due diligence on the company before the deal closes.  In this due diligence window the VC can opt to terminate the deal.

VCs vary in the way in which they use this diligence period - some use this period for the bulk of their diligence, others only use it for the final diligence considerations.  As a result, there are two points in the investment process when VCs typically issue term sheets: before due diligence or before confirmatory due diligence.

VC funds that issue term sheets before the due diligence process typically do a deep dive into their external diligence on the company after the term sheet is issued. The external research that I am referring to here includes, market evaluation, a review of the competitive landscape, customer calls and a testing of other unique considerations (e.g., regulatory reform).

However, VCs that issue term sheets after they complete (or nearly complete) their external due diligence still conduct confirmatory due diligence after the term sheet is issued. Confirmatory due diligence might include management reference calls and a review of the company’s actual financials, patents and contracts. Confirmatory due diligence is by-in-large a review of the claims management made which are likely to be less subjective in nature.

While exceptions exist, most funds are consistent about issuing their term sheets at the same point in the process. Each fund either typically issues term sheets before any due diligence or after the external due diligence but before the confirmatory due diligence.