At the stage where you’re selling a company, you’re expected to have sales, metrics, and various track records that can be verified, hence the intensive due diligence. And usually the acquiring company has in-house expertise on the domain, and is capable of doing the due diligence.
Early stage startups have none of that, just an idea, things the team have done before as proof they can execute, and sometimes some social proof like TED talks or high-profile board members.
The challenge of doing due diligence then is that most general VCs that invest across a broad range of domains lack the in-house expertise to fully vet all of them. They can hire SME advisors, or ask around in their network, and should. But it’s possible for things to slip through the cracks sometimes.
Turtles all the way down.
We happend to know one of the newer investors and asked who did technical due dilligence, because from what we could tell the primary product was just a bunch of outdated open source software glued together and general build on 15 year old tech. We got a very angry call from the CEO telling us “to mind our own fucking business”. We don’t work for them anymore.
"due diligence" processes are in practice a lot less stringent or rigorous than an outsider would expect them to be given the amount of money involved. Companies get bought based on glorified sales pitches and nobody looks too hard at what they're buying is the unfortunate truth of the matter. Investors are no better.