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ABSTRACT Diffraction-limited radial-velocity instruments offer a pathway towards improved precision and stability, and the exploration of new parameter spaces at high spatial and spectral resolution. However, achieving the necessary performance requires careful instrument design and considerable on-sky testing. We describe the design and construction of ‘Little iLocater’ (Lili), a compact spectrograph that has been used to validate the performance of the front-end fibre-injection system of the iLocater spectrograph. We present the design, assembly, and performance using on-sky data obtained at the Large Binocular Telescope (LBT), including extraction of spectra from standard stars, testing of the atmospheric dispersion corrector to elevations of 40°, and spatially resolved spectra from close companion systems. These results show the front-end fibre-injection system is performing as expected and is indicative of iLocater’s capabilities once installed at the LBT.