Thursday, July 23, 2009

Due Diligence for Angel Investors

In another post in this site, addressed to business owners seeking angel investment, I proposed that, in my experience, Angel Investors fall in one of two groups: "Golf Cart Investors (GCI)" and "Professional Angels (PA)".

GCIs buy into deals pitched on the golf couse by a buddy with supposedly inside knowledge of a revolutionary shure thing.  They generally experience an improving golf handicap, a badly handicapped portfolio, significant loss of capital and a high level of frustration resulting from failures that are perceived as unpredictable and arbitrary.

PAs spend perhaps less time on the course to put more effort in Due Diligence Investigations (DD) of the deals they are offered thereby resulting in fewer deals being done, but with a higher probability of success.

The difference between the two groups is the degree of due diligence they apply to investigating all aspects of a deal before getting into it.
GCIs frequently see due diligence as no more than reviewing financial statements and projections and calculating deal terms that could let them "make a killing" if the deal succeeds.
PAs on the other hand see DD as absolutely required to develop the necessary competence in the business and its technology to decide whether to go on to negotiating the terms of their funding knowing that besides capitalthey may have to contribute advice and expertise to see the vnture succeed.

So, what does DD have to address?

  1. Management team

  2. Technology assessment

  3. Market assessment

  4. Scalability

  5. Potential returns

  6. Exit strategy

In my experience the order of the above list is not accidental because the answers found at each step determine how the following stage may be approached. Let's look at the questions and answers involved in each:

[hana-code-insert name='dd4ai' /]

or check my roadmap.  In either format the above list is only a brief summary for illustration purposes.  A comprehensive DD effort requires a variety of domain experts with an emphasis on determining the scalability of the process and of the company, which is most often the Achilles' heel of new technology businesses. For more information contact the author or SafeTnet Consulting LLC

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