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Some investors will be able to draw a sketch of the startup after having a 60-minute conversation with the founder, they know by that time whether to invest in the startup or not. These kinds of investors mostly rely on instincts and past experiences with successful startups.
In the hindsight, there are investors who like to leave no stones unturned. They will start with founder due diligence to financials to Intellectual Property. Investors in this spectrum want to ensure that their investment decision is 100% right.
Despite your position in any of the above buckets, a basic level of Due Diligence is always advisable for angel investors due to the inherent risks associated in the early stages of a venture.
Starting from a clean slate here would be some of the pointers you should consider before investing in an early-stage venture.
1. People and Management- Investing in early-stage ventures are much about investing in people as investing in businesses. The management team is everything during the early stage. If the management team is well equipped with people who have all-round experience in handling business aspects, it should give a positive signaling effect to invest into the startup. As an angel investor, you have to be comfortable working with the entrepreneur alongside, mentor, and coach him.
Some due diligence on the founder and the management team would be-
· Take personal references, credit checks, and dig for mutual connections, if any
· Getting a sense of if the founders understand their weaknesses and limitations
· Do they understand the business?
· How much committed they are for this venture?
· Can the partnership between the founders survive? (Crucial one)
2. Market Opportunity – The next most important factor to validate an idea would be, understand the potential of the market that the startup is targeting. Often founders start by scratching their own itch, this kind of startups fail as it may not have a great market opportunity.
As an angel, you should comfort yourself by asking this question – How many others are facing the same problem, and will there be any paying customers? This will help to gain clarity on the potential market.
3. Identify Key Risks- Every business is exposed to risks. Risks can be in any form. Keyman risk, technology risk, political risk, competition, legal risk, etc. Being able to identify the key risks associated with the business puts an investor in a safe zone. Also, after identifying the risks, an investor should understand from the founder if he is aware of such risks and is he doing anything to mitigate those risks.
4. Numbers Speak too- The greatest investors are those who can identify the story behind the numbers. Numbers often show certain trends and they speak a language that many of us don’t understand. Seeking expert advice from Investment Bankers, consultants, and investment advisors can serve a long way in making the right investments. One area that an investor can look at while evaluating startups is where is the money flowing. This helps to understand the frugality of the founders.
Few Questions to ask during the financial due diligence-
> Has the company prepared a proper projected financial plan that substantiates your required returns.
> Are the assumptions reasonable that the management has taken?
> Can the revenue numbers be validated by contracts and orders?
5. Unfair Advantage- This one is the most tricky amongst all. When it comes to investments in startups, being able to identify the competitive moats or unfair advantage among peers can be a great way to assess startups. Moats can be in the form of the underlying technology, trade secrets, Brand value, low CAC, or even low capital requirement due to the inherent nature of the business.
Conducting this first layer of Due Diligence can avoid pitfalls and save your money from burning. Angel Investing is more about gut feeling and being able to connect with the problem that the startup is solving puts you in the winners league. It is advisable to take advice from other Angel Investors when you are investing beyond your circle of competence.
Now you can start off your Angel Investing journey. All the best :)