In this article I will talk about the due diligence process that angels go through in order to assess if they will invest in your company. At this point let’s assume you have made your investment pitch to a group of angels. Recall when I spoke about the overall investment lifecycle, when you make your pitch presentation your main goal is to get people interested enough in the investment opportunity of your company to want to spend the further time required to go through the due diligence process.
After you have made your pitch, the angels that are interested in your company will form a due diligence team. The usual next step is to schedule a follow-on meeting between your management team and the interested angels. At this meeting you will have a longer period of time (a few hours vs. the 20 minutes you had for the investment pitch) to discuss your company, answer angel’s questions, etc. This will allow the angels to get a more in depth understanding of your company and determine the areas they want to focus on during the due diligence process.The process, depth, timeframe for a given due diligence investigation will vary with each specific circumstance and the angels involved. However, in general angels will want to assess the main areas of your company: management, product, market opportunity, competition, and go to market strategy.
At a minimum you should have the following documents prepared to feed into the due diligence process:
- Business plan
- Past financial statements / future financial projections
- CVs of management team
- Shareholders agreement
- License agreements / supplier contracts
Doing a full due diligence exercise can take a lot of time. So generally angels will look for any early opportunities to surface any fundamental issues that would make it better off for them to determine the opportunity does not warrant further use of their time. Remember that when you present to an organized angel group, you will be one of a few companies presenting that month. Then there are also the due diligence exercises going on for companies that presented in previous months. In addition to this, angels will probably have their own deals they are aware of. The main point is that angels can have a lot of deal opportunities on the go at a given time and they cannot do a detailed due diligence exercise for all of them. They will want to quickly focus in on only the most favorable companies.
The first thing the due diligence team will do is to tap into their network to find somebody that knows about the industry space your company is in. If they find a trusted outside person that can validate the viability of your product/market opportunity, that will go a long way to establishing credibility for what you are pitching. This is why it is important to assemble a good board or board of advisors of people in the industry so you have respected people in the industry that are willing to put their name behind your company.
If the team is comfortable in the viability of the company’s product, then it’s a matter of assessing the key areas of the company. This can happen in many ways. Examples include: discussions with current clients, discussions with suppliers, reference checks for members of the management team, research into competitor product offerings, review of IP, assessment of operational capabilities, review of financial projections, sitting in on sales calls, visiting manufacturing facilities, legal review of contracts & patents, etc. In addition to the company assessment aspects, an important part of the due diligence process is the time you will be working together with the angels. This will allow both sides to get to know each other better. Angels will want to feel comfortable on how you do business, your ethics, your business acumen, etc in order to determine if they want their name & reputation associated with you and your company.
One of the more important things to keep in mind is that generally when the investment is done, it will involve each individual angel getting comfortable enough with the investment to write a cheque. In order to help drive the due diligence process, it is important to identify the angel in the due diligence team that will take a leadership position. This person will help drive the due diligence process, ensure it keeps moving forward, address concerns of members of the due diligence team that are not as highly involved in the process, get commitments from people on how much they will invest, etc. Given the dynamics of the investment process, it is a lot better if an angel is playing this role as opposed to the company trying to drive it. From the company standpoint, you should quickly identify who is the angel that is taking on this role and work with them to help ensure they have everything they need.
Lastly, if it turns out you do not come to terms and get an investment, it is important to ask for feedback as to why the investment did not close. The due diligence team may have uncovered valid concerns with some aspect of your company that you will want to address. Or it may be a matter of timing in that people had other deals on the go and were not open to spending the necessary time to assess your company. Whatever the reason, angels generally will be open to giving their candid feedback which you can use to help your company.
In my next series of articles I will talk about term sheets. To view an organized index of all angel financing articles as well as sees a roadmap of future articles, click here. If you have any comments or suggestions for future articles feel free to contact me: craig at mapleleafangels.com