For those who want to become sophisticated angel investors, there are several key steps that you should follow. As you grow in sophistication, you will branch out beyond these basics and learn what appeals to you most directly. As an Alliance of investors over many cities and large geography, there is a need for standardization so we are all looking at the same picture at once when deciding to invest in a given venture. There are 14 steps that precede a final decision to invest in a startup/private equity company:
- Review the information provided by the company – look for strongly positive and negative elements and identify key questions that must be answered to proceed.
- Seek peer advice – find peers in your network that have expertise and market intelligence.
- Review market information – independently validate the market projections of the entrepreneur.
- Study the team – find out if these are people you want to work with for the next five to seven years. For instance, we ask for Myers-Briggs personality types to be provided so that we can gain some insight into the team dynamics.
- Talking terms – talk terms early to avoid wasted time and effort of full diligence.
- Review the business plan – discover if the team can actually plan a business.
- Review the financial projections – discover if the team can use their financial tools properly to grow a business.
- Review market traction – find out if they have real market opportunity or not.
- Review the IP – find out if they have valuable, defendable IP that creates barriers-to-entry to competitors and drives acquisition.
- Reference checks – independently verify the entrepreneur’s character not just his/her charisma.
- Document review – dig into the details to ensure they are structured properly.
- Review of prior rounds of capital – dig into the prior rounds of funding to ensure there are no deal-breakers from past rounds.
- Review of the capitalization table – dig into the cap table to make sure all obligations of the company are clearly accounted.
- Final gut check – never do a deal you don’t feel good about!
Each of these general categories must be satisfied before you can make a clear decision to invest. They should be executed in order. Each of these categories should be thought of as a stage gate. There is an iterative process inside of each until a point of diminishing returns is reached followed by a Yes/No decision to proceed to the next category or terminate the process and move to the next venture. So, if you are wondering, the answer is yes, you have to say “yes” 14 times before you invest in a deal. You only have to say “no” once.
You should compile your answers into a form that captures the essence of the deal and is ready for sharing (heavily disclaimed, of course!) with your peers you will want to bring into a syndication with you.
The point of this exercise is several fold:
- Identify problems now that will likely be the undoing of the company later.
- Build a relationship with the company and team.
- Help the company to correct errors that may have crept in over rounds of funding and changes in operations.
- Set a baseline from which you can judge the success of the company’s operations going forward.
- Identify what you can contribute to the company’s growth.
This is all to say this process should be taken very seriously and engaged with enthusiasm. You are NOT simply validating the entrepreneur’s vision. You are protecting yourself and your fellow angels and value-adding the investment you are about to make!
This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.
Copyright Appalachian Investors Alliance, Inc. 2018
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