Due Diligence: Your Offensive Line

Peyton Manning

bradjward | Flickr via Creative Commons

We’re covering the angel track at the Angel Capital Summit. And we’ve heard the first (of many) #PeytonManning reference of the day. Oy.

Why is due diligence important? Ryan Goral of Strategic Equity Partners, says that investors who spent more than 40 hours researching a company see a 7.1x return. Less than that, you’ll see an average of 1.1x return.

But there is a sweet spot. Once you get beyond reviewing the team, product and market fit there are diminishing returns.

Phase I: High level sniff test — are there obvious red flags

Phase II: Deep due diligence — recommends using London Business School management faculty John W. Mullin’s Seven Domains of Attractive Opportunities.

Entrepedia

Goral says the most important element of the due diligence is the management team. It’s also the toughest to actually quantify. Does the team have industry, technical and transferable skills to make this endeavor successful? It’s not always evident that past experience predicts future success.

Large round numbers drive Goral crazy when analyzing startup financial models. Look for specificity and detail. Ask for rationale for revenue and expense projections.

One area that can significantly change the risk profile of an angel investment is consumer behavior. Is there a plan for pivoting when customer preferences change or evolve?

How to making angel investing more efficient? Goral recommends splitting due diligence costs through syndicates, designating an experienced lead investor who shoulders the work or focusing on investment markets where the investor has special expertise.

We’ll post the presentation slides when they become available.