Due Dilligence for Angel Investors: The Key Quality You Want

  • December 8, 2022
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  • 4 min read

Even if I’ve conducted many interviews about individuals over the years, you can always improve.

I had an interesting discussion last week about the qualities an angel investor looks for in a candidate to lead a new business, and as a result, I now have a question that I will always ask—and not only about entrepreneurs.

When someone is managing a company for the first time, coachability—the word for this investor—is important. The concept for more seasoned managers may be referred to as openness, but it all stems from the same place: Can the person in control confess he isn’t an expert in everything and then seek to become knowledgeable in that weak area?

Initially, some definitions An angel investment, commonly referred to as seed capital, is an early-stage investment in a business. Family and friends are frequently the ones who help an entrepreneur get off the ground, whether it is by providing cash for the necessary equipment or by hiring people to operate out of a garage, a WeWork location, or—as was the case with Dell, Microsoft, and Facebook—a dorm room.

At Crowdcrux, all fundraising stages following the angel stage—including those in which venture capital and private equity typically participate—are described. The ultimate objective is an initial public offering (“IPO”) when you sell shares to the public, while some businesses choose to remain private.

According to the angel investor I spoke with, 10% of all of his investments were responsible for his total return over the previous few years. In other words, nine out of ten are losers, but the other three are profitable for him. A typical angel investor will invest somewhere between $5,000 and $50,000, occasionally by themselves and occasionally with several investors. For the following round of investment, many people then set aside two or three times that amount. If they don’t, the company might eventually become profitable, diluting their original share.

Coachability: What is it?

It occurred to me that many of us might stand to improve a little bit on the quality of coachability. While it’s important to follow instructions, it’s also important to realize that there is always more to learn, whether it’s about real estate, marketing, or anything else.

It might not merely refer to delegation. How will you know whether the real estate person you hired to handle the real estate portion of the business (warehouse, office, and retail space) is doing a good job if you claim, “I know semiconductors but I just don’t understand real estate”?

As we’ve already stated, using Google is not a replacement for considering that the majority of the information you know about yourself is not searchable on Google, and the same is true of anyone you are trying to research before making a financial commitment. A manager’s or an entrepreneur’s qualifications won’t be known to the general public. Speaking with those who have engaged with them is necessary.

Considering the Value of Due Diligence

If a service offers a significant benefit, it won’t be free for long. To provide the service to you or someone else who cannot afford it, either you pay for it or someone donates their time and money to do so.

Spending $1,800 to $2,400 on due diligence is a costly fee if you can afford to put down $10,000 on a high-risk investment, especially if you make ten of them annually. However, a lot of angel investors combine their funds. Now consider eight investors, each of whom has $20,000, but they will split the $2,000 check for an executive. One percent of the price.

The $2,000 cost keeps going down as a fraction of the money at stake in later rounds of investment, which makes sense to many angel investors. Don’t you want to know more than someone’s criminal record before making a $8 million Series A investment? You get there by doing your research well.

It is odd, then, that the Series A due diligence checklist provided by Ycombinator makes no mention of investigating the company’s management team.

One wishes that could alter. It’s net beneficial to screen your future partner, back the correct startups, according to a TechCrunch article from last year about a stampede out of a company attending a Ycombinator event when easily discoverable information on one of the principals was, eventually, revealed.

The fewer frequently you may need to press the ejector button on a candidate who probably shouldn’t have been employed in the first place, the more carefully you will need to hire.

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