Due Diligence is defined by Merriam Webster as “research and analysis of a company or organization done in preparation for a business transaction (as a corporate merger or purchase of securities)“. When it comes to Due Diligence in Angel Investing, there are many schools of thought. With the advent of Angel List and other online platforms as well as a myriad of crowdfunding sites, it is possible to make investments in early stage companies without ever actually meeting the entrepreneur. Conversely there are Angel Groups like Golden Seeds, of which I am an active member, whose members conduct a rigorous due diligence analysis of potential investment opportunities. And there is every variety in between.
So why Due Diligence?
A study entitled Returns of Angel Investors in Groups released in 2007 by the Kauffman Foundation and the Angel Capital Education Foundation (now the Angel Resource Institute) and conducted by Robert Wiltbank of Willamette University and Warren Boeker of the University of Washington found that investors who conducted due diligence experienced higher returns.
Here is my view as to why the results of this study make sense:
- Angel Investing is about investing in great people who have great ideas. A resume may help me screen a potential founder, but when it comes to writing a check, I really want to know who I am investing in and with. I anticipate that many of my investments will take several years to arrive at a liquidity event and I want to make sure I am comfortable with the prospect of working with the founder(s) for that anticipated time horizon.
- Due Diligence, if done right, can help a CEO a learn a great deal about her business. It can serve to validate the business model or perhaps highlight an area where there may need to be more thought.
- Finally, when I invest with other members of Golden Seeds, I have the opportunity to take advantage of the incredibly wide range of expertise resident in our membership. Due Diligence is all about asking the right questions.
One of the great aspects of being an angel investor and writing your own checks is that YOU get to decide how you want to make investment decisions. So in terms of diligence – to “due, or not to “due”: that is the question (my apologies to Shakespeare but I just could not resist) that can only be answered by you!