12 Due Diligence Best Practices to Ensure Efficiency & Transparency for Angel Investors

"Best practices" refers to the most effective and efficient methods or processes that have been established through experience and research to achieve a particular goal or objective in a particular field. These practices are typically accepted and endorsed by industry experts and professionals as being the most successful ways to achieve a specific outcome.

In various fields, best practices can include specific methods, techniques, tools, or procedures that have been tested and found to work well. For example, for angel investing, best practices come from educational resources like the Angel Capital Association, the experience of conducting multiple rounds of due diligence, and research conducted to make provide rigor or clarity to existing processes. following evidence-based guidelines for patient care to improve outcomes and minimize the risk of medical errors. In addition, best practices in angel investing can also help to establish clear goals for founder-funder relations, timelines for an efficient process to decrease investor fatigue and increase founder confidence, and communication protocols to ensure that the due diligence is completed in a respectful amount of time and within the investment thesis parameters of an individual angel investor, angel group, angel fund, or angel syndication network. Overall, best practices are important because they can help angel investors achieve better results, reduce risk in already a risky asset class, and promote efficiency and effectiveness to increase TRUST (Tremendous Recupricoty between U and Us with Sincerity and Transparency) between founders and funders for a more capital efficient & thriving innovation ecosystem.

Best practices are continuously evolving and improving as new techniques and technologies emerge, and as organizations and industries learn from their experiences. Adopting best practices can lead to improved efficiency, productivity, quality, and safety, and help organizations achieve their goals more effectively.

12 Due Diligence Best Practices for Early-Stage Angel Investors

Due diligence best practices lead to more efficient investor decision-making processes, grow trust between investors and founders, and assist angel investing groups to thrive in collaborating and investigating together. Here are 12 that I have experienced first-hand and since the San Diego Angel Conference is conducting due diligence right now, this info is always asked of me, so in my typical posture, wanted to share them in a bight-size way based on experience, research, and education throughout more than a decade of being an angel investor.

1. Record every single deep dive call. Then, for the due diligence report, add notes to an appendix. There are many benefits of recording the calls, like (i) providing a comprehensive record for accurate evaluation, (ii) assisting with accuracy and detail, (iii) facilitating collaboration between investors on a due diligence team and amongst the investor team and the startup team, and (iv) providing evidence to verify information that was provided or to resolve any misunderstandings during the entire process. Overall, recording every single deep dive call during an investor due diligence process can help ensure that the due diligence process is thorough, accurate, and transparent, and can provide a valuable resource for both the investor and the company being evaluated. However, it's important to ensure that all parties involved are aware that the calls are being recorded and that they provide their consent.
2. Write for syndication. To be able to leverage the hard work angel investors put into researching, writing and executing a due diligence report, other investors should be able to also benefit from a good deal and founders should be able to be supported through their fundraising journey, so write for others to be able to use the reports for their own due diligence. Writing a report so that others can use it is important for effective communication, clarity, replication, accountability, and efficiency. A well-written report serves as a means of communication between investors (share with a treaty - it's easy and increases trust). Investors can convey information, ideas, and findings to other investors in a clear, concise, and easy-to-understand manner so that other investors can make actually save time and resources so that they can make more informed decisions based on the information provided. Writing a due diligence report that others can use promotes accountability, transparency, and fairness. Therefore, investors can leverage networks by writing, researching and sharing great deals in our early-stage innovation ecosystems.
3. Get organized with a deal/data room. What are the main components of a data/deal room? Check out my article from 2022. Two main reasons for getting organized are to (i) increase efficiency in the entire process by having all relevant documents, financial statements, and legal agreements in one place and (ii) improve investor collaboration by being able to discuss and share insights about the company and its potential more effectively. This can lead to a more informed and nuanced decision-making process and can ultimately result in better outcomes for all investors involved. Organizing a single place to store information can also save a significant amount of time and effort compared to requesting documents from the company on a case-by-case basis.
4. Appendices add depth to keep the main document easily digestible. Appendices are seriously, my favorite thing to add to due diligence reports I am writing with a group. They provide Supporting Information necessary for informed investment decisions. Appendices allow due diligence reports to include additional information and supporting documents that are relevant to the analysis but may not be essential to the main report. This helps keep the main report focused and concise while still providing a comprehensive overview of the company's operations, financials, and legal matters. Appendices can also be used to organize information in a way that makes it easier for readers to access and understand, especially with clearly labeled headers & titles. This helps readers quickly find the information they need without having to navigate through the entire report. Lastly, appendices ensure clarity and brevity to ensure that due diligence reports can remain concise and focused, not long and cumbersome, on the main findings and recommendations.
5. Focus on key investor questions that need answers. Every investor has a core set of questions, typically around the 5 M's of investing, Management, Market, Money, Momentum, Momentum. due diligence reports, albeit whatever outline is used for an angel group, should focus on answering the 5 main groups of questions. another way of organizing the main questions is in a four-quadrant group of questions around (i) the idea, (ii) the market, (iii) the people, and (iv) the terms, as described by Keiretsu Forum educational platform. Some of the highest-level questions that investors ask are: Does the company have a real possibility of becoming successful and; thus a real investment opportunity for early-stage funders? What are the obstacles being faced & will be faced by the startup and how does the team get around them or mitigate them? Does the company have a clear vision of what it wants to achieve and a good plan to get there based on experience, advice and boots-on-the-ground information from customers??
6. Use a system to stay current on revisions that all are willing to use. One of the most effective ways to stay current on revisions of a document is to use version control software. This software allows you to track changes to a document over time, and to see who made each change and when. It also allows you to compare different versions of the document side-by-side, making it easy to see what has been added, removed, or modified. Collaboration tools, such as Google Docs or Microsoft Office 365, allow multiple users to work on a document at the same time. These tools also keep track of changes made by each user, making it easy to see who made what changes and when. They also provide real-time updates, so everyone working on the document can see changes as they are made. Very importantly, the best system for staying current on revisions of a document will depend on the specific needs and preferences of the angel group and individuals working on the due diligence. Angel groups should spend time finding a system that works for all in their group. Personally, for me, using Microsoft word using a million versions is like a million paper cuts, I really dislike Dropbox due to the vast variety of how people use the platform, some people use it as a folder system and rarely can use it as a version control system, so love Google Drive, it's scrappy, free, very startup-friendly.?
7. Risks are real & mitigations are magic. It’s easy to paint a negative picture of all of the risks of a startup. Challenge yourself as an angel investor to find how the company, team and advisors are mitigating the risk.?Risks are real, for sure, and by conducting a significant risk assessment to identify and assess risks associated with a potential investment opportunity, angel investors can make informed decisions about the level of risk they are willing to take on. By understanding the potential risks, investors can better evaluate the overall investment opportunity and determine if the potential return is worth the risk. Next, Identifying either the mitigation strategies that the startup team is undertaking or developing possible mitigation plans helping to minimize the impact of those risks. Including risks and mitigations in the due diligence report provides transparency to all investors. This ensures that all investors are fully informed about the risks associated with the investment opportunity, which can help prevent misunderstandings and help manage the investment over time for optimal return on investment and return on impact.
8. Assign one point contact for founder-investor questions. Efficient information flow is key for a successful due diligence process & report-writing. Don't overwhelm the founder, don’t frustrate the investors, and get a seamless system established for easier and more fruitful communications and ongoing investor relations. This ensures that the investors receive accurate and up-to-date information in a timely manner and that the founders are not overwhelmed with multiple requests from different investors. By having a designated point of contact, the investors and the founders can develop a better working relationship. This can lead to more productive conversations and a deeper understanding of each other's needs and concerns. In addition, this efficient, and easy, process can also help reduce distractions for the founders. By consolidating requests and questions through one person, the founders can stay focused on running the business rather than fielding multiple inquiries from different investors.
9. Conduct interviews with customers, if appropriate. Conducting customer interviews can be an effective way to gain insights into a company's customer base, verify customer traction from the source, and evaluate the market opportunity. FIRST, get consent from the founder to conduct the customer interview because they might be in the process of gaining a letter of intent and it might not be the best idea at the time. Investors should prepare interview questions that will help them gather the information they need to evaluate the investment opportunity. Questions may include topics such as customer needs, buying habits, pain points, and feedback on the company's products or services. I find mostly that these interviews help me clarify what are the true needs of the customer, what the benefit they have when using the product, better define customer feedback, and gain insight on their future plans around customer engagement or retainment. Conduct the customer interviews either in person, over the phone, or via video conferencing. During the interview, investors should ask open-ended questions and encourage participants to provide detailed answers. Once the interviews are complete, investor due diligence teams should analyze the results to identify key insights and trends to include in the due diligence. Then, follow best practice No. 2 to add notes & analysis in appendices.
10. Verify Information. It is important to verify all information provided by the company during the due diligence process. This includes financial statements, market data, customer lists, and legal documentation. This is important because it (i) ensures accuracy that the data provided by the company is current, correct & precise, (ii) identifies omissions or errors that may have a significant impact on the investment decision, (iv) validates assumptions, (v) mitigates risk by actually identifying and assessing the company's risk, and (vi) provides a complete picture.
11. Engage with founders & team. Build a relationship with the founders to gain insight into their vision, strategy, and values to gain a better understanding of their business, operations & growth plans. This can also help you assess their ability to execute the business plan. How to do this? Plan for a site visit to get organic connectivity with the team IN THEIR ELEMENT. Review documents with the team to show that the due diligence team values collaboration (helps with investor relations after the investment too). Attend meetings to experience internal culture and customer relations. Ask questions in multiple ways, like over coffee, walking get-to-know-you talks, group experiences like a celebration of a milestone, or attending a panel that the founder is speaking at. Engaging with the management team helps build relationships and can lead to a better understanding of the investment opportunity.
12. Recruit investors with industry expertise, customer awareness, & startup-stage competence for the due diligence team. Investors with industry expertise have a better understanding of the market and can provide valuable insights into the industry and its trends. Crucial to the due diligence process & report-writing is the industry expert investor's ability to (i) assess the company's competitive advantage, (ii) identify any unique selling points that the company may have, and (iii) because of familiarity with the regulations and compliance requirements in the industry, can identify any potential compliance issues of the startup being evaluated. Investors with customer awareness can provide insights into the needs and preferences of the company's customers. Investors with startup-stage competence have experience working with early-stage companies and understand the unique challenges that these companies face. This can help the due diligence team better evaluate the company's business model, product development, and market fit. Having a diverse group of investors bringing their strengths to the table makes for a more rigorous & deep due diligence process for the benefit of the angel group conducting the due diligence, the syndication partners, and ultimately, the startup.

Best practices are important for the due diligence process for angel investors because they help to minimize risk, improve efficiency, ensure consistency, provide accountability, and increase investor confidence. By following best practices, investors can make more informed investment decisions and build a stronger investment portfolio of startups. Following best practices can help angel investor groups build a reputation for professionalism and rigor (assessment of risks & mitigation), transparency and inclusivity (speaking with customers, founders, and team to include all information), connectivity and collaboration (conducting due diligence together in teams of expert-investors & writing for syndication). This can help investors attract high-quality deal flow and build relationships with other investors and entrepreneurs. Building a strong investment portfolio is key to building wealth and growing a thriving innovation ecosystem. Let's do it in connectivity, collaboration, ad sharing of due diligence for efficiency of resources and time for epic returns on the BEST startups.