Due Diligence before you Angel Invest
Would you prefer to invest wisely or gamble your money? It is your choice.
Dear Angel Investors,
Would you prefer to invest wisely or gamble your money? It is your choice.
Have you ever bought a property before you verified the credentials of the land/house/apartment before you invested in it? Have you ever tried to register a property without ensuring there is no outstanding litigation?
Why is this principle any different when it comes to early-stage investing? Would you prefer the fastest closure on funding, or would you prefer the safest, verified path even if it takes a couple of more weeks?
One of the cornerstones of how we complete transactions on LetsVenture is to define a process, which ensures there is no call for money done before the due diligence is complete. This includes complete financial and legal due diligence, which is accepted and signed off by the Lead Investor. I am outlining a simple process, that you as an investor, committing to a startup must ask your network or your online platform to follow before they ask you to transfer your committed amount. There was an angel study done in the US which revealed that startups, where due diligence was done, had a 30% lower probability of failing. One more reason, if the basic reason of ensuring business sanctity is not enough for you.
- Ensure you know who the Lead Investor is — What percentage carry (incentive paid to the lead investor at the time of exit) is being promised?
- Ask for the process being followed for diligence? Legal and Financial due diligence is mandatory and a non-negotiable step.
- Ensure the Lead Investor signs off on the DD report. As the Lead, this is one of the responsibilities they undertake, as they represent the interest of the investor syndicate.
- Ensure all CP (conditions precedent) are fulfilled before money is transferred.
Ensuring that the due diligence is done is a very basic requirement, and one which you might assume is always done. However, of late, I have seen several networks and online platforms claiming ‘fastest’ path to funding (15 days seems to be the mantra) and I am compelled to raise my concern here. I do believe in the rush to get visibility, but by creating urgency, the syndication platforms are forgetting that building a sustainable, long-term business which gives back returns to investors has to be built on strong fundamentals. Here, the fastest may not be the best path — efficiency needs to include the right way to being the fastest.
We decided that in the best interest of the ecosystem, and for the investors, we would open source our due diligence checklist. We had earlier open sourced all investing documents about 2 years back (term sheet, SSHA, founders agreement, advisory agreements) and saw close to 12k downloads in 72 hours. So here again — I decided to open source something core to how we do business on LetsVenture. If it helps build a more educated set of angel investors, we are ready to open this up for you.
Please find the checklist we follow. Ensure you follow this when you invest. Ensure the founders give you the required information. It will help both you and the founder. This asset is known to be the highest risk category — we can only ensure we don’t increase the risk factor by overlooking basic diligence at the time of investing. Wishful thinking post investment will help no one.
Can we ensure that we enforce due diligence when we angel invest?
Field Application Engineer at Trident Techlabs Pvt. Ltd.
5 年We are from Ensaio Consulting and we are a startup based out of Kharagpur, West Bengal. We are launching “Prototype breath analyzer” for Non Invasive diagnosis of Helicobacter pylori infection, ulcer disease or non-ulcerous dyspepsia in our stomach through human breath tests only. The total Investment would be Rs 4.25 Cr for 25% share in the company. * My profile is partially updated ( Please dont step back looking into it)
Seasoned F&A -28 yrs exp || MBA Fin ll Aspiring CFO|| Fin. Controller II US GAAP || Indian GAAP & Compliance || FP&A || Project costing || O2C , P2P, R2R II Reporting II Audit II Accounting Software implementation II
5 年You are right. Due diligence is must before investment, but post investment thing will not be same. Accounting and finance domain is always Last preference in any organisations. I have been seeing it from 2 decades. Whether it's start-up or existing business finance should be given due credit and respect for their eagle eyes, however they are always treated as thankless job because they don't generate revenue. Most of the time startup spending is on advertising and expanding the customer base and investment on creating the app and keep on updating. We being finance professional are always asked questions when mis report is presented about the profitability. They will tell why expenses are going so high, even after explaining the reason they will nod their head understood but no action will be taken. Startup guys need to understand the simply spending and creating value race is not important because when you in case want to sell the company again due diligence will take place or even for next round of investment certainly the financial discpline is seen. I believe spending should be seen with ROI.