Due diligence in angel investing

March 20th, 2019

Angel investing is inherently riskier than venture capital. It's earlier in the life of a company, sometimes pre-revenue, which means fundamentals like product-market fit are not yet proven.

Due diligence in the angel world isn't about perusing financial statements and analyzing unit economics. It's gut... with a little backchannel research. Here's how I prioritize the aspects of a company when considering an investment. Ordered from most important to least: team, timing, business model, idea, and funding.

Team is the most important to me, even if all the other parts of the business are poor. If a company has an incredible team, they can do incredible things. A full company pivot can only be pulled off if the right team is in place, and launching a business into the stars without pivoting is tough.

Timing comes next. Tesla as a company is an incredible idea. But it didn't become successful until battery technology got to a point where the trade-offs vs. a combustion engine car were minimal. Investing in the same idea in the 90s would have been fruitless.

Business model is where rubber hits road. Whatever you're doing, it needs to be something someone wants to give you money for. One could argue Facebook didn't have a true business model until 2012, but it clearly would have been worth investing in beforehand. That's why it's a factor, but not the most important factor in my rubric.

Idea is the trap to be avoided. Most people, many angels included, would consider The Idea to be the number one factor when evaluating a business. But great ideas fail every day of the week because they didn't have the right team, timing, or business model. Plus, everything is a remix. Whatever idea you have, you can be sure someone else had it years ago. Whatever will drive a success this time around isn't the idea per se, but the combination of the other fundamentals of the business.

Funding. In this context, I'm talking about existing funding. Have they raised funds previously? Have other investors passed on them? These are certainly factors in an investment decision, but the least-decisive one for me.

Overall, when I'm watching a pitch, I'm paying close attention to how passionate the team is about the business, and how qualified they are to see it through to success. I believe that is the biggest driver of success, the others being details that can be adjusted. A team, once built, is difficult to adjust.