Pitch meetings can be exciting affairs.
The passionate founders, the suspense of the hot seat, the back-and-forth volleys of questions and answers, the very real potential of changing peoples’ lives forever…
It’s no surprise that the TV show Shark Tank is so popular.
What you don’t see on television is what happens behind the scenes: the homework, or due diligence, all angel investors do to ensure that startups and their founders are legit.
Some angels spend weeks or months digging into a startup’s nooks and crannies, from balance sheets to background checks. Others rely on gut instinct above all else.
No matter which type of angel investor you are, you should always complete these 4 homework items before you invest.
1) Find out what other people are saying about the founders.
Are they hard workers? Have they built successful businesses in the past? Do they get along with others? Do they treat their investors well? If you Google them, what comes up? A founder’s reputation is incredibly important (more on that subject here). Be just as wary of those with no reviews as you are of those with bad ones.
2) Ask people what they think about the product or service.
When you tell your family and friends about the business, do they love the idea? Do people express excitement or doubt? Do existing customers love the product? The bar is high for startups at this early stage. If people don’t love the product, it probably won’t take off.
3) Ask those same people if they would be willing to pay for the product.
This one’s a no-brainer. It’s easy to love a product that’s free. If customers aren’t willing to pay, then you’re looking at a bad idea. If they are, follow up with: how much?
4) Assess the founders’ ability to adapt.
Do they seem like they handle stressful situations well? Are they good on their feet? Can they deal with chaos? Most importantly, are they willing to adjust their vision to fit the needs of the market? Most startups need to pivot – or shift focus – several times from inception to exit. Make sure the founders can handle it.
These four assignments should at least give you a baseline idea of where the company stands… and whether you stand to profit from it.
Of course, there are plenty of other ways to assess a deal opportunity, too. Click here for my tips on choosing the right startup.
Until next time,