Dear Startup Investor,

David Weisburd here.

Due diligence is one of the most important parts of the angel investing process. It can also be tricky to learn – after all, it takes years of practice to know what to look for.

As angel investors, we’re constrained by how much diligence we can conduct on a specific opportunity. In most cases, you’re unable to even speak with an entrepreneur unless you plan to invest a minimum of $25,000 into any given company (and remember, you want to invest in a minimum of 30 different startups so that you’re diversified).

That’s why it’s so important to develop strategies that will allow you to conduct preliminary diligence (and thereby de-risk your investments) quickly and efficiently.

Here are the top four ways to do it:

Diligence Item #4: Who else has invested into the company?

If you are not able to spend 25+ hours diligencing a specific opportunity, the next best thing is to follow smart investors who have already done this diligence.

As an added benefit, you can piggyback on the many years (and often decades) that these investors have spent making all the mistakes in the book in order to become great investors.

For a basic overview of who is invested into a company, you can use Crunchbase.
For a more advanced overview, you can go to Pitchbook.

If well-known investors with great track records are willing to put their own money into a particular startup, that’s a good sign that you might want to do the same.

Diligence Item #3: Is the product good and does it solve a problem?

Not all good products are good businesses, but all good businesses have good products (with a few very limited exceptions). If you’ve ever used 23andMe, Airbnb, Uber, Robinhood, etc. you can see why they are worth billions of dollars.

Great tech companies are not built on financial engineering. Great tech companies are built by providing a great product or service to the end consumer.

Quite shockingly, the majority of investors (both angels and venture capitalists) never take the time to try the product or company that they are investing into… which is a huge mistake.

Leading Indicators of Success:
Metrics that forecast a high probability of future success; e.g., a great product or important early hire.

Lagging Indicators of Success:
Metrics that indicate a history or track record of success; e.g., revenue growth over time.

As angel investors you are looking for leading indicators of success, which include a great product, versus lagging indicators of success, such as financials and historical performance.

Diligence Item #2: How is the competitor’s product?

Startups do not operate in a vacuum, but rather on a crowded battlefield.

As the co-founder of Paypal and famous startup investor Peter Thiel says, “Competition is for losers.” A good product within a market of hundreds of other good products is unlikely to generate a great return.

In addition, if a company you’re looking into has an incumbent competitor that has been around for a few years, your company’s experience needs to be significantly better (think 10X better) in order to convince customers to switch to the new product.

Before investing into a specific space, it’s important to check out your competition’s product and be honest with yourself as to how the startup’s product compares with both new and existing competitors.

Diligence #1: What is the startup’s traction?

Traction is a fancy term for momentum that a startup has achieved. Whenever possible, it’s important that you find out the revenue that the company has generated in the past few years, and what the revenue growth % has been from the previous year to this year.

Revenue growth (as a percent) is an indication of how quickly a startup is growing… which ultimately makes it more important than revenue numbers alone.

Revenue encapsulates hundreds of different variables and is a good way to gauge overall demand and momentum for a startup.

Investing in startups requires that you do your homework. At Angels & Entrepreneurs, we provide some of those services – like gathering financials and interviewing founders – so that you have all the tools you need to make an informed decision.

Regardless of what methods you utilize, it’s critical to do your diligence and diversify your investment portfolio to mitigate risk.

I’ll be back soon with a story I’ve been really excited to tell you…

Until next time!

Very best,

David Weisburd