Angel investing is not for the faint-hearted. It is also not as swift and glamorous as reality shows like Shark Tank would have us believe. In fact, angels often spare few efforts to ensure their time and resources create lasting value for themselves and the market. Much of this effort goes into due diligence — a term that makes startup founders queasy and remains a daunting prospect for angels themselves. How much due diligence is too much?
Angel investor and entrepreneur Rob Neville shed light on this topic in his Keiretsu Forum keynote. As MD of Springbok Ventures, a firm that backs early-stage startups, Rob has worked with countless founders, refining their business plans and ensuring they are well-equipped for growth. Let’s dive into the key diligence insights he brought to the table.
An Active Relationship
Rob’s due diligence philosophy goes beyond creating checklists and confirming facts. A company’s claims aren’t simply verified. Instead, his method is a lot more collaborative. It involves taking an active role in guiding the company, getting to know the team, and judging the team’s ability to execute the plan.
“We don't see that diligence ends when you're done with the diligence report. [It is] an opportunity to shape the company into a viable and investable entity,” says Rob in his keynote address. In other words, the process is a lot more immersive and symbiotic. Angel involvement can also mean making tweaks to the business model or the pitch to ensure the company is better placed to succeed. According to Rob, understanding why startups fail underpins a high-level diligence process. He narrows down 3 ways in which early-stage firms crash:
—Poor capitalization: Failure to raise enough funds
—Bad product fit: Flawed business model or getting outcompeted
—Inefficient team: Lack of credibility; disharmony with board
Let’s look at Rob’s advice on making interventions in each of these cases.
Capitalization
Startups often fail because they do not raise the money they need to take off or sustain operations. And nothing puts investors off quite like the lack of a good story. When the story does not live up to the product, Rob suggests working tirelessly to shape the CEO into a great storyteller. This is done to ensure investors can also believe in the founder’s (well-defined) vision and pledge their dollars. Primary risks need to be addressed early as well. His team helps companies by going through their GANTT charts along with their use of financials and proceeds to ensure they line up. It takes multiple rounds of vetting to refine a financial model. It doesn’t hurt for investors to even reach out to vendors and verify that the company will be able to scale and fulfill its promises.
Last but not least is refining the terms of security or collateral to manage the risk undertaken by angel investors. Rob summarizes his view, “We want to make sure the company is raising the right amount of money for the right security and that they're going to be able to get to where they need to get to with that money.”
Product-Market Fit
Investors must confirm whether the startup’s product will serve the market’s needs. To this end, every single claim the company makes has to be tested against a credible source. For example, if a med-tech founder says that 20 million patients across America are diagnosed with a certain illness each year, Rob might ask for a peer-reviewed article that verifies the facts. His team also creates its own Total Available Market, Serviceable Available Market, and Serviceable Obtainable Market (TAM, SAM & SOM) reports, vetting them from various perspectives. Realistic assumptions guide these forecasts — sometimes leading to adjustments in the business model.
While validating a product is easier when it is in the market, there are ways to do this with products yet to be launched. Building surveys and doing on-ground research helps pinpoint the ideal customer persona and their thinking process. Lastly, rigorous competitor analysis is a more obvious stage of the process — one that can involve communication with competitors themselves.
Team Dynamics & Personality
Hundreds of business plans delivered to Silicon Valley VCs don’t see the light of day because the people pitching them don’t appear credible or warm enough. So how does one build a good level of credibility and connection? Angel investors need to spend considerable time with the founders and the team to forge a human connection. This can take many forms. Rob often takes CEOs and their wives to dinner and recalls how he even found a running partner in one founder!
Rob also advises conducting second-degree reference checks to make sure a founder with a dubious history does not take the investors for a ride. Commitment to the team also needs to be gauged and any wild claims made by the company is always good reason to raise doubts.
The angel investor life cycle is one of continuous research, judgment and instinct. A high-level due diligence process asks the right questions and takes active steps to shape the answers as best as possible. Drawing from valuable years of experience, Rob Neville has laid bare the intricacies that lie behind the veil of efficient angel investing, suggesting that due diligence is more than just ticking all the boxes. In the end, it’s about nurturing a relationship and going that extra mile to remove as many uncertainties as one can before the cheque is signed.
About the speaker
Rob Neville is an angel investor, serial entrepreneur, and member of Keiretsu Forum. Currently, he serves as Managing Director of Springbok Ventures and is also the President and CEO of non-profit employment generator Goodwill Central Texas. As a repeat judge and past winner of the Ernst & Young Entrepreneur of the Year Award, he has analyzed hundreds of successful companies.
To watch his entire keynote address click here: https://keiretsuforum.tv/three-key-focus-area-while-conducting-due-diligence-before-writing-a-check/
