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 people's lives forever...
It's no surprise that the TV show Shark Tank is so popular.
But what you don't see on television is what happens behind the scenes: the homework, or due diligence, angel investors do to ensure 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.
It can be an overwhelming amount of information, but today I'll boil it down to four key steps successful angel investors follow before investing even a penny.
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Your Four-Step Angel Investing Due Diligence
1) Find Out What Other People Are Saying About the Founders
Business ideas change over time. If the founders don't have a good track record, then the company's probably not going to do very well. So you need to ask...
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. 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. If, let's say, about 20 people complain about the product, then there's definitely an issue.
So make sure you listen to the people who are familiar with or have actually used the product, and take their reviews into account. You want them to express excitement about the product, not the opposite.
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. But if customers aren't willing to pay for it, then you're looking at a bad idea. If they are, ask how much.
Without that revenue or income, the company isn't going to be worth 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 and that they're willing to adapt with the market.
These four assignments should at least give you a baseline idea of where the company stands... and whether you stand to profit from it. It's absolutely critical to complete this before you invest even a cent of your money.
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