No matter where your startup is at in its development cycle, it must undergo due diligence before raising capital. Without proper due diligence, you could end up with a bad investment.
Investors typically require you to provide documentation for your team members, organizational charts, employment agreements and inventor assignment agreement. They also want to learn about the customer base and competition.
Angel investing is an exciting way to get involved in the startup ecosystem and potentially earn high returns. However, it can also be a risky venture, with many startups failing to gain traction and investors losing their money. To maximize the chances of success and minimize the risks, it’s essential to conduct thorough due diligence before making any investment decision. In this article, we’ll provide you with the angel investor due diligence checklist every investor needs.
1. Financials
Angel investors and venture capitalists carry out due diligence to verify a business is run efficiently. This process helps them identify any investment risks which could hinder the company from reaching its full potential.
Investors often become excited by the potential of a product, service or technology; however, they need to assess its real-world performance and viability. Furthermore, they want to know which risks are material – those which could potentially cause your startup’s demise.
For a new search engine, this could include researching its competitive environment and how easy it would be to duplicate the product. Furthermore, they will want to determine if the service is scalable and has adequate IP protection.
Entrepreneurs must collect as much information as possible before pitching to investors, in order to avoid costly errors and save time during the fundraising process.
2. Business model
When pitching your startup to investors, you want them to believe that your product or service is worth investing in. That’s why the due diligence process is so essential.
Though you may have presented your pitch as a high-level overview of your business, due diligence will go much deeper and often wider than you could ever imagine. Throughout this process, you’ll be asked to explain every detail involved in creating your product or service as well as answer questions about your company and operations.
Luckily, there’s a straightforward checklist you can use to guarantee your business is ready for investor requests. This list, which includes the documents listed below, will keep you organized throughout the due diligence process.
Additionally, be prepared for any potential issues that might arise. For instance, if an investor feels your contract exposes the company to unreasonable risk, they might require you to negotiate an amended agreement that reduces that exposure. This process can take time and be disruptive.
3. Management team
Angel investors or venture capitalists looking to invest in a startup have already assessed the business and determined which ones merit investment. Now it’s time for due diligence – an investigation of the business to verify if the founder’s story rings true. This process helps ensure your investment decision will be successful and provide you with peace of mind during this critical stage.
Prepare a comprehensive checklist ahead of time to identify potential issues before they escalate into legal troubles, saving your firm both time and money while looking more professional in the eyes of investors. Whether raising seed investment or Series D funding round, this list contains essential materials needed for conducting an exhaustive evaluation of potential partners. To keep organized throughout this entire process, utilize DocSend Spaces for document gathering and sharing that’s seamless. You can download the full PDF version below or utilize the chart below to view all essential documents included within the checklist.
4. Customer base
Venture capitalists prioritize the customer base of an early stage startup or new business when investing in it. Whether it’s a major corporate acquisition, an IPO, or even a small business loan, investors want to know where their money comes from. A reliable document management system can ensure this happens by having an intuitive user interface and supporting collaborative editing and sharing features like tagging, archiving, and even search engines that help keep track of all files – plus their meaning!
5. Competition
Angels often invest in startups that are currently losing money but could potentially turn a profit later on. Additionally, they look for companies with patents or copyrights with high valuations.
Angel investors typically conduct a thorough background check on the company, its management team and customers. Furthermore, they examine the product, market size and financials to gain insight into potential risks or opportunities.
The most challenging part of the due diligence process is sorting through all the data to identify which aspects matter most to you. Utilizing a centralized document sharing solution like DocSend Spaces will help organize and streamline this step, helping to prevent any last minute mistakes and save you time in the long run. Plus, with DocSend Spaces, all documents can be stored together so everyone has easy access to what you have available for them.
6. Intellectual Property
Investors interested in investing in your startup typically request to view the intellectual property rights of the company. This includes patents, trademarks, copyrights and any other IP assets you may possess.
During the due diligence process, investors may request all patent applications that you have filed. This helps them assess whether or not your business has any legal right to sell the products it’s creating.
Unfortunately, startups often fail to file patents before raising money – an alarming sign. This is particularly true for early-stage companies.
Startup companies rely heavily on their IP assets for financial success, so having ownership rights to all of your IP assets is paramount to maintaining that value.
To protect your investment, ensure all of your company’s IP is legally owned and has been filed for patents. Furthermore, make sure there isn’t any security interest on it; this could be a major red flag since it allows so-called angel investors or commercial banks to take back your IP before any equity investors do.
7. Marketing
Investors want to see evidence and financial statements that back up your claims. This includes copies of contracts confirming customer commitments, testing results that back up performance claims, as well as market research findings.
Investors also need to verify the startup has a strategy for user scalability, an essential issue in software products as it ensures an app or service won’t crash under heavy demand. Venture capitalists usually hire technical specialists to perform comprehensive due diligence on their investments.
Conducting due diligence may take some time, but it’s essential for making an informed investment decision. That is why venture capital firms and angel investors require a checklist of due diligence requirements for each company they evaluate.
This checklist can help you stay organized throughout the process, so be sure to download it and use it as a guide before beginning your own due diligence processes. Afterward, store all completed checklists in a central data room (like DocSend) so that both you and your team have easy access to them when needed.
8. Legal
Venture capitalists and angel investors frequently ask “What’s on the due diligence checklist?” These checks ensure a business has the potential for success and is an attractive investment.
Investors often request a variety of items from companies, but financial documents, contracts and intellectual property ownership are likely the most frequently requested.
In addition to these documents, VCs might also want to learn more about the company’s employment practices and understanding of securities law. These matters could have legal repercussions for both the business and its shareholders in the future.
That is why it’s essential to have an organized document-gathering and organization process in place before an investor reviews your materials. A reliable document platform can keep you organized throughout the procedure, giving your management team the tools they need to respond promptly and precisely.
Conclusion
Angel investing can be a lucrative opportunity, but it’s not without risks. Conducting thorough due diligence is crucial to minimizing risks and making informed investment decisions. The angel investor due diligence checklist includes evaluating the team, market, product/service, financials, customers, and partnerships, and conducting comprehensive due diligence. By following this comprehensive checklist, you’ll be equipped with the tools and knowledge you need to invest wisely as an angel investor.