In my last blog (which was a bit depressing I know) I highlighted that the due diligence process is a two way thing. Just as an angel will carry out due diligence on you – you will need to carry out diligence on them.
Here are some of the questions you should ask them with an explanation of things to look out for;
- Where are you meeting them? I have to say that I have been very disappointed by so called Angel events in the UK. In Canada at the angel meetings, they really probe and make sure you can only come to an event if you have both the means and the appetite to invest in funding a Daytona Beach wedding photographer. Lots of people want to join the network to sell their own services. It is great at excluding them. If you are lucky enough to pitch at one of their events you WILL raise serious money. I went to a London event last week. Out of the 120 people at the event, I suspect only 12 to 15 people were investors.
- When did they last invest in something? (If it was more than 12 months ago – forget it) you have to be careful that you are not the ones they are losing their virginity to. I took ages over doing my first angel investment. And when I did do it, I put in half the money I first wanted put in. (That is very common as well)
- What have they invested in? (If they give you sectors or generic descriptions – probe more. Most of the investors I know love telling people what they have invested in. I, for one get a real buzz telling people about the businesses I have invested in. Funnily enough, one of the Canadian Angels I was working with got ‘caught out’ through this probing)
- Do they invest or do they ‘earn’ sweat equity? There is nothing wrong with sweat equity (I can do a blog on this if required) but be clear that this is what you after. I prefer combination deals whereby someone puts in hard cash as well as the opportunity to earn more. Human nature being what it is we have a greater motivation to not lose something rather than win something. Therefore I will be twice as motivated not to lose £25,000 as I will be to make £25,000. (Strange but true)
- Can they give you references? If it looks like you will be doing due diligence together and spending time – find out what they are like as an investor. Ask the companies they have provided details for.
- How much do they normally invest? I was raising money for a business once in the region of just under £1m. One potential investor I met asked some great questions and wanted to meet the entire management team (not unreasonable). I then learned that he wanted to invest £10,000. Nothing wrong with that amount – but if every investor putting in that level wanted a meeting lasting two hours that is 600 hours of management time (assuming one out of every three investors you meet ends up investing). That is 15 weeks of management doing nothing but raising money!
- Do they invest in the best work boots for plantar fasciitis with ‘strings attached’? There are loads of tricks whereby investors can get more from their investment. Again nothing wrong with this – but you have to be clear from the outset. For example, do they insist on being a Director? Again, not a problem, but what is the cost. I have written a blog about one ‘investor’ I knew who had done a great PR job on himself, convinced many companies that he would be a great NED and invested £10,000 in many companies, but got a payment of £24,000 from each company (with 50% needed upfront) Fantastic business model – but I have to say it lacks Honesty! (He also did a very poor job) Again be careful of investors looking for a job – unless you need their skills.
I hope this is useful. It was good to write this blog as it is very much about going back to basics and the reason why I started out writing this blog. Sadly, the world of finance always attracts more than its fair share of talentless morons.
Make sure you find angels to back you who get the wealth creation and risk ‘thing’.