Think back to the last time you sat in on someone’s job interview, as either the interviewer or the applicant.
The process is pretty much the same anywhere you go: the hopeful candidate answers a series of questions, hands over some documents, shakes a few hands… and, invariably, is sent out the door with a simple “we’ll be in touch.”
At this stage, most interviewers begin digging into the applicant’s suitability for the job by performing background checks, calling references, and, well… Googling them.
That’s because a new hire is a big investment. On top of salary, benefits, and other expenses, studies show that the average cost per hire is around $4,000.
Investing in a startup is a lot like hiring a new employee. In both cases, you’re giving someone money in the hopes that they will add value to your bottom line. Double-checking the facts before you sign is a good way to make sure things work out.
So, while you may not find yourself calling up founders’ college advisors or processing federal background checks… you absolutely should spend some time looking into every startup’s (and founder’s) history.
Typically, when you’re considering investing in a startup, you’ll be handed a due diligence package. Contents vary from case to case. I personally like to see a pitch deck (i.e., a printout of the pitch presentation), financial documents, company structure, some background on the founders, and some evidence of consumer traction or market research.
Unless you know the founders well, you shouldn’t take their claims at face value, either. A founder’s role is to convince investors to sign on. Many of them will “cherry pick” their rosiest qualities and omit less flattering details.
As a savvy angel investor with a carefully curated portfolio, your job is to poke as many holes in a startup’s claims as you can.
There are dozens of avenues you may head down during the due diligence process. At the very least, you should consider:
- The company’s financials (margins, cash flow, etc.)
- Customer acquisition and retention
- Feedback and traction
- Total Addressable Market (TAM)
- Intellectual property or protection of assets
- The competitive landscape
- The team’s competence and completeness
- The idea’s viability with your own family, friends, and colleagues
The more comprehensive you are in your digging, the better. Startups aren’t perfect – you’ll be hard-pressed to find a business that checks every single box flawlessly. If they were flawless, they wouldn’t need money.
But if you identify a few weak spots and still come out the other side loving the idea, you may have found a winner. The key is to dig up dirt before you invest – both to weed out the bad seeds and to ensure you aren’t blindsided by issues later in the game.
Until next time,
12 responses to “Skipping This Step is Like Following Somebody Off a Cliff”
May 21 2019