March 29th, 2019

Due Diligence: How It Works

Due Diligence: How It Works

When entering the world of investing, there is a lot to consider. The good news? You don’t have to do it on your own. As a new investor, it’s important to seek out others to learn alongside. Entering your first deal can feel like a big leap of faith, which is why each deal generally has a “Lead” investor — someone who commits the round before other investors. This may be an angel investor, but is more likely an institutional investor. A lead investor determines the deal structure, sets the price and terms of the investment, takes a large part of the round, and usually agrees to represent the entire round on the board.

A lead investor will also dig into the key components of due diligence, which is the evaluation of very early-stage technology companies. One of the benefits of entering a deal with other investors is that detailed processes like due diligence (parts of which are outlined below) are taken care of by the lead investor on the deal. Keep reading to learn more about what due diligence is and why it matters.

Topic: Leadership Team

Necessary Info: Resumes for key leadership team members, references/contact info for board members/advisors.

Then: Interview references, gather additional information from network as available (asking around, checking LinkedIn - anything to find blind reference checks), spend time with the CEO and assess the CEO and team for: leadership, integrity, track record, required competencies. Assess the CEO and leadership team’s coach-ability, assess the suitability and the commitment levels of board members and advisors.

Consider: What is the team’s track record? What are their values? Does the team possess the appropriate balance of experience and skill sets? If not, what key hires are needed to address the gaps? Is the management team open to feedback and ideas? What is the formal devotion of time for each advisor?

Topic: Business Model

Necessary Info: To assess if the business model is scalable, source out the regulatory strategy (if relevant) as well as the status of dialogue with regulatory authorities and/or consultants. Procure copies of relevant communications, including minutes from meetings with regulatory agencies.

Then: Review the company’s growth plan and their regulatory strategy and interview regulatory experts. Assess the regulatory climate, as well as comparable regulatory pathways for other products.

Consider: Is this business model achievable? Is the regulatory strategy well-thought-out and feasible? Are the company's financial resources sufficient to implement their regulatory plan? Are assumptions about partners/acquirers' roles in the regulatory plan reasonable? What are the remaining regulatory risks?

Topic: Market Opportunity

Necessary Info: Market estimates from the company, properly segmented down to a reasonable addressable market segment, plus published market data and industry reports by segment, industry vertical, and/or geography as relevant.

Then: Interview industry experts as needed and assess market opportunity and the product/market fit. Assess the company's market estimates and share assumptions.

Consider: Are the top-down and bottoms-up market estimates consistent and attractive? Are the market share projections reasonable? What are the remaining risks in market development?

Topic: Technology & IP Roadmap

To learn the rest of the Due Diligence process, including what an IP Roadmap is and how to build one that supports a successful investment, consider joining the next cohort of our accelerator program Angel Academy. Under the guidance of experienced investor mentors, senior female leaders will gain the knowledge, the network, and the access to deals that lead to their first angel investment. Find out more about the Spring 2019 Cohort here: