Preparing for Due Diligence with Angel Investors
This blog post is based on an article that originally ran in the September issue of the Angel Resource Institute newsletter entitled Ask an Angel: How Should an Entrepreneur Prepare for Due Diligence?
Preparation. Preparation. Preparation.
The best advice angel investors have for entrepreneurs seeking funding is to prepare in advance. Most angel groups have due diligence checklists and documents and are willing to share them. Some even post that information on their websites.
Business incubators are also a great source of information and great prep coaches. Many times these groups have worked with the angel investors and have prepared other entrepreneurs for due diligence. They’ve been over this road before.
Make sure all your legal documents are in order, up to date and in one place. There are several online sites for due diligence where these documents can be filed. Having everything easily accessible sends a positive message to potential investors.
Getting to know you, getting to know all about you
Most due diligence processes are geared to help the angel investors get to know the entrepreneur. Rick Vaughn of Mid-America Angels says this: “It goes back to that old saying that people get funded, not business plans. To some degree, we are looking at the entrepreneur and thinking, does this person have the vision, patience, courage, creativity, and integrity necessary to lead a successful venture?”
Investors are looking for someone they want to work with, someone in whom they can have a level of trust.
Here’s the tricky part
Angel investors recommend more attention to market strategy, financials and potential customers. Often the focus is on the product or innovation, not on the customer. Investors want to know who will buy, how many will buy over what period of time, and how much it costs to acquire each customer.
Financials are also an issue. “Entrepreneurs need an EXCEL model that ties together all the assumptions of the company. To be able to do that, they must have a well thought-out business model,“ according to Jo Ann Corkran of Golden Seeds. A realistic cap table and best/worst case projects help the entrepreneur gain credibility with investors.
Finally, entrepreneurs need more than just a list of every potential customer. A funnel analysis of that customer pipeline list, along with criteria for sorting leads and what it takes to close a sale again signals that the entrepreneur will be able to generate the sales needed to recoup investment.
Content contributed by Kate Hodel, MOSourceLink, a proud affiliate of U.S. SourceLink, America’s largest resource network for entrepreneurs.