C HAPTER 2
S U M M A R Y Before investing, angels are cautioned to conduct due diligence on five key elements of the company, these being the legal, financial, technology, marketing and human resources aspects. The experience of many investors is that failure in just a few items can easily result in failure overall. The article lists a number of questions to ask with respect to each of these categories and provides six warning signs of a potentially flawed deal. Investors are also advised to understand the core technology and validate the fundamental values of the individuals involved, as this will provide the best index as to whether or not an investment should be made.
D UE D ILIGENCE by Paul LaBarge
INTRODUCTION There are five key elements that angels should consider before investing in a particular enterprise. These are the legal, financial, technology, marketing and human resources aspects of the company. Each of these areas presents the investor with several fundamental issues, which should be examined and addressed before embarking on an investment. The experience of many investors is that a failure in just a few items can easily result in failure overall. Thus a major challenge for investors is to distinguish between those items that are deficiencies, and can be remedied, and those items which are fundamental flaws.
TECHNOLOGY There are several factors to consider with technology. For instance, is there a demonstrated demand for the product? Creating a superior rat-trap – or even a wholly new product or technology for which there is little consumer need – will rarely result in a well-trod path to the company’s door. A product’s success is directly related to its utility. Secondly, will the technology function reliably under the real-world conditions proposed? To what extent has it been effectively tested? Does the technology offer benefits that are not available from competing products – such as added functions or features or lower costs – or does it simply duplicate offerings currently available? Is the technology protected? Are patents in place? To the extent that there is no proprietary technology, what evidence is there of an ability to create a competitive business? Efforts should also be made to check the employment history of management and to determine whether or not the technology or any part of it was engendered in the course of prior employment. Former employers may have substantial resources dedicated to the enforcement of their patent and technology rights.
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