C HAPTER 2: D UE D ILIGENCE
An investor is also advised to understand the technology from the bottom up. This often involves talking to the full development team. It’s not unusual for senior people to have a limited grasp of the internal workings of the technology. Finally, it is important to be honest with yourself as an investor. To what extent do you actually understand the technology and how it works? If you do not, it may be advisable to solicit the advice of a third party expert or simply walk away from the opportunity. HUMAN RESOURCES As an angel investor, you are betting on the talents of the management team, its ideas and its core values. How well do you know these people? Are their values aligned with yours and can you work closely with them to move the company forward? What have they achieved in the past and what are their reputations among their colleagues or in their industry? What is their previous history with investors? Unfortunately, there are entrepreneurs who move from one failed venture to another, and seemingly, have no problem raising money from naïve investors. In considering the management team, ask yourself whether or not they represent a full package. Does the group understand the marketing, financial and intellectual property implications of their venture, or are they just a “one-trick” pony? Who really contributed the most to the group’s innovative ideas? Is that person still with the venture and still participating in a meaningful way? Credentials are an important part of the assessment process, bearing in mind that they do not necessarily tell the whole story. There are many talented and experienced people with limited or no university backgrounds. Consequently, an assessment of each individual’s participation in the development of the technology may yield a more realistic assessment of the team capabilities than would their CVs. FINANCE Take time to assess the true value of the investment you are making. During the technology bubble in the late 90s, many angels failed to do this and sometimes lost their entire investment. High valuations usually lead to unrealistic expectations and endanger an angel’s investment in the next financing round. Valuations must be based on sound and realistic projections. A financial spreadsheet is germane only to the extent that the underlying assumptions are realistic or factual. Consequently, investors should focus on the assumptions. In particular, the absence of certain items in the financial material may indicate a lack of understanding or expertise with regard to the overall business operation. Also, pay close attention to indicators that demonstrate whether or not the entrepreneur has the capability to build a successful business. These include such metrics as revenues per employee and sales cycle, and such considerations as adequacy of staffing and the investment infrastructure.
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