Pick Good Companies
Time spent in due diligence matters!
According to the largest study performed on investment returns for Angels in groups (Wiltbank & Boeker; Wiltbank), the average time spent in due diligence is around 20 hours to generate an average return of 2.6X. • Spending 20–60 hours in due diligence increases returns to 5.9X • Spending more than 60 hours results in returns of 7.1X • Spending less than 20 hours in due diligence results in returns plummeting to 1.1X These numbers are for larger investments by Angels working in groups. Individual Angels making smaller investments would not normally spend so much time. And Angels, as a class, do far less than other types of investors. For example, Smart found that venture capital investors (VCs) spend at least 120 hours of due diligence per investment. “VCs spend so much time on diligence because they have to account for their decisions to their investors,” says Dr. Maxwell, “This is not the case for Angels, who are only accountable to themselves. The consequence of too much due diligence is that you need to make larger investments to cover the overhead.” Momentum investors often must jump into a deal and skip due diligence when speed is of the essence. Value investors are never in a hurry but need to be sensitive to their own time and never waste the entrepreneurs’ time. According to Ian Bandeen: “Don’t fall in love with the deal! Never skimp on the due diligence because you are too excited about the deal. There is no downside to spending too much time on due diligence.” Mike Volker agrees: “The biggest mistake is to rush into a deal. After every failure, I think – Gee, if only I had spent more time getting to know that person.” Adding Value Through Due Diligence is perhaps the most frequently requested NACO Academy module and many books have been dedicated to this topic (try a search for “due diligence books”). This guidebook focuses on giving you a general overview of the major concepts and terminology. What specific activities should you consider with your available 20–60 hours of due diligence? Quality of due diligence is more important than just the time. This is perhaps the most important activity in the investment process and can dramatically
44 A Practical Guide to Angel Investing: How to Achieve Good Returns
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