Angel Investing 101
PART 2: DUE DILIGENCE
Agenda
 Purpose of this presentation:
 An opportunity has been (tentatively) qualified, how to dig deeper and
why.
 Due...
Deal Flow:
Sourcing to Exit
Pre-Funding
•Exploratory contact
•Application
•Pre-screen
•Due diligence
•Revisions/Pivots
Fun...
Why Due Diligence is Important
Returns are positively correlated to hours spent on due
diligence
More than 40
hours = 7.1x...
What is the right amount of due
diligence?
 Due Diligence Sweet Spot ~ 40 hours
 Not an exact science and depends on the...
Due Diligence Process
Phase I – High Level
Sniff Test
Phase II – Deep Due
Diligence
•Using Mullins Framework
•Due Diligenc...
The Seven Domains of Attractive
Opportunities
Source: John Mullins, Associate Professor of Management Practice in Marketin...
Due Diligence
Phase I
Management Team
Experience
Produce/Service
Description
IP Potential
Target Market
Clarity
Industry D...
Due Diligence
Phase II
Management Team
Analysis
Product/service
comparison to direct
and indirect
competitive offerings
IP...
Due Diligence Product/Service
 Features versus benefits
 What is the pain being solved?
 How does the product/service’s...
Due Diligence Product/Service
Source: Angel Capital Association
Features versus benefits
Pain Point
Product -> Pain point
...
Market Analysis
Macro
How big is the market?
How fast has the market
grown historically?
How fast will the market
grow?
Wh...
Market Analysis
 How attractive is the micro/macro-market?
 Fit market into one of three buckets:
 Attractive
 Fairly ...
Industry Analysis
Porter’s Five Forces
Source: The Five Competitive Forces That Shape Strategy- Harvard Business Review
Industry Analysis
 How attractive is the Industry?
 Fit industry into one of three buckets:
 Attractive
 Fairly attrac...
Management Team
Execution Risk
Experience
Industry Skills
Technical Skills
Transferable Skills
Passion?
Source: Angel Capi...
Management Analysis
 How attractive is the Management Team?
 Fit into one of three buckets:
 Attractive
 Fairly attrac...
Financial Analysis
 What is the company’s revenue Model
 Are the revenue projections realistic?
 Has the founders inclu...
Financial Analysis
 How attractive are the financial terms?
 Fit into one of three buckets:
 Attractive
 Fairly attrac...
Key Takeaways
 This is the 2nd step in the process, you’re interested in the opportunity
 Time intensive 20-40 hours.
 ...
Efficient Due Diligence
 How can you work with others to share in due diligence tasks?
 We can help with:
 Deal flow
 ...
Questions?
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Lsaa education ali2

  1. 1. Angel Investing 101 PART 2: DUE DILIGENCE
  2. 2. Agenda  Purpose of this presentation:  An opportunity has been (tentatively) qualified, how to dig deeper and why.  Due diligence process.  Next Steps  Benefits  Learn about what it takes to research opportunities.  Mitigate some of the risks inherent to angel investing  Useful for giving advice to fledgling entrepreneurs
  3. 3. Deal Flow: Sourcing to Exit Pre-Funding •Exploratory contact •Application •Pre-screen •Due diligence •Revisions/Pivots Funding •Term sheet and valuation •Presentation(s) •Deal structure/documents/legal •Closing Post- Funding •Monitoring •Mentoring •Resources/Network •Harvesting/Exit 20-40 hours
  4. 4. Why Due Diligence is Important Returns are positively correlated to hours spent on due diligence More than 40 hours = 7.1x returns Less than 20 hours = 1.1x returns Source: Kauffman Foundation
  5. 5. What is the right amount of due diligence?  Due Diligence Sweet Spot ~ 40 hours  Not an exact science and depends on the deal  More doesn’t correlate to higher returns  Diminishing returns after initial threshold met  Need to be intentional and deliberate when you perform due diligence – in other words: Know what you are looking for and where to look for it. Source: SEPA Partners LLC
  6. 6. Due Diligence Process Phase I – High Level Sniff Test Phase II – Deep Due Diligence •Using Mullins Framework •Due Diligence Checklist
  7. 7. The Seven Domains of Attractive Opportunities Source: John Mullins, Associate Professor of Management Practice in Marketing ; London Business School
  8. 8. Due Diligence Phase I Management Team Experience Produce/Service Description IP Potential Target Market Clarity Industry Definition Valuation Reasonableness, High-Level Financial Summary, Exit Possibilities High-Level Risk Assessment Source: SEPA Partners LLC
  9. 9. Due Diligence Phase II Management Team Analysis Product/service comparison to direct and indirect competitive offerings IP research and investigation Details on the target market and break- down on the company’s marketing plan Competitive matrix with positioning analysis Valuation comparisons and detailed financial analysis, exit scenarios and target ROI Detailed risk assessment Source: SEPA Partners LLC
  10. 10. Due Diligence Product/Service  Features versus benefits  What is the pain being solved?  How does the product/service’s benefits relieve that pain?  Current product/service alternatives?  IP potential? Source: Angel Capital Association
  11. 11. Due Diligence Product/Service Source: Angel Capital Association Features versus benefits Pain Point Product -> Pain point Alternatives IP Potential
  12. 12. Market Analysis Macro How big is the market? How fast has the market grown historically? How fast will the market grow? What trends will affect the market? Micro Benefits Pain resolved Purchase incentives Willingness to Pay Other Markets Source: Angel Capital Association
  13. 13. Market Analysis  How attractive is the micro/macro-market?  Fit market into one of three buckets:  Attractive  Fairly attractive  Not attractive
  14. 14. Industry Analysis Porter’s Five Forces Source: The Five Competitive Forces That Shape Strategy- Harvard Business Review
  15. 15. Industry Analysis  How attractive is the Industry?  Fit industry into one of three buckets:  Attractive  Fairly attractive  Not attractive
  16. 16. Management Team Execution Risk Experience Industry Skills Technical Skills Transferable Skills Passion? Source: Angel Capital Association
  17. 17. Management Analysis  How attractive is the Management Team?  Fit into one of three buckets:  Attractive  Fairly attractive  Not attractive Source: Angel Capital Association
  18. 18. Financial Analysis  What is the company’s revenue Model  Are the revenue projections realistic?  Has the founders included the details on ‘how’ they plan on achieving these projections?  Gross, operational and net margins?  Sources and uses of funds?  Projections  Management, downside and upside scenarios?  ROI for investors? Source: Angel Capital Association
  19. 19. Financial Analysis  How attractive are the financial terms?  Fit into one of three buckets:  Attractive  Fairly attractive  Not attractive Source: Angel Capital Association
  20. 20. Key Takeaways  This is the 2nd step in the process, you’re interested in the opportunity  Time intensive 20-40 hours.  Main points to look for  Industry Risk  Changes to Porter’s Five Forces  Market (Product/Service) Risk  Changes in customer preference  Financial Risk  Appropriateness of fund sources and uses  Execution Risk  Management team execution ability Source: Angel Capital Association
  21. 21. Efficient Due Diligence  How can you work with others to share in due diligence tasks?  We can help with:  Deal flow  Collaboration  Leverage investor specialties/experience  Lead investor strategy  Due diligence delegation based on specialties
  22. 22. Questions?

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