How to perform due diligence on your investors

Why is due diligence important?

Strict due diligence was not always necessary.

In the past, if you wanted to find investment for your business, your options were closely tied to the reach of your personal network.

This had the following consequences:

On the one hand, any investor you were introduced would most likely have come from a referral you trusted. As a result, trusting the prospective investor and their credentials was relatively easy. Most of the due diligence was accomplished via the intimacy of the referral.

On the other hand, your reach would have been limited to your network. And as a result, many businesses would have failed to find funding because their entrepreneurs weren’t linked to any ‘Old Boys’ Club’ or similar.

due diligence old boys' club

Today, the rise of networking and connection sites like LinkedIn and more specifically, Angel Investment Network, means that you can now access investors from all over the world. Investors whose network would never have overlapped with yours.

This democratisation of access means that more and more people are receiving investment, irrespective of background. This is, of course, great news (though there is still much work to be done).

However, this brings its own dangers.

Entrepreneurs looking for funding are often in a vulnerable state. They have invested time, effort, passion and resources into a project, but they need financial support to take it further. As a result, they can be overeager to accept funding from wherever it is offered which can be a bad idea.

This is where simple due diligence work can help entrepreneurs to easily avoid the pitfalls of scammers and con-artists.

What is due diligence?

Due diligence is the general term used to describe any background check on a company or individual to see if they are legitimate and suitable to do business with.

Basically, in the case of angel investment, it’s checking that an investor is who they say they are and can help you in the ways they suggest they can.

This process starts, in a loose sense, from the moment you connect with a prospective investor as that’s when you start forming an impression of them. But you only need to formalise the process when you are sure they are interested.

In this sense, due diligence is a complementary part of investor relations.

You don’t then need to carry out full due diligence on every investor you speak to. But, when the relationship progresses to the point of meeting and discussing deal terms, then it’s a good idea to make sure you know exactly who you’re dealing with.

How do I perform due diligence on investors?

1. Talk to the investor

It is a good idea to be upfront and tell the investor that you want to research them.

This is such a simple course of action. But too many entrepreneurs are afraid of annoying their investor leads and scaring them away.

A good investor will not only understand why you want to check but will be reassured that you want to. It shows that you are diligent and professional.

Remember, they want to trust you too if they are going to invest in your company!

You can tell a lot from an investor’s reaction to this. If they help you in your research, then you’re onto a winner. They should provide you with links to their online profiles and emails addresses for people they have worked with.

If they are not happy with your desire to investigate them, it suggests they may have something to hide. A red flag for sure!

2. Conduct basic research online

A lot of investors will have websites, blogs, and profiles on sites like LinkedIn, Facebook and Twitter. They may be found in articles or have written articles themselves. These can all be found easily on Google.

due diligence power of google

Of course, a digital presence is more likely in different parts of the world and depends to some extent on the age demographic of the investor. So, you should factor this in.

3. Examine their business and financial status

You should ask the investor and anyone s/he puts you in touch with about their industry experience and about any previous investments. This will give you an idea of their authenticity as an investor and how useful they could be for you beyond simply financial help.

You will also want to find out where their funds are coming from – money from offshore accounts should be avoided unless they can give very good reasons (which you can verify with a lawyer).

You should also do a routine credit and criminal check.

4. Speak to any entrepreneurs the investor has worked with

A legitimate investor will let you which companies they have been/are involved with, and will give you a way to contact them. So, make sure you ask!

However, you may also want to do some research and approach people not referred by the investor.

You should dig into what the investor is like to work with and whether there were disagreements, and if so, whether/how they were resolved.

Try to do this in person as you’ll get a more detailed response. (Obviously, this won’t always be possible.)

5. Speak to other investors or brokers

If you can, speak to other investors (whether they have invested in your business or not). Ask them for a second opinion on your prospective investor.

Sometimes their reputation (good or bad) precedes them and other investors/brokers on the scene may be able to give you some useful insights.

due diligence good or bad (1)

6. Avoid upfront fees

Another major warning sign is if an investor asks for upfront fees before they invest. Fake investors will come up with all sorts of plausible reasons for the fee. These should be ignored without exception.

At Angel Investment Network, we constantly try to reiterate this to entrepreneurs on our platform:

No genuine investor will charge an upfront fee.

Conclusion:

While the danger is real, awareness of the information in this article and others like it, should provide every entrepreneur with a framework for spotting an investor who is not genuine.

They will, therefore, be able to process the situation rationally and to not act hastily in desperation to close their funding round.

There is a world of possibility out there for entrepreneurs. If it is treated with respect and due caution, it will yield its rewards.

Acknowledgement for this blog:

We’ve been selected by Feedspot in the Top 5 Angel Investment blogs

Angel Investor Blogs

10+ Best Practices for Engaging Potential Investors

Last week, I wrote an article called ‘How to Update your Investors for best results’. The post set out the importance of updating your investors; and how you should go about it. I laid out a useful (hopefully!) formula for your updates. And gave you some real-world examples from fast-growth companies in my network like Sweatcoin and ScreenCloud.

The post proved more popular than I expected; a number of people have been kind enough to contact me with their thoughts. The response was positive except for one thing: I had only covered one aspect of a broader theme…

Investor Relations.

Last week’s post gave advice for the tail end of the fundraising process i.e. after investors have actually invested in your business.

But what about before they’ve invested? When you’re still trying to persuade them to do so?

Angel Investment Network connects angel investors with startups looking for funding, contacts, advisory board members etc. It would be remiss of me not to complete the picture and give advice on investor relations for the first half of the fundraising process…

Engaging Potential Investors

When interacting with people you hope to convince to invest in your company, there are 3 principal types of interaction you will have:

1. Reaching out
2. Responding
3. Reminding

In this post, you will learn the best practices for each type of interaction.

I’ve been helping people do this for a long time now. I’ve seen some hilarious but tragic examples of how not to do it! But more importantly, I’ve built up a picture of the best approaches. I hope this article means that you or anyone you share it with can avoid the common conversation-ending mistakes.

The aim is to help you generate more leads, and convert a higher percentage into investors.

Reaching Out

To be clear, this section does not deal with how to find investors. That’s a different question for another time. You can find some ideas here though.
reaching out to investors

But assuming you’ve identified and acquired the contact details of potential investors, how do you go about approaching them?

Reaching out to potential investors is a tricky business. People hate cold approaches. Even if your company is the next big thing, people have a strong aversion to being hailed from out of the blue. A stranger danger thing perhaps. But get the tone and hook just right though, and you can overcome this aversion.

How?

The key is to keep the email short. Value is king. People want to understand it quickly. If they see huge chunks of text in an initial email, they will be put off before even reading.

At the same time, if you shorten your email but lose the articulation of your value proposition. Then the hook is gone.

So, while moderating the length, you need keep your sights on the purpose of the message. The ability to do this ultimately comes down to being able to pitch your venture clearly and concisely.

This is crucial. The purpose of the email is not to explain the whole idea. It’s to hook the contact into wanting to know more. Once you’ve engaged them, you can dive into the detail.

The question you need to ask yourself is:

“What is the most attractive thing about my business likely to be for this potential investor?”

If you can answer this, then you can frame your message around it.

What are some good hooks?

– Introductions – if you can be introduced by someone they trust and know, your chances of engagement increase dramatically

– Relevant & large market opportunity

– Trending topics e.g. AI, Blockchain, Machine learning (obviously not always applicable but check this out!)

– Impressive traction e.g. funds raised, key partnerships, big-deal advisors

– Problem/solution articulation – can work for early-stage projects but is risky because they might not see the problem as you do

Beware, there are also some “anti-hooks”!

A contact of mine was approaching a VC company in London. He made the mistake of asking for an NDA. They never replied. Annoyed, he ACTUALLY walked into their offices and asked why he never got a response. They explained the NDA turn off and sent him on his way. (More on this next week).

Summary:

Keep it short and make sure your hook is clear.

End with a call-to-action. This gives them a framework to respond. At this stage, the most likely example is:
“Can I send you some more info? I’d love to get your feedback.”

Responding

This interaction is particularly important to anyone raising via the Angel Investment Network platform. On the platform, an entrepreneur submits a pitch using the template and onscreen instructions which is listed and sent to the network of angel investors. Interested investors can then click to connect. It’s at this point only that the entrepreneur can message an investor. So, there’s a lot riding on the response!

That said, this advice goes for any time you receive a message/email from an investor whether they are reaching out or responding to you.

What should you do then?
appropriate response to investors

The advice is dead simple. But you’d be amazed how often I see people do the opposite.

– Respond promptly (24-48 hours)
Quick responses make investors feel important. They also show that you are professional and organised.

– Avoid spelling and grammar errors
Duh!

– Make sure you address every point they make
You’ll leave a bad impression if you don’t have a considered response to address every issue they raise.

– Avoid blocks of text
Blocks are boring. And not easy to digest. Address questions/points they make with bullet points or numbering.

– End with a call-to-action
This gives them a framework for responding and will increase the chances that they do.

This advice seems so trivial that it pains me to write it (the first 3 in particular). But I’ve seen it go wrong too many times through haste, laziness and even stupidity.

Last year, I watched the final night of a play written by a friend. At the party afterwards, I was talking to one of the actors. During the performance we had all remarked on his incredibly muscular physique – the man was a monstrous! I asked him ‘why’.

“Why so much gym?”

His response impressed me. And can be applied to this situation and many others.

He said;

“Control the things you can control.”

In his case, he realised that one of the reasons he didn’t get every part he auditioned for was because he was out of shape. But more importantly, he realised that this was an aspect of his life and attitude that he could directly address. And as a result, he would optimise his chances of getting great roles. (I’m afraid I can’t say who he is!)

So, to optimise your chances, ‘control the things you can control’.

Remember this interaction with investors is a bit like an audition. The reality of it is that investors don’t have much time to judge you. Their impression of you will be created over the course of a few emails, a call and perhaps a coffee.

When deciding to invest a considerable sum of money in someone, that’s not a lot to go on!

So, in the small window of opportunity you are given to make an impression, ensure that what can be polished is polished. That way, you’ve given yourself the best chance.

Reminding

So, you reached out to an investor, they responded, you exchanged a few emails discussing the venture, it all seemed to be going so well. But now they’ve gone dead. No response to your last message. Cue tumbleweed and depression…

What can you do?

The first thing to remember is that in most cases, any investor worth having is going to be very busy.

So, you should never take it personally if you don’t get a response for a while. You don’t know what’s happening at the other end. They may be taking the time to carry out proper due diligence and discussions with various people before pushing ahead.

There is no sense fretting and waiting for a response. It may never come. In which case, you’ve wasted valuable time worrying about it. Equally, it may come. In which case, you’ve also wasted time.

That said, you shouldn’t wait indefinitely. It is perfectly acceptable to nudge people to respond.

But how do you do it without royally p***ing them off?!

Time is important. DO NOT nudge anyone if they haven’t responded after 3 days. (Unless they specifically asked you to).

7-10 days is an acceptable interlude. But longer is fine too. I was helping someone raise money once: we actually met the investor face-to-face before pitching anything as we had been connected via a strong introduction. He then said he would follow up via email after he had had time to think.

We waited 29 days and had given up all hope when his email finally came through. It was a positive one too!

What about the content of a reminder?

This will vary according to time and circumstance. But there is an optimal approach.

Consider:
a)

“Hi X,

Did you have any more thoughts about our project?

Thanks,
Founder Y”

b)

“Hi X,

It’s been a good few [insert time period] since we last spoke.

We are showing strong growth across the following key metrics: [insert impressive figures].

Also, [insert Mr/Mrs Big Deal] has committed £X and joined the advisory board.

Did you have any more thoughts about our project?

Thanks,
Founder Y”

Sometimes approach a) may be appropriate. But most of the time, b) will be better.

The reason for this is momentum.

This builds on the ‘hook’ idea we looked out when discussing reaching out to investors. You have to give them some incentive to respond. Hack their desire to engage with you.

At this stage of the process, you can do this by the impression of momentum. By updating them on your good progress, you can make them feel like the opportunity is a train leaving the station. Without them.
investors missing the train

Fear of missing out is a strong psychological influence to tap into. No investor wants your business to be the one that got away. So, make them feel like it is getting away with positive updates in your reminders. You should find an uplift in engagement.

That’s all folks! Thanks for reading.

Tweet me () if you think I missed something etc…

Or get me on oliver@angelinvestmentnetwork.co.uk