Acing Due Diligence: Selecting Startups Like a Pro

Antonis Argyros is the CEO of Vesquad, in this guest post he shares advice about getting Due Diligence right – from setting up processes and using relevant tools, to getting to know the founders. Vesquad support investors by enabling them to provide hands-on support to their portfolio companies through an integrated approach.

As an angel investor, handpicking promising startups that actually do have the potential to succeed is one of the most challenging tasks you’ll have to undertake. Europe in 2021 had one of the best – if not the best- years in terms of startups’ revenue, which possibly exceeded $100 billion in total venture capital investment, according to a report created by Atomico for the investment firm Cambridge Associates. But how can you ensure that you’ll secure a piece of that revenue?

By creating a transparent and objective process of evaluating which ideas and early-stage startups are worth investing in, you’ll be able to identify the most profitable opportunities and increase your revenue through successful exits. Building and implementing such a process allows you to identify a startup’s weak points early on to evaluate which of these can be improved through operational support or which could lead to failure.

For a VC firm with multiple investors, one profitable exit for every ten investments might be an acceptable ratio. For an angel investor, however, a thorough due diligence process is essential in decreasing investment risk as much as possible. Bonus points, providing constructive feedback to the founders of startups that were not selected for funding, gives them the opportunity to improve any weak points and emerge again as a candidate startup with more potential in the future.

However, handling an entire portfolio of companies and at the same time evaluating new investments can be very time-consuming. To make things easier, we’ve gathered the most important steps that will help you during the due diligence process, and the things that you should look out for before investing.

Build a structured process

Before moving on to financials, you probably already have certain basic criteria that a candidate startup needs to meet before investing in it, such as a specific area of focus or a specific market both in terms of technology and geography. If not, make that your number one priority.

Assuming that you have, in order to better examine if those criteria are met, you’ll need to build a structured and transparent process that will ensure there will be a careful evaluation of all the desired parameters before a startup becomes part of your portfolio. The best way to do that is by dividing your process into stages and identifying what you need to examine during each stage. This will help you to quickly eliminate any startups that you don’t think would be a good addition to your portfolio and focus on the ones that seem fit.

Get to know the founding team

We’ll start with the basics, as this is something that is often overlooked, usually due to everyone’s hectic daily schedule or due to the fact that we tend to focus on business and forget about the people. Dedicating some time to grasp a founder’s vision can reveal a lot about the startup they’re trying to build. What their background is, what skills they have and what value they can bring during later stages, what inspired them, and what drives them are all questions that will help you establish a relationship with the people you’ll possibly be in contact with until that much-coveted exit.

Enrich your inventory with the right tools

To gather all the necessary information that will guide you in the right direction and help you conduct the due diligence in the most effective way, you’ll need a series of different tools for each stage of your process. You could start with simple tools, such as an extended questionnaire with targeted questions that will give you an idea about the basics, such as the vision, the value proposition, the market size, and the KPIs. Keep in mind that the entire process should be guided by a positive attitude since the goal is to find the ideal fit for both the investor and the startup so that there is a win-win situation.

At Vesquad, we’ve developed a series of tools exactly for this purpose, that can help you automate the due diligence process by going past the basics and defining in precision the maturity level of each venture.

Adopt the best negotiation tactic for your personality

When negotiating financing, it is important to aim for a result that will be fair for both sides, keeping everyone content, and that the relationship between everyone involved remains intact. The composition of a legal term sheet that will be beneficial to you and at the same time attractive to the startup’s founders, can be achieved through the right negotiation tactic that matches your personality. These tactics have analogs and can be useful or ineffective in reaching a negotiated agreement. It’s crucial to understand how different styles complement one other, how some conflict, and how some have inherent advantages.

Being prepared in advance of the meeting and having a specific plan is crucial. This will give you the opportunity to be prepared about which terms you will be willing to accept and when to abandon the deal, which if it is left to be decided during the meeting can lead to mistakes and ruin the relationship with the founding team. This is why building a relationship beforehand, as mentioned earlier, is crucial. Knowing the people who will attend the meeting could reveal their strengths, weaknesses, motivators, and insecurities, which can give you valuable insight and ensure a better deal.

Venture Building Framework

After the deal has been sealed, what’s next?

We said that selecting the right startups that will lead to a successful exit is one of the many challenges an investor will face. The next big challenge is everything that takes place during the interval right after the investment is made and during the startup’s exit. Maintaining a close relationship with the founding team is equally important even after the investment has been made. There is more and more data showing that founders expect more than money from all their funding sources. So how can you stand out and satisfy that ever-increasing need?

By offering an added value that goes beyond capital itself and focuses on the operational needs startups and their founding teams have in order to grow. This is exactly the value we offer both to investors and entrepreneurs at Vesquad. We can help you adopt an operational model and provide hands-on support to your portfolio companies in order to accelerate their growth and minimize failure rates. From sourcing new ventures to supporting your existing ones, we’ll connect the dots for you so that you can focus on the cool stuff.

How to become an Angel Investor

2021 saw a record number of investors join Angel Investment Network. We expect to see the trend continue into 2022, with both established investors and new investors joining the platform. 

If you are thinking about taking the plunge for the first time and getting involved in backing some of the great businesses of tomorrow, here’s our guide for getting started:

What is an Angel Investor?

An angel investor is an individual who backs one of a startup’s first rounds of funding, investing their own money, rather than a venture capitalist (VC) that invests pooled funds at a later stage.

The term ‘angel’ apparently originally came from Broadway theatre, where wealthy individuals gave money to help bring the theatrical productions to life. 

Why should you become an Angel Investor?

Backing startups whilst high risk, opens you up to much higher potential returns than traditional forms of investments. In some countries, governments also provide tax breaks to investors that back startups. 

Who can become an Angel Investor?

In the UK, to qualify as an angel investor, you will need to meet the criteria of either a self-certified sophisticated investor or a high net worth investor:  

Self-Certified Sophisticated Investors 

Self-certified sophisticated investors need to broadly meet at least one of the following criteria:

– Have been a member of an angel network for at least 6 months;  

– Made two investments in an unlisted company in the last two years, this could for example include on crowdfunding platforms;

– Work or have worked in the last 2 years in private equity, or providing finance for small and medium enterprises; 

– Be a director of a company, or have been in the last 2 years with annual turnover of at least £1 million.

High Net Worth Individual 

Achieving high net worth individual status broadly means that you have a salary in excess of £100,000, or net assets excluding property of over £250,000.  

US – Accredited Investors 

In the US, angel investors are normally (but not always) individuals who have accredited investor status. The Securities and Exchange Commission (SEC) defines an ‘accredited investor’ as one with a new worth of $1million in assets, excluding personal residence, or having earned $200k income for the two previous years, or $300k for married couples. 

How much do you need to invest? 

Whilst startup ticket size varies hugely, a typical amount that an angel investor might invest is between £10k and £50k in the UK, and $25k to $100k in the US.

Should I diversify?  

Many investors aim to diversify their investments by building a portfolio with 10+ investments, in the hope that a few successes will counter any companies that are unsuccessful, leading to a positive Internal Rate of Return (IRR) on their portfolio. 

How do you get started? 

On the Angel Investment Network platform you can set preferences for the kind of deals that you are interested in and get relevant opportunities sent to you, or use the search facility to find deals worldwide. 

Providing you either meet the criteria of a self certified investor or a high net worth individual, you can sign up as an investor on Angel Investment Network here

Fundraising New Year’s Resolutions for Startups

Whilst we’ve seen some huge successes in terms of fundraising in the last year, it’s important to remember the companies that have been successful, not only have worked very hard and persisted to get there, they often have clever hacks and systems to help. 

As many of you are thinking about new year’s resolutions from a personal perspective, here are some recommendations for hacks, tips and processes that could improve your fundraising in 2022.  

Look after yourself to look after your startup  

Get exercising

Running a startup means there is always too much to do. Important investor meetings get diarised, exercise and eating healthily, not so much. But if you are not creating the best version of you, are you going to be presenting your start up optimally when you pitch to investors?

Make sure you are looking after your physical and mental health, it will likely pay off with you presenting yourself in the best manner possible, and in the quality of your pitch with investors.

Sleep well – keep your phone out of the bedroom 

Avoid blue light – keep your phone out of the bedroom

Now’s the time to start getting some actual quality downtime. If you check your emails in the middle of the night, it can quickly become a self enforcing habit that effects your sleep and alertness.

Lack of sleep has a number of negative effects, including impacting memory – important when recalling key metrics in investor meetings.

Keep your phone out of the bedroom and ideally have a pre-bed curfew to avoid blue light before bedtime. Leave it charging in another room over night to ensure that this doesn’t slip. 

Try the Pomodoro Technique

Raising investment whilst balancing the everyday tasks of running a business is an arduous process, it’s easy to get bogged down in the never ending cycle of replying to emails and firefighting tech bugs and customer complaints. 

Reclaim your time by planning and blocking out time using the Pomodoro Technique. 

With the Pomodoro Technique, you create a list of the key tasks that you need to do. 

Break the tasks into 25 minute segments (the optimal amount of time that people can generally concentrate effectively for).

Then fill your day with the appropriate amount of tasks. Set a timer for 25 minutes and get started on the task in hand, ignore the temptation to check your email, or anything else for that matter. When the timer ends, have a scheduled five minute break before jumping into the next segment.   

It’s a unique way to stay focused, avoid distractions and obtain a sense of flow when working. Find out more about the Pomodoro Technique here.

Pimp Your Zoom Set Up

External webcam versus internal webcam

The large majority of investor meetings are still happening virtually, and it looks like that might be a lasting legacy of the pandemic, with all but a small minority of later stage meetings likely to take place over video calls. 

With so many investor meetings, how can you make sure that you present yourself in the best possible way? Firstly using meeting scheduling software such as Calendly can be useful for sharing gaps in your availability, making it easier to coordinate meeting times with investors – it can also be integrated with Zoom or Google Meet to automatically schedule a video call.

Think about your backdrop – what kind of message do you think a cluttered backdrop sends to investors? You could use a virtual background, but sometimes using a real background will give investors some insight into what you like and help build rapport, whether it’s books you enjoy reading, pictures or some unique memorabilia. 

Whilst you can make it work with pretty much any kit for video calls, having an external mic will make your voice feel warmer, like you are there in the room; an external webcam can give you a much clearer image and more of a contrast to get you stand out from the background; and a ring light can help you ensure that you maintain the focal point. 

Find more tips here.

Use a CRM 

CRM for investor management

Do you find fundraising dispiriting? You’re not alone. Investors are typically very busy and often looking to invest in something that specifically meets their criteria, meaning that it’s not uncommon for messages to not receive a response.

On the Angel Investment Network platform, you can keep track the stage of investor conversations. You can also use software such as Pipedrive, ForceManager or Trello to categorise your investor conversations by stage.

It means that you can set yourself clear targets: i.e get X number of investor meetings this week, rather than fixating on the goals of raising investment, which can take longer, and you need to focus on getting more people through your funnel to get yourself in a position where they will convert.

CRMs have the advantage of letting you set yourself reminders to follow up with contacts, giving you analytics as to how long it is taking for contacts to get between stages, as well as adding in automation, i.e an email that it sent to investor contacts when they get to a specific point in your funnel.

In Summary

We hope you have had a chance to restore over the festive period and have come back invigorated. If you are about to embark on a fundraising journey, now is the time to think of a few habits and hacks that could go on to pay dividends for you. 

Wishing you every success in 2022.

The AIN Team