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Checklist for Angel Investing
by Bob Chaworth-Musters
ANGELforum.org
What is the market Need: How clear is the market pain or need and who will pay. Why will buyers pay good money for the solution?
The Business: Listen for a clear statement on how the entrepreneur will meet this market need. Is the solution unique and a painkiller "must-have" or a vitamin "nice to have" solution? What are the substantial savings and payback period for the buyer. Is it very clear what the value-to- buyer proposition is? How will the business model work and how is it profitable? What stage of development is the company? Will it grow quickly to a large size or slowly to a modest size?
Management Management Management is the mantra for private investors. Investors invest not in business plans, products or services, but in teams that can execute business plans. Ask about the 4 key managers, directors and advisors that will implement the business plan, deliver the profits and increase shareholder value. Explore the knowledge, relevant experience, successes/failures and motivations of the 4 key people. Focus on the three key areas: their knowledge, capabilities and goals. Are they willing to partner or are they control freaks? Do they just want a business that gives them a comfortable lifestyle? Identify the management gaps and can you as an investor play a role? Later focus your due diligence on who management is, what is their previous business reputations, what is their lifestyle? Very important is honesty and strength of character. Sometimes a good team can be re-oriented to a more compelling market need and a better unique solution.
What is the Product or Service? Do you understand the basic product or service - not always necessary to understand the technology or manufacturing process - but ensure you understand the business model. Focus on the value created and who pays. Do they have sales or contracts pending that will validate market acceptance?
What is the clear Competitive Advantage that can be sustained over 5 years? What are the advantages over competitors, what patents and trademarks, uniqueness, exclusivity? What are the strengths and weaknesses of competitors? If the entrepreneur says there is no competition, don't believe it - always competition for buyer's money. Will the company dominate the market?
Has the Market been clearly identified and has it's market characteristics including growth rate, been verified with clear third party market data. Does the company really know who the customer is and do they spend a lot of time interacting with the real customers? How will the company reach the identified market, how much time and resources are required to obtain a sale. How long before buyer pays? What will be their market share be? Timing is a subset: is the market ready for the product/service? If the solution is revolutionary, then speed to market is critical versus an evolutionary product can be more measured.
What are the mid-case Financial Projections? Identify the monthly burn rate, time to breakeven and the conservative gross margin. What are the three largest business risks and how will the company mitigate them.
Now listen for the investment opportunity.
How will the realistic financing amount be used in 3 main ways? Know the range of funding that the company will need to reach sales, then to ramp up marketing and then to reach cash flow positive. What type of investor will provide the next rounds of equity? And while they be interested?
What is the stage of development and what Return on Investment is projected? Is this appropriate for this stage of risk, remembering that large cap stocks will generate 10% on average. What is the value of the company calculated 3 different ways. Absolutely critical that valuation is realistic and ideally less than $2 million.
What is the deal structure? Some say structure is essential and others say it is irrelevant. Focus on alignment of interests and keep things simple. Three common structures are: Preferred shares for investors and common for others like staff. Convertible preferreds. Convertible debt. To choose the right structure consider the result on exit, the downside protection and the upside potential. Best to consult with experienced angels before seeking legal advice.
How will you as an investor monitor the company and your investment? What is the realistic exit strategy for your investment investors in 3-7 years?
Shhhh ! Just Listen to the entrepreneur tell you why she/he needs your money, your management experience and how the business will benefit. Then follow your gut.
� Bob Chaworth-Musters
Bob Chaworth-Musters in 1997 initiated the BC Angel Forum� (www.ANGELforum.org) where emerging companies present to private equity investors. Sept 30 is the company deadline for 18th Angel Forum on Oct 25, 2005. He is a Board Director of Canada's National Angel Organization. � 2005
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