Insights into the Angel Investment Due Diligence Assessment Process

Angel Investors use their own personal money and make their own decisions on whether or not they want to be part of a deal to invest in a company.

The role of Mint Ventures and other angel groups is to ensure that their members are prepared to start doing their own evaluation of a company and the investment deal terms. 

For each potential investment deal the angel group will have a deal manager or lead angel, often referred to as gatekeeper, who will be responsible for managing the members of the group and the investee company through the process.

Due Diligence

Background Pre-engagement Due Diligence

Prior to proceeding with a deal, basic checks will be performed which may include:

1) Basic searches on Google

2) Searches on founders’ names in Companies House, Creditsafe, Beauhurst, FCA, etc.

3) Review existing Articles of Association and other Governance

4) Review detailed accounts for the last few years if available.

5) Determine if there are any Charges etc. against the assets (eg. Assets have been used as collateral for lending)

6) Director name search to see what else they are or have been involved in

7) Check the patents. Are they in the name of the Company? Is any IP currently under litigation?

8) Is there a business plan that makes sense? Does this plan bring out the key value being added by the Company?

9) Is there a financial model that makes sense – this needs to include Balance Sheet, Cashflow, Income statement and Change in Equity on a monthly basis for the past five years if available and more general figures/ projections showing the possible growth over the next five years?
The exact period will vary from business to business, but should show clearly how they get to the next stable position, value inflection points and how the next funder / acquirer will make a good return.
The model should be fully functioning so that it can be stress tested and different scenarios modelled.

10) Can they clearly show the route to profitability through named customers / partners / routes to market?

11) Can they clearly identify the funds required to take the business through to profitability?

12) Do they have a commercial strategy, and go to market strategy to ensure the business is sustainable over time?


Full Due Diligence

Below are details of the type of information required and questions that angel investors will want to have answered as they make their assessment of a company and a potential investment deal.

The Management Team – do they have the skills required
to deliver the vision / business plan?

1) CVs, previous experience and track record in delivering for a previous and/or current business

2) The back story, what has motivated them to start this company

3) Combination of skills within the team including commercial, technical, financial, operational and staff management

4) Interaction and behaviours of the team during discussions

5) Staff turnover and quality of staff employed. Is there an understanding that the original management teams will need to develop and may need to change as the business grows.

6) Corporate Governance understanding and this may involve moving from an advisory board to full governance board with an investor on the board.

7) Are there processes/ clauses in the shareholder agreement allowing for the replacement of a member of the management team who is not performing

 The Business Model – does this make sense and is it achievable?

1) Product – is it ready for market, what development is required, is this a service and how will it be scaled?

2) Is there a clear need for the product or service. Have potential customers been identified, or is there other clear evidence e.g email feedback, quotes, email of intent to buy from potential customers to support the need for what the business is providing?

3) Types and examples of customers who will be potential purchasers of the product / service – why will customers buy this product or service?

4) Is the product or service scalable, how will the revenue be increased by going into new markets and taking market share from others?

5) Competition – clear understanding of both direct and indirect competition.

6) USP – clear differentiation on what you are doing differently and how this is defendable to stay ahead of the competition.

7) Product life span and potential diversitfication.

8) A clear breakdown in how product is manufactured, delivered, paid for etc. with outline costs

9) An initial financial plan with base assumptions for operations, market dynamics and sales projections for 3 years.

 The Investment Proposition – does this make sense and can it show a clear return on investment?

1) What funds are required to take the business to next level?

2) What is the total funding required to take the company to exit (eg being acquired by another company) in line with vision?

3) What will the funds be used for?

4) What is the optimal capital structure to ensure stability but limit dilution for all the stakeholders?

5) What is a sensible valuation, in line with market trends and stage of the company’s growth

This will all be recorded in a detailed Due Diligence Questionnaire with the required supporting information/documents.

Due Diligence / Checks and Team Engagement

Once the engagement process has begun Mint Ventures is making the decision to invest significant time and resources into a client company and this requires acknowledgement from all parties that costs begin to be incurred and therefore the terms and conditions around incurring legal costs will be agreed upfront.

The Investment documents should all complement and be consistent with each other, demonstrate the real opportunity, show the management team can execute and also incorporate an understanding of the risk factors.

Investors are looking for any red flags as to why they shouldn’t proceed and / or to identify clear risks to the investment. If founders can flag up risks and include what they have already tried and doesn’t work that is really helpful to investors, they are looking for honesty and integrity and not trying to trip you up.

The overall review is a balance of how the team has answered both financial and non financial questions and how they respond to this process and engage gives a good measure of what it will be like to work with the team going forwards.

All of the above efforts are to ensure that an Investor can have the confidence that they can all work together, and conditional upon Due Diligence and other prior conditions, then a deal will be concluded.