Count me in the camp that believes that doing due diligence is a very important. For me, it is about being comfortable as an investor that the team, market and product have a chance for success, that there are no red flags pointing toward failure, and better understanding the company’s capital needs over time.
As I’ve posted before, angel investing is risky. Due diligence doesn’t completely “de-risk” a deal, but it helps eliminate deals in which there are clear problems that lead to failure – things like products with no real customers, CEOs with integrity issues, and no true right to sell the innovation.
A 2007 study found that angel investments in which at least 20 hours of due diligence was done were five times more likely to have a positive return than investments made with less due diligence time. Put another way, while 45 percent of investments in deals with 20 hours of diligence resulted in a loss, 65 percent of the investments with less diligence took a loss. That is pretty compelling.
The point here isn’t that an individual must do at least 20 hours of due diligence for every opportunity you seriously consider. Instead it is to understand that due diligence can help you make better decisions and increase chances for a good return. And you don’t have to do all of the work yourself – many times you can access diligence information conducted by other investors you trust.
Autora: Marianne Hudson