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What is Due Diligence?

Posted by Erica Duignan Minnihan on May 11, 2016 2:30:00 PM


Due Diligence may sound like a scary process, but it really just means exercising a reasonable standard of care before making an investment decision. During the due diligence process at 1000 Angels, we get to know the companies we are considering investing in very well. And a lot of that starts with getting to know the founders.

We rely on referrals from other founders, 1000 Angels and experienced investors to help us meet founders that we can trust. If you have meet a founder for the first time and like his or her idea, make sure you do a lot of “asking around” and reference checking before making a decision. Many of the founders we have made investments in we have known for several years before actually writing a check.

Not only do investors have to perform due diligence, but they also need to work to source a strong pipeline of startup investment opportunities to be successful. Just a few of the important issues we consider during the due diligence process include:

  • Qualified, motivated founders and team
  • Attractive business concept and business model
  • Large target market and anticipated growth of market
  • Good traction: revenue and/or user growth
  • Viable unit economics: Customer Acquisition Cost (CAC), Customer Lifetime Value (CLTV), Strong Product Margins
  • Scalability of distribution and/ or production
  • Solid distribution channels
  • Company has significant partnerships or contracts
  • Clear understanding of the competitive landscape and strong competitive advantage, IP or patents
  • Well-developed financial projections & reasonable additional capital requirements
  • Reasonable burn rate and runway from current cash position
  • Plausible exit opportunities: M&A, PE or IPO

These are just a few of the questions we ask during due diligence. For a full due diligence checklist, click here.

At 1000 Angels, we do a lot of the heavy lifting for you. In a typical month, we review hundreds of startup funding applications, screen the top opportunities with the help of our members and investment committee, and only feature the top 3-4 fully vetted deals. We include an investment memorandum, video recording with the founder, key business data points and findings through independent research to support the investment recommendation. Investment opportunities are sourced from a number of different channels, including referrals from portfolio companies, network members, and partnerships with top VCs, universities, accelerators, and incubators in the startup ecosystem.

Topics: Venture Investing, Invest in Startups, Due Diligence, Venture Investing Academy, Direct Investment