23 Jan Due Diligence- The Backbone of Solid Investing
“My company is going to be a billion dollar company in just a few years, so invest now while you still can!”
Ok, so none of the entrepreneurs we’ve heard from have made such an audacious claim, but we believe essential ingredients in any entrepreneur are enthusiasm and a deep belief that their idea will become huge. After all, creating a successful business out of an idea is extremely difficult, and if the leaders of the company aren’t passionate or don’t believe in its success, why should we?!
Such enthusiasm and confidence, however, can lead the entrepreneur to make inflated claims about their company. For example, a founder may say that the company’s new product has a very large market (i.e. big potential), when in fact that product only addresses a small subset of the large market (i.e. small potential). Or perhaps financial projections only build in salaries for two full-time employees when it is more likely that the company will need six or more. Claims like these are rarely made to deceive investors or misrepresent the company, but they often stem from differences in opinion or experience. Thus, it is very important to conduct independent research on potential early stage companies before making an investment; this research is known as “due diligence.”
Many (if not most) seasoned early stage investors would agree that thorough due diligence is a key factor to successful investments. In fact, a 2015 article in Forbes Magazine by Marianne Hudson (Executive Director of the Angel Capital Association) states that she uses due diligence to become “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.” She also references a study that found conducting 20 hours of due diligence increased the likelihood of a positive return on angel investments by five fold!
At CAV Angels, we believe due diligence is the backbone of quality investing in early stage companies and take a professional approach to creating our due diligence reports. By providing thorough and independent reports to our members, we believe we can better educate non-seasoned angel investors on our approach to company evaluation as well as provide a greater level of comfort that any investments they make are rigorously vetted. We also encourage members to verify and expand on our reports by doing their own due diligence on companies.
Our educational mission, however, does not stop with those looking to make investments. CAV Angels offers an educational membership category just for those who want to learn more rather than actually make investments themselves. These members get the same access to deals, reports, communications, etc as investor members, but they current have no plans to make investments themselves.
We also interact with multiple student groups throughout UVA to expose the next generation of entrepreneurs and investors to real world due diligence research. We provide every student intern with guidebooks and background material on our due diligence process; meet with them throughout their research to ensure they are on the right track; and use their final research deliverables to inform the larger CAV Angels due diligence report. Over fifteen students have worked with CAV Angels on due diligence, and as would be expected from students of Mr. Jefferson’s University, their contributions have been tremendous!