Due Diligence and Safety Nets
By
William Cate
If you're an Angel Investor, you're an endangered species. You live in a high-risk environment. Many of your predecessors failed to take even the minimum safety precautions to ensure their survival. They didn't survive. If you follow their unwise investment policies, your bank balance is at serious and predictable risk.
An entrepreneur, without a business plan, shouldn't be taken seriously. If you invest in a business without a critical review of the company's business plan, you should expect to lose your money. The company's business plan is its roadmap to business success. If the roadmap is vague, success is very unlikely. Cashflow charts are to be ignored. You should expect that a successful business plan will require twice as much money as being sought and will produce half as much revenue as being projected.
Due Diligence is one of the U.S. Securities and Exchange Commission's solid recommendations to the investing public. It's in your best interests to verify each and every fact in any business plan, BEFORE you risk your money. A concise business plan with specific data makes it easy to verify the entrepreneur's claims.
Resumes
The Management Teams' education and work experience are important to the potential success of your investment. Business plan education claims, beyond high school, should include the name of the institution issuing the degree and the year in which the degree was conferred. The Due Diligence questions are the following:
1. Is the institution accredited by a recognized accrediting organization and did the person receive the degree in the year stated.
2. Relevant work experience should list the employer, the firm's address, a job description and the exact years that the person worked for that company. You should verify that each of these companies exists by getting their phone number from the phone company and then calling the Human Resources (formerly Personnel) Department and verifying the work record of the person. You can use the Net to get Credit Histories and Court records for each person on the management team.
3. The company's balance sheet should tell you how much money each member of the Management Team has at risk in the venture. It the Management Team isn't at serious risk of loss, the business plan usually fails.
Beating the Odds
Most startup companies fail. In concise terms, the business plan should tell you why the Management Team believes that they will beat these odds? If the answer to this question requires detailed knowledge of a specific industry, someone not involved with the company, but with years of experience in the industry, should be asked to evaluate the Management Team's rationale.
A past employer of mine taught that if you find one lie, there are ten. If your review of the business plan uncovers one serious misstatement of a material fact, you shouldn't invest. There are other lies in the business plan and even if the one found is corrected, the others will destroy the company's chance at business success.
Limiting Risk
Assuming that the business plan withstands your Due Diligence review, you should ask yourself how will you limit your risk in this venture? The lack of a safety net is one of the major reasons that angels are becoming extinct. There is no reason to lose all of your money in a venture that proves unworkable.
Anyone who regularly evaluates business plans for angels and other investors can offer you their safety net strategy. I have mine. Other investment consultants use other strategies. If you intend to use a consultant to evaluate business plans, you should ask them about their safety net formula at an initial consultation with them. If their formula will work for you, hire the consultant and let them worry about the truth of the business plan. By the way, a good business consultant should have an arsenal of strategies that will enhance your success and limit your losses.
Insurance
Consultants charge for their work. This fact can be your first line of defense against the hordes of swindlers and flakes seeking business investment. I advise my clients to make this simple deal with the entrepreneur seeking funding. "If my advisor gives your business plan a clean bill of health, I'll pay for the review. If there is a material misstatement of fact in your business plan, you'll pay for the review. So, please remit your business plan with a check to me that covers my business plan review costs." If the entrepreneur declines to risk paying for a review, ninety nine times out of one hundred, they know their business plan is fiction.
To contact the author, email Beowulfinvestments@Earthlink.net
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]