How to Invest in Startups: What is the Real Due Diligence Work

Investing

I’m always surprised by how many investors say the team is the most important element of a startup but how little the due diligence focuses on the team. I can look back on successes and failures in my startup investing career and almost all failures can be traced back to the “team wasn’t up to the task.” I recognize that I often underestimated the challenge at hand but in all cases failure was due to the team lacking skills or focused commitment.

In running due diligence, it’s not about the product – it’s about the team.

There are standard checklists and the investor should verify the basics such as legal entities, tax filings, patent filings etc. But the real due diligence comes when you go to the startups office and meet the team.  

I had a new angel investor ask me the other day, how he should diligence a startup.

I encouraged him to setup a meeting in the startups office and to meet the team and interview each one. The first person you want to meet if you haven’t already is the CEO. You are assessing leadership, communication, strategy, and other key skills. If this isn’t stellar, there’s no need to continue further with the potential investment.

In reviewing the rest of the team, you want to check to see the skill levels of those on the team.  If there are advisors or mentors you want to meet with them as well to see how much time commitment they have for the project.

In the end, time, skills and focus will need to be applied and you are looking to see if the team can do that.

You can learn a great deal about a company when you go to their workplace.

I had a friend who worked for IBM and considered investing in a startup by some of his former IBM coworkers. He set up a meeting at their office. When he followed the address to their office, it led him to a skyscraper in the downtown area and then to the twelfth floor of the building. There he found the team had rented out the entire 12th floor of the building. Needless to say, the startup ran out of cash in just 6 months.

Walking through their office you’ll get a much deeper sense of who they are and what they are doing.

Products come and go, markets shift and change, but the team is a constant.

Read More: How to Invest in Startups: Learn From Other Investors


Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies

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