Due Diligence Pays Off for Angels in Groups

December 18 2009 No Commented

Due Diligence Pays Off for Angels in Groups

I’ve been asked for thirty years if due diligence on angel deals really pays off.  Are we angels better served spending substantial time with entrepreneurs before investing or should we simply to throw darts at a list of deals to pick companies in which we invest?  Frankly, I didn’t have a quantitative answer until November 2007.

In a study for the US Kauffman Foundation (Returns for Angels in Groups), Professor Rob Wiltbank found that due diligence by angels makes a huge difference in returns.  In a study of over 3000 angel investments, he found that angels who collectively did less than 20 hours of due diligence per deal received portfolio returns of 1.1X, (versus 2.6X returns for the entire study) a return so small as to not be worth the effort.  But, angels who collectively completed more than 20 hours of due diligence enjoyed portfolio returns of 5.9X, and those who did more than a collective 40 hours of due diligence were rewarded with returns of 7.1X! 

I made about half of my 51 angel investment before joining my first angel group and the other half since.  One advantage of investing with a group is the quality of due diligence members of an angel organization can do.  Angel groups form teams of investors who work together to validate the business plan, using the skills and experiences of the group in the business vertical of the target company, as well management team background checks, financial analysis, sales and marketing, competitive analysis, etc.  With each member of a five angel team expending a day’s time over a period of a month or so, a quality report can be generated for the remaining members of the group interested in investing in the target company.  Angels in groups can now complete due diligence on a par with the top VCs in the world.  And, best of all, we can then expect to be well rewarded (eventually) for our due diligence efforts!

It’s a GREAT time to be an angel.  Find a group and jump in!

Bill Payne is the 2010 BNZ University of Auckland Business School Entrepreneur In Residence. www.billpayne.com