Once you’ve got investors invested in your company, your first reaction may be to break out the champagne. But be careful. Just as investors do due diligence on you and your company, you should be doing due diligence on them. Here’s how:
Instinct and Chemistry
Do you like the investor? Can you communicate well virtually? While there is a lot of emphasis on face-to-face relationships, the truth is that once your start-up takes off, the odds of you and your investor ever being in the same city at the same time are very slim. If communicating via email is tricky in the early days, watch out. It’s only likely to get more difficult over time.
Go to www.crunchbase.com and make it your friend. Crunchbase lets you find out all sorts of details about your potential investor and his or her fund. AngelList is fine, but to me, Crunchbase is more relevant. It’s more sterile, less social, and just the facts. Here’s what you’re looking for:
- An investor’s personal investments
- Current or previous funds
- Investments made within a current or previous fund. What types of company does this person invest in, and at which stage?
- Founders that have accepted money from this investor. Get in contact with them. Grill them.
- Between Crunchbase and your own network, see if you can find an entrepreneur that turned down an investment from your potential financier, or one that had a round fall through. Often you learn more about investors from the deals they don’t do than the ones that they fund.
Many investors have spent years or even entire careers working behind the scenes, so googling them may be less fruitful than you’d expect. Still, keep an eye out for:
- Old blog posts or rants about other investors or entrepreneurs
- Hobbies and personal interests
- Previous employers or funds that you may not be aware of
Before an investor writes a check they will want to know every single detail about you and your life. Do your best to return the favor. See if they will be your Facebook friend or if they have a semi-open profile on Facebook. Transparency is always a good sign. If your potential investor is really loved, they may have reached the maximum number of Facebook friends (5,000) and may be unable to add you to the list. This is always a good sign and probably someone you want to become close with, whether or not they invest.
A competing term sheet or letter of intent will help you get an idea of how good a deal your investor is offering. Of course, it isn’t always possible to get a competing termsheet, but you might be able to get a friend or founder of a similar-sized company to share his or her termsheet with you. Make it clear that you don’t mind if they scrub out names or confidential info.
It’s important is to share investment documents with other founders. Some investors might pass on your company because they don’t think they can get a good deal, or because they only invest with certain terms. It’ll be a huge help to know what terms other companies are getting. Also bear in mind that “standard” terms can vary hugely by region—this is one time there is almost no such thing as too much research!