How to conduct due diligence when investing in start ups

Rise of the Online Angel Investor series: #8

First of all, what is due diligence?

“Due diligence” is just the fancy name given to the research process that is carried out prior to making an investment. It usually involves an investigation into a person or people, a business, or a marketplace.

Why does it need to be done?

As an investor, you want to know that the money you put into a business will be used in order to deliver whatever plan has been set out in the company’s business plan, investor presentation, etc.

Sometimes, start up, early stage, and even some established businesses fail for reasons outside of the business owners’ control. These things, unfortunate as they are, are usually the result of a sector crash or more general economic downturn.

This is why due diligence is carried out. So that you, the investor, can gather all the facts and information you need in order to decide whether or not the product, service, or venture you invest into is right before you part with your money.

Although investing online through an equity crowdfunding platform is still a relatively new process, investors of all types, from the new business angel to experienced angels, and those in networks, have found ways of utilising the web in order to conduct their own due diligence.

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How is due diligence conducted online?

In a number of different ways. Just as finance is crowdsourced on an equity crowdfunding platform, so too is due diligence. Although GrowthFunders would always suggest that you take responsibility for conducting thorough due diligence for yourself, using the crowd is a great addendum to the research process. Let’s look at how the internet can aid you in carrying out due diligence:

  1. Director checks
    Prior to listing on the GrowthFunders platform, the owners of the business looking to raise equity finance, are required to undertake a director check. This is a background check into the people themselves, rather than the business. The main reason for this is that in a lot of the cases we see at GrowthFunders, the company either isn’t running yet or if it is, it hasn’t been operational for very long.

  2. Pitch page
    This is where you can overview of the business: watch their video pitch, meet the team, and download resources such as their business plan, investor presentation, and financial forecast.

  3. Ask questions
    On the GrowthFunders platform, there is a Q&A section on each pitch page, where you can ask questions directly to the business owners. We have a diverse investor base with specific industry/sector knowledge (lawyers, accountants, marketers) who may ask relevant questions that you hadn’t thought of / wouldn’t know to ask. The idea is that these different perspectives will mean that every angle is covered. You’ll be able to see both the questions and answers on the platform and use them as part of your own due diligence.

  4. Cyber Sherlock
    This is where you get to play detective. You can check business owners out via their social media channels (both professional and personal. On each pitch page, you’ll find links to a number of the social media accounts of the business owner(s). Use Twitter, Facebook, LinkedIn, Google+, and Pinterest, etc to see how they interact with their audience. You can often get a fair sense of who a person is and what they’re like by looking at their social media activity.

  5. Do it face-to-face
    Contact the business owner to arrange a Skype or telephone call, or enter into an email exchange with the business owner. If you’re making a larger investment, you may like to arrange a real face-to-face meeting, which can easily be done via the GrowthFunders platform.

Crowdsourced due diligence

What are the two most important things you want to know before investing online using an equity crowdfunding platform like GrowthFunders?

1) Whether, or not, you can carry out the same level of due diligence as an institutional investor

2) If the people behind the businesses are who they say they are

Crowdsourcing information on the Internet can go a long way to providing both answers and results. You have access to a variety of information about the business owner, both personally and professionally, as well as a number of fellow potential investors who can ask the questions you hadn’t even thought of asking.

Always trust your gut...

...on an initial impression before even bothering to embark on due diligence. If the business doesn’t appear attractive to you from the start, then there has to be a reason for that.

GrowthFunders: Home of the online angels.

  1. What is online angel investing?

  2. How online angel investing in important to the UK economy

  3. What is the risk v. reward profile

  4. How to invest online

  5. What tax benefits are available to investors?

  6. The 5 ”M”s of investing

  7. The “what”, “how”, and “why” of building a diversified portfolio

  8. How to conduct due diligence when investing online

  9. Co-investment and syndication opportunities in equity crowdfunding

  10. Making money: exit strategies

Are you ready to build your investment portfolio? Why don't you head over to our pitch pages and take a look at our selection of tax efficient investment opportunities all with high growth potential.

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.