Author: Abu Cassim
26 October 2020
In this blog, we cover the following additional six categories of questions that every angel should ask before investing: progress in the business, marketing and customer acquisition, risks, intellectual property, financials, and financing rounds. These questions will go a long way to helping you understand how your money will be spent.
Progress in the Business
Matching a startup with your investment preference should involve the business stage. Disciplined investors will stick the business stage they are comfortable with. Investments could take place anywhere along the following spectrum:
Idea stage – Prototype – Complete Product – Signed Up Users – Paying Users – Profitable
The earlier you invest, the lower the entry point. Then again, the greater the risk and challenges. Keep in mind that proof of concept through early traction is not always necessary. It does, however, provide an indication of where the solution could go. It goes a long way in mitigating market adoption risk (e.g., will customer part with money for the solution). Here are a few questions to ask:
- Describe the business’ development to date?
- What early traction has the company had (sales, traffic to the company’s website, app downloads, etc., as relevant).
- How can the early traction be accelerated?
- What has been the principal reasons for the early traction?
- What are expected future milestones?
Marketing and Customer Acquisition
Remember, the cost of client acquisition should always be less than the customer life time value.
- How does the company market or plan to market its products or services?
- What is the customer acquisition strategy?
- Will any partners unlock a group of customers?
- What is the cost of a customer acquisition?
- What is the projected lifetime value of a customer?
- What is the typical sales cycle between initial customer contact and closing of a sale?
You’re not always going to get a complete answer to these questions, so it’s important you consider them in conjunction with the rest of your due diligence process. Understanding the risks will help you develop strategies to mitigate them.
- What do you see as the principal risks to the business?
- What legal risks do you have?
- What legislation does the business need to be aware of?
- What licenses does the business require?
- What are the requirements to maintain this license?
- Are there any product liability risks?
Intellectual property (IP) can be a significant differentiator. A strong value proposition, as a result of IP, is often key to success in scalable solutions.
- What is the company’s secret sauce that differentiates you from the competition?
- What key intellectual property does the company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?
- Who owns the IP? Would any prior employers of a team member have a potential claim to the company’s intellectual property?
- Will there be any claims by a party claiming to be a co-founder? (Note, this issue arose with Facebook and other companies.)
Financials are part of any due diligence. Early stage companies may not have any track record to point to, but it’s important for the financials to tell a coherent story. The numbers will tell you the company’s current financial situation and proposed future burn rate.
- What are the company’s three-year projections?
- What are the key assumptions underlying your projections?
- How much equity and debt has the company raised; what is the capitalisation structure?
- How much of a stock option pool is being set aside for employees?
- How much burn will occur until the company gets to profitability?
- What are the key metrics that the management team focuses on?
- What are future plans for raising equity or debt?
In closing, angel investors should get a full understanding of the funding round. An investor or investment syndicate can often take up a full round of funding, but this is not always the case.
- How much is being raised in this round?
- What is the company’s desired pre-money valuation?
- What is the planned use of proceeds from this round?
- What milestones will this round of financing help you achieve? What runway will this round of funding provide?
- How much runway will this round provide? When is the next funding round expected?
In our next blog, we’ll discuss why Africa provides a unique investment opportunity.