In Part 1 of the interview, Rob Delman, managing director of Golden Seeds New York, told us the benefits of investing in women-led ventures, shared his lessons learned and pointed out a critical term in a term sheet that many might have overlooked. Today, Delman the “Golden Dude” talks more about due diligence, an area many beginning angels are puzzled about.
Delman was the president of Delco International Ltd., a US$76 million manufacturing and distribution company of tableware products for the food service and transportation industries. In 2000, Delman sold the company to Oneida Ltd., the world’s largest producer of tableware products. Since then, he’s become an active angel investor investing in high-potential companies.
So far, Delman has held equity positions in 11 companies and has had 1 positive exit. The rest of his portfolio companies have survived the tumult of 2009 and are still in business today. Delman expects some positive exits within 2 years.
VH: One of the ways to learn the ropes of angel investing is to co-invest with seasoned investors. What etiquette should new investors adhere to in a syndicated deal, in order to avoid doing things that might annoy experienced investors?
RD: A seasoned and professional angel investor is always happy to help a new angel. Other than common sense and professional courtesy, there are no specific etiquette rules that we require. It’s our job to make sure they understand the opportunity and the technical issues of the term sheet. Most of all, we need to constantly remind them that there’s no such thing as a “dumb” question.
VH: Your colleagues and friends at Golden Seeds have given you props on the way you conduct due diligence. When you take lead on DD:
a. What data do you analyze immediately? Why?
RD: The benefit of working on a due diligence committee is that you have people with different areas of expertise.
Some of the first items the team looks at are:
Of course, hard data is only a small part of what we look at. The management team, product phase (alpha, beta, etc.), market size, revenue stream model are all just as important.
b. There are varies ways to do credit and background checks on entrepreneurs. How do you go about conducting these checks?
RD: There are various services that you can employ on the Internet but we always ask the entrepreneur if they’ve ever been convicted of a felony or declared personal bankruptcy.
We also do reference checks with past employers.
It should also be noted that during the due diligence process, we spend a lot of time with the entrepreneurs so you definitely develop a gut feeling about their integrity.
c. How much time should be spent on due diligence for a typical deal?
RD: Of course that all depends on how detailed you want to get, but 4-8 weeks is usually the norm.
Remember that due diligence should include:
After all of that is completed, we generate a comprehensive deal memo to be circulated among our members.
d. Any organizational tips that would help speed up the due diligence process while making sure all bases are covered?
RD: You should definitely have a checklist of generic due diligence items to send to the entrepreneur.
Establish a timeline at the beginning of the process and deadlines for submission of specific items.
Try to highlight all your deal-breaker points early on.
e. What due diligence advice would you give to individual investors who are just starting out?
RD: There’s no question that being part of an organized angel group helps in the process. You learn all the right questions to ask and things to look for when evaluating a deal. It’s tremendously difficult to do a good job on your own unless you’ve been doing it for a very long time.
VH: The Golden Rule of Angel Investing from the Golden Dude is …
RD: Have fun and listen to your gut.
* For series, references are published in the last installment of the series.