Intro To Angel Investing | Lecture #6 | Analyze Interesting Deals & Doing Your Due Diligence - Taught by Garry Johnson III
Dear Students,
Now, we won't delve into the full due diligence process just yet, but we will discuss high-level methods for analyzing deals. Analyzing deals is where things start to get serious for you as an investor. You want to determine whether a particular opportunity is a good, great, or terrible investment.
When you analyze potential deals, you will examine the variety of information the company provides on their campaign page. One of the first things to determine is whether the company has filed its Form C. If it has, that means this is an official investment offering. The filing of Form C ensures that the investment terms offered on the campaign are finalized and cannot be changed.
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If the company hasn't filed its Form C, it likely means they are still in the "testing the waters" phase. They have set up a campaign to gauge investor interest, and any commitments made are non-binding. Investors are not obligated to transfer any funds, and the entrepreneurs behind the company can decide whether to make the raise official based on the interest they receive.
When you first land on a company's campaign page, make sure to check whether it is an official campaign. Next, examine the various sections of the campaign page. For example, on WeFunder, you will see the company name, a quick tagline, a pitch video, and information about where the company is based, its website, and the industries they operate in.
As you scroll down, you'll find details about the company's team, an overview of the company, and a presentation deck. Look for information about the problem they are solving, their solution, financial projections, key partnerships, revenue streams, and their intended use of funds.
In the “Details” section, you will find financials, management's discussion and analysis of financial condition and results of operations, and risks and disclosures. This information will give you insight into the company's financial standing, milestones, liquidity, capital resources, and potential risks associated with the business and its industry.
Pay attention to the company's capital structure, ownership, past fundraisers, outstanding debts, and use of funds. You can also view the official Form C filing on the Securities and Exchange Commission's (SEC) Edgar website.
In summary, when analyzing potential investment opportunities, ensure you carefully examine the campaign page, determine if the company has filed its Form C, and review the provided financial and operational information. This process will help you make informed decisions about whether to invest in a particular company or not.
Here’s a hypothetical scenario to illustrate a realistic example:
As a first-time investor with a budget of $100, I came across a coffee shop investment opportunity on WeFunder that piqued my interest. Given my limited budget, I want to ensure I am making an informed decision before committing my funds to this investment.
First, I verified that the coffee shop has filed its Form C, confirming that this is an official investment offering. Next, I started examining the different sections of the campaign page to better understand the business and its potential.
The coffee shop's quick tagline and pitch video grabbed my attention. The video showcased the unique ambiance and offerings of the coffee shop, which sets it apart from other competitors in the market. The founders explained their vision for the coffee shop, emphasizing their focus on sustainability, locally sourced ingredients, and providing a cozy atmosphere for customers.
In the company overview section, I learned that the coffee shop is solving the problem of offering high-quality, ethically sourced coffee and pastries in a comfortable environment. Their solution is a brick-and-mortar shop that emphasizes customer experience, eco-friendly practices, and strong connections with local suppliers. Their financial projections showed promising growth and revenue streams from both in-store sales and online purchases of their signature coffee blends.
After reviewing the “Team” section, I was impressed by the founders' background and experience in the coffee industry, as well as their passion for creating a unique coffee experience.
The “Details” page provided me with insight into the coffee shop's financials. The shop is relatively new but has demonstrated consistent growth in revenue and customer base. Their debt ratio is low, and the earnings per share show promise. The management's discussion and analysis section highlighted their achievements and plans for expansion, including opening new locations and developing an e-commerce platform.
“The term debt ratio refers to a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.” - Investopedia
The debt ratio is important because it provides insight into the financial health of the coffee shop. Understanding the debt ratio helps me determine the company's level of leverage and financial risk.
A company with a high debt ratio may have difficulty obtaining additional financing, making it harder for them to grow and expand. High leverage can also make the company more vulnerable to economic downturns, as it may struggle to service its debt in times of reduced revenue. On the other hand, a low debt ratio indicates that the company relies less on borrowed funds, which can be seen as a sign of financial stability.
In the scenario, the coffee shop has a low debt ratio, which suggests that it has a lower financial risk and is in a healthier financial position. This information can contribute to my decision to invest in the coffee shop, as it indicates that the company has a manageable debt level and might be better equipped to weather challenges in the future.
By assessing the debt ratio, I can make a more informed decision about whether to commit my funds to this particular investment opportunity. This is essential in ensuring that my limited budget is allocated wisely and that I am aware of the potential risks and rewards associated with the investment.
The “Risks and Disclosures” section outlined potential risks, such as fluctuations in coffee prices and increased competition. However, the company has plans to mitigate these risks by expanding their product offerings and focusing on customer loyalty programs.
Considering my $100 budget, the minimum investment required for this coffee shop is within my reach. Given the strong team, unique value proposition, and promising financials, I am inclined to invest my funds in this opportunity. However, as a first-time investor, I must also remember that investing in startups carries inherent risks, and there is no guarantee of returns. In conclusion, after thorough analysis, I feel confident in allocating my $100 budget to this coffee shop investment opportunity on WeFunder.
When it comes to performing due diligence, this is the next level of being a great investor. You want to ensure you are making not only an educated investment but a highly informed one. This is where you get to do your homework as an investor, diving deep into understanding whether the claims made by the startup and the founders on their campaign are accurate, believable, and trustworthy. This requires extra effort on your part as an investor since you can't solely rely on what is included on the campaign page.
To conduct your due diligence, there are numerous approaches. In the pitch deck provided by the entrepreneurs, they will have listed their market size, the market opportunity, and the growth of that market. It's straightforward to perform a Google search to investigate that market and conduct your research to determine if the market is growing at the rate the founder claimed. Verify if the sentiments expressed in various reports, articles, and research align with what the founder outlined in their presentation.
There is also due diligence when it comes to the founders. Of course, on a campaign page, everyone will present themselves in the best light. You have to dig deeper by examining the founders' LinkedIn, Instagram, and other social media accounts. Assess what they post about, ensuring it aligns with what you see on the campaign page and that they represent their business positively.
When considering the business perspective, examine the founder's LinkedIn, looking at their background, achievements, and testimonials from others. Investigate the other team members, ensuring they represent the business outside of the campaign page on their social media.
Additionally, do a Google search for the company and see what articles appear. Are they positive or negative? If the company is building an app, check the app store for reviews and comments.
Remember to visit the Q&A page on every campaign and look at the questions others are asking. The founders' responses can be a test of their character and can influence your decision about whether or not to invest.
Other ways to conduct due diligence include verifying the company's intellectual property claims by searching through the USPTO website and researching the competition. Investigate the competitors' performance, fundraising, user experience, and product quality to make an informed decision.
In summary, due diligence is an essential part of making informed investment decisions. Use the power of the internet to gather information about companies beyond what they provide themselves.
Here’s a hypothetical example:
Jason, a first-time investor, came across an investment opportunity on Republic for a financial literacy app called "FinLitPro." Intrigued by the app's mission to promote financial education, he decided to perform due diligence before making a decision to invest.
First, Jason examined the campaign page to understand the market opportunity, growth potential, and the team behind FinLitPro. He noticed that the app aimed to target millennials and Gen Z individuals, promoting financial literacy through engaging and interactive content. The market size was promising, with an increasing number of young people seeking financial knowledge.
Next, Jason researched the market growth independently to verify the claims made by the FinLitPro team. He discovered articles and reports confirming the increasing demand for financial literacy apps, particularly among younger generations. This information reassured Jason that the market was indeed growing and that the app had potential.
Moving on, Jason decided to investigate the FinLitPro team. He browsed their LinkedIn profiles, examining their backgrounds, accomplishments, and recommendations from other professionals. He found that the CEO had a solid background in finance and had previously worked at a reputable financial institution. The rest of the team comprised experienced professionals in software development, design, and marketing, which gave him confidence in their ability to execute their vision.
To further assess the app, Jason downloaded FinLitPro from the app store and tested it himself. He found the content to be engaging, informative, and well-organized. Moreover, the app's reviews were mostly positive, with users praising its ease of use and effectiveness in teaching financial concepts.
Curious about the competition, Jason researched other financial literacy apps on the market. He compared the features, pricing, and user reviews of FinLitPro with its competitors. While some competitors had a larger user base, FinLitPro's unique approach and focus on interactivity set it apart from the others.
Finally, Jason visited the Q&A section of the campaign page to observe the FinLitPro team's interactions with potential investors. He noticed that the team was responsive, transparent, and respectful in addressing concerns and answering questions.
After performing thorough due diligence, Jason felt confident in the potential of FinLitPro and its team. He believed that the app had a competitive edge in the growing financial literacy market and decided to invest $100 in the campaign. By conducting due diligence, Jason gained a better understanding of the opportunity and made an informed investment decision, mitigating his risk as a first-time investor.