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Due diligence is part of an investor’s path to reach an investment decision and start an investment relationship (or more accurately, continue an investment relationship that began when they first met an entrepreneur).

In all my dealings with investors – whether they are investing in large, established companies or early-stage startups, the questions on their minds are essentially the same:

  1. When will I get my money back?
  2. What are the outcomes from this investment that will please me?
  3. Can I trust you with my money?

The information gathered during due diligence is sought to answer these questions (to be clear, question #1 is about return of capital and question #2 is about return on capital and includes other pleasant outcomes such as enjoyment, status, reputation, and others…)

I have not seen a standard due diligence practice followed by all investors, however I have a process that I follow for all of the early-stage investments made by Pique Fund, an angel fund that I manage, as well as investments I make personally.

There are two key parts: experiential due diligence and a collection of evaluation tools.

Experiential due diligence starts with meeting entrepreneurs over time and observing whether they do what they say they are going to do. I also get a chance to experience how we get along, how we both deal with “bad news” or challenges, and how we build upon opportunities.

The collection of evaluation tools I use is made up of the following:

Traditional Evaluation Tools

This is a combination of analytical tools such as:

  • scenario analysis – has the entrepreneur considered “what if” situations or “Plan B” if something doesn’t go to plan?
  • review of financial projections – what are the underlying assumptions, to what extent are they guessing or basing their projections on data they’ve collected and validated?
  • SWOT analysis – good old-fashioned strengths, weaknesses, opportunities, and threats
  • risk analysis – what are the risks and how are they being managed?

Venture Development and Evaluation Tools

With the number of tools available to entrepreneurs starting new ventures, I took some of these and applied them from an investor perspective:

  • business model canvas – as much as this is a business model design tool, it is also useful for communicating a business model and use by an investor to understand the business model of a startup
  • seven domains model – this tool concisely guides entrepreneurs to evaluate the market and industry they are in, the customers they serve and their competitors, and the qualities of their team. Equally, investors can use this tool as a memory aid to remind them to evaluate the market, industry, and team domains in relation to a company

Impact Identification and Evaluation Tools

I’m an impact investor, so I also evaluate the positive (or negative) social impact a company may have. For this, I developed my own tools.

  • access to essential resources matrix – this helps me identify what type of essential resources the company provides access to and what level of access
  • business impact canvas – this is a variation of the business model canvas and looks at where in the business model, positive impact is happening
  • cost/benefit analysis for all stakeholders – this evaluates the cost and benefits to stakeholders including customers, partners, suppliers, employees, the community, and the planet (particularly useful for identifying negative externalities)
  • impact summary – I capture and summarize four areas of impact in my evaluation – business impact (potential for the usual – revenues, profit, etc.), social impact (that which can be counted), qualitative impact (impact that is difficult to measure, but can be captured through stories), and macro impact (the broader systems-level impact they are trying to achieve, but may be difficult to trace directly to the company)

I collectively call the evaluation tools the Integrated Investing Toolkit and they are described in greater detail in Chapter 7 of Integrated Investing (coming November 2016).

I meet entrepreneurs often, over time – experiential due diligence is constant and ongoing(I’m always doing due diligence, even when people don’t think I am. I can’t help it, it’s in my blood) and if I think a company may be a good fit as an investment, I do preliminary due diligence (with Pique Fund, I talk to my investment committee colleagues and together we green light those opportunities that go to detailed due diligence). Since due diligence is time consuming, I tend to do detailed due diligence on the companies I feel we have the best chance of finding good fit and reaching agreement to invest. After we complete detailed due diligence, we review legal agreements and negotiate any final terms in the documents.

This post was first published on Quora on May 15. Have a question about angel investing? Leave a question in the comments below.

On October 5th, Bonnie Foley-Wong will be speaking about Alternative Models for Funding Growing Companies at the National Angel Summit in Vancouver at 3.40pm. She’ll be hosting Happy Hour cocktails at 5pm immediately following her panel session. Join us and learn more about Pique Fund.