What to look for in a deal

There are many approaches for selecting the right deal and below we give you some tips based on the experience of angel investors.

For many investors looking at a startup or early stage business, the people, i.e. capacity and experience of the founders and, if relevant, also the other members of the management team, has been shown to be the most significant factor to consider when deciding to make an investment.

However, you should of course also look carefully at the project i.e. the business itself, before the deal. The following are some important issues to consider.

 

The People!

 

  • What is the experience and skill of the founder(s) of the business and other relevant team members (if any) what do they bring to the business?
  • What other achievements have they had in their past career (academic and business) that bring value to the current business?.
  • Do they have the drive and passion to deal with the ups and downs of running an early stage business and to devote all the time and energy that is needed?
  • Do they have ambition to scale the business and take it through to high growth success?
  • Do they seem hungry to make a big capital gain?
  • Can they sell the project to you- are they able to communicate the opportunity to you so that you can feel assured they can sell the product/technology to key customers?
  • Do they have the business skills and understanding to execute the plan?
  • What skills are currently missing in the team and where can you add value to the team. (This does not need to be a complete team at this stage, but they should be aware of what they other experience and skills they lack- this can form part of the investment proposal).

View UKBAA Top 10 Tips for Due Diligence on the People & Management Team 2016

The Project

  • Does the product, technology or service address a real challenge in the market or society – what is the pain they are solving?
  • Is it likely to be disruptive and make a real impact in the marketplace or the sector?
  • Does the product or technology have identifiable Intellectual Property? This may be patentable, but in the case do software/digital or may in the form of copyright or branding or other intangibles – If there is identifiable IP who owns this and is there freedom to operate?
  • What is their defensible market position? What other businesses are in competition with this project? How does it compare and what is the unique selling point or advantage, or does it have first mover advantage?
  • How does the business make money? Are there clear identifiable revenue streams? Are there likely to be good gross/net margins?
  • How scalable is this business model to achieve explosive growth?
  • What kind of validation have they had in the market place? If already selling or has this been tested out with potential customers? Can they show results of market testing/surveys?
  • What traction has been achieved so far by the founders/team
  • What is the market size and realistic potential market share?
  • Is the deal EIS /SEIS eligible and do they have advanced clearance?
  • Do they have a desire and strategy for exit? Or is it a lifestyle business/ with no exit potential?

 

The Deal

  • Do you understand the business or sector – or does one of your fellow investors?
  • What is the valuation of the business – is this good value for money and can this be justified in terms of stage, traction so far and identified growth potential?
  • What is the current shareholding and amount of equity available – what shares are you taking and your fellow investors?
  • What are the terms of the deal – to be reflected in the Term sheet
  • What are the results of your Due Diligence (Team, Financial, Legal, Market, Product and IP, Growth and Exit potential)- what areas of doubt remain?
  • What else can you bring post deal in addition to finance?
  • What is your role going forward- passive, active or lead?
  • For further information, access Due Diligence and Legal templates

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