According to a report by NESTA, Business Angels who perform at least 20 hours of due diligence experienced fewer failed investments . If due diligence is so important for business angels, what is it, who is doing it and how are they doing it? To find out I met with Graeme Porteous, one of the most meticulous Business Angels in the business and a real stickler for due diligence.
Graeme Porteous is the epitome of a low-profile angel investor; you won’t find him on LinkedIn or Twitter and getting hold of him without a personal introduction is virtually impossible. And yet, in the past few years Graeme has jumped into the spotlight in the angel investment scene with his thorough approach and well-defined investment strategy. Graeme investment interest partially reflects his past experience in the energy sector and it spans water and renewables, engineering, telecoms and analytics software. What Graeme will not invest in are social media without a revenue model and will not take the lead investor role in Med Tech that he doesn’t understand. Graeme is a member of Par Equity, London Business Angels and SyndicateRoom.
The first step for Graeme is, naturally, attending the investment pitch. Here the entrepreneurs present their vision and future plans. Interestingly Graeme will let it cool off for a week before taking any further action. “If I’m still excited about it after a week, it’s because there is something special that has attracted my attention”. The real due diligence then begins, with Graeme dividing it into the following different sections:
1) Founders – Graeme highlights the importance of meeting the entrepreneurs outside of the high pressure environment of an angel network. It gives him a better chance to see the people behind the business in a more relaxed environment, including visiting the company’s premises to meet the whole team.
2) Customers and suppliers – “don’t underestimate the importance of the key people to the business” he says. This includes the management team but also contacting customers and suppliers. Graeme is particularly fond of contacting customers and potential customers – “this gives me a real insight to the need for the product or service and often opens the doors for other business opportunities for the business itself.”
3) Business Plan – Interestingly the business plan only comes third for Graeme. He will spend an average of half-day researching the market size and a full day analysing the written business plan.
4) Legal documents – Graeme analyses the investment documents himself, as he knows what to look out for and what investment terms without which he categorically will not invest. He also usually spends one full day drilling into the IP behind the business, often hiring his own IP lawyers for this – “They can avoid costly mistakes”.
5) Final reports – Graeme writes his own final reports on his findings, flagging risks and concerns and combining factual observations with his own opinions. Not only that, he shares these with other business angels to get their feedback. This is the first time I’ve seen someone do this and it explains why Graeme is quickly gaining so much respect in the angel investment industry.
All in all, Graeme spends an average of 40 hours on due diligence for each company, with many failing along the way. Due to the significant amounts he invests, he argues this level of work avoids what would be costly mistakes, and I can’t refute that. It also makes him a very well informed business angel that can really add value to each business that he carefully selects to invest in.
Graeme is currently the lead investor for Bactest and you can watch a video of Graeme explaining his investment into Bactest here. Bactest develops and sells products that make use of its proprietary technology that turns microbial activity into data.
Gonçalo de Vasconcelos is the CEO of SyndicateRoom, an equity crowdfunding platform.
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