Beyond the Due Diligence Report

By: Solomon Brenner, member of Keiretsu Forum Mid-Atlantic and Managing Director at Startup2angel

This post originally appeared on Startup2angel.

The guru of due diligence reports, the man known for thorough research and reconnaissance at Kieretsu is Howard Lubert. At one point, he took a look at some of his investments and compared them to others that were more successful and he found one consistent pattern that determined whether a venture was successful or not that went beyond the due diligence report. It came down to people:

“In every case, it was because there were partners and they had people to work with.” And he went out and got a partner, someone with skills and strengths that complemented his own. They have separate powers and responsibilities. He’s the public speaker. His partner is strong in logistics. Having a partner has given him increased strength and understanding of his investing position. The due diligence report is important, but beyond it is the art of working with people with specific skills and strengths.

“It takes a ton of guts to take risk in investing. Those are the kind of people with the level of risk I want to be around. You expect an entrepreneur to step up, too,” he said.

Angel investors have to be mentally prepared and emotionally strong. There’s a certain amount of irony to the best approach: a sense of detached poise along with emphatic passion.

“You have to make the assumption as an angel investor that every investment you write has a better than 50/50 chance to fail. You have to be willing to write the whole thing off right up front and not worry about it or you shouldn’t be investing. The second piece: every single investment you make you should make as if it’s the only investment you’re going to make, and you’re going to ride this thing for all it’s worth.”

As you navigate that decision, he says:

“The single most important thing an angel investor needs to do is not make an emotional investment decision.”

He illustrated the point by comparing a blind emotion-driven investment to donating to charity.

“That’s what I do on my charity side. I write checks. I think I’m helping and doing good because it makes me feel good. I hope it will be well-used. But when I’m investing it has nothing to do with charity. I’m doing it for a great return.”

Editor’s Note: When I was a new member, I approached him shortly after the first or second meeting and asked about a recent presenter, “Are you investing in that company?” He answered, “No, but I might. Why?” I answered him directly: “Because you know what you’re doing and if you are, then I am.” I learned an important lesson in his reply. He said, “That’s a mistake. Just because I decide to write a check doesn’t mean it’s good for you. You need to do your own homework and get comfortable with your own deals.” That’s when I really began to dig in and develop my own style of understanding what it means to be an angel.