Due Diligence

Outside of pitching to individual investors one at a time, the typical ways for a startup to solicit early-stage (angel) investment typically comes in one of two flavors:

• Angel group: a group of loosely-affiliated, accredited investors who hear pitches as a group, but individually assess the opportunity for a personal investment; or
• Angel fund: this is led by an expert adviser who analyzes deals and determines the appropriateness of investment for the fund.

From the investor’s perspective, there are shortcomings to each model.

In the first group, the investors typically come from a diverse background and evaluate a broad range of startups.

During one recent local angel group event, investors heard, in succession, pitches on enterprise software, a wearable device, a medical hardware product, and agricultural software. Not only do individual audience members lack the background to understand the ins and outs of any one particular presenting company, but, they lack the incentive for doing so: each individual’s investment level simply does not warrant the time and effort necessary to comprehend the core value proposition.

Conversely, an angel fund led by a single adviser has a different dynamic and set of challenges. While this leader may have expertise in one or more investment theses, this framework is subject to individual bias and limited by the manager’s experience and skill. Further, as fund managers are compensated, there is an expectation to make profitable and regular investments. This creates a dynamic where the fund’s approach is more rigid: for example, the economics of a fund typically necessitate a bigger investment stake in any single deal and may limit deal structure and compatibility in other ways as well.

Gain Compliance recently completed a round of funding which included investment from FIN Capital.

In a lot of ways, FIN is superficially similar to the first structure described above: I pitched to a group of twenty, and decision-making was decidedly de-centralized as each investor ultimately acted independently with regards to her own participation.

However, behind the scenes, FIN has a prescribed and disciplined approach to evaluate the opportunity as a cohesive unit. Its process provided a forum for each member to coordinate with, and leverage, the expertise of fellow members when evaluating Gain Compliance. As a result, the group not only conducted an extensive (but still very much on-target) due diligence process, but did so with efficiency.

With a best-of-both-worlds approach, FIN exploits the expertise of its member-base with a formal vetting process.

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