One of the biggest mistakes that new Angel Investors make: Signing a check before they look at the financials.
This is a crucial step in the Due Diligence process.
This advice applies to pre-seed companies, too. Even if the company has no revenue yet, they’ve still got financial projections.
As an investor, an early-stage company’s financials tell me two things:
1. The Historic Financials: These tell a story of how the company has decided to spend their limited resources in the earliest stages of product development. How much have they spent on Marketing? R&D? Sales? Where are they over-investing? Where are they under-investing? How does this compare to other companies at a similar stage?
2. The Projected Financials: These tell me where the founder resides on the spectrum between ambition and delusion. That said, the projected financials can be anything, as long as the founder can defend the numbers.
The reason that many investors neglect the financials is simple: They’re afraid to ask.
If you’re ever worried that the founder will be offended by this request, there are only two ways the situation can play out:
- The founder doesn’t get offended and you receive the information you need (most common).
- The founder is offended and the deal falls through. If that’s the case, the company isn’t a good investment in the first place (you dodged a bullet).
So, here’s my hard-won advice to all investors out there: ALWAYS ASK FOR THE FINANCIALS!!!
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