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- Why Do Angels Hate Due Diligence?
Why Do Angels Hate Due Diligence?
Because it punches fun in the face
Angel investors hate due diligence.
Why?
Lots of reasons. It’s time-consuming to create & consume. It’s difficult to perform consistently. It can be highly subjective.
Sure, it can help drive better returns by saving us from a bad decision (some math on that in this post). But at the end of the day, it’s something angels hate because it’s fundamentally designed to reveal what they missed & challenge biases, and that’s no fun.
It’s way more enjoyable to go with our gut.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
Diligence is a secondary pain point that only becomes relevant if there’s a great deal that requires “diligencing”.
Buying stuff is more fun if we skip the diligence.
There is a ton of bias going into any form of deeper diligence, which contributes to angels’ general distaste for it.
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Insight
As I spent time this week processing lessons from the 1st half of 2024, one of the things I realized is this: due diligence, as important as it is, is a secondary purchase - great deals are what drive the need for DD.
Let me illustrate this point through the home purchase process.
When I bought our home, I commissioned a home inspection (aka due diligence). Why? To avoid looking stupid and making a huge uninformed mistake. I commissioned that inspection report hoping that nothing problematic or that I wasn’t already aware of would come back. Of course, inevitably I did miss something, and the 3rd party perspective ended up being super helpful for my negotiations with the seller.
The point is I only paid for DD because I was already heavily committed to the property. It was a secondary purchase.
More Fun
Honestly, I would’ve enjoyed the home-buying process more if I skipped diligence. But because it mattered so much to me and my family, I spent the time, money, and effort to double-click.
Most angels aren’t that serious. It seems to me like the vast majority are doing this whole thing for fun. They like the energy of the startup ecosystem, helping entrepreneurs, socializing with peers, learning about new technology, and having interesting companies in their pocket to talk about over dinner. It’s cool.
Occasionally, if they find something that really strikes their fancy, they’ll put in a bit of work to double-click. But more often, these deals tend to be “play money” and represent such a small percentage of the investor’s overall portfolio (typically no more than 10% or so at most) that the actual “diligence” is severely limited.
And even when diligence is performed, it tends to be met with natural resistance due to inherent bias.
Don’t Touch My Bias
Diligence tends to be inherently negative in nature. If I’ve already decided I like a deal so much that I’m willing to invest in diligence, can I truly interact with that diligence in an unbiased way?
Nope.
I don’t really want to find anything that would dissuade me from the decision I’ve already made, and a DD investment opens me up to that risk. I’ll probably consider any diligence material (whether I produce it or someone else does) with a mix of the following natural biases:
Overconfidence Bias: Relying on what I already know instead of truly considering the facts.
Confirmation Bias: Overweighting information that supports what I already think, and ignoring stuff that challenges that view.
Affect Bias: Deciding whether or not I like something immediately, and filtering new information through that lens.
Availability Bias: Relying on information that is readily available instead of considering a broader range of data.
This is a big part of why I think most angels actually hate diligence. Truly objective, well-executed diligence punches all these biases in the face and requires an investor to set aside their feelings to examine the facts of the deal. No fun.
Easier and way more exciting to go with my gut and write a play-money check.
Final Thoughts
Of course, all this changes (in theory) for professional investors, family offices, and other institutional sources of capital. But for angels, the DD process seems to be something of a “necessary evil” that is oftentimes functionally ignored in practice.
Main takeaway: since DD is no fun, angels tend to only value it if there’s a great deal worth putting “real” money into.
What Do You Think?
How do you fight bias in your personal angel investing? What forms of diligence have you found to be the most helpful & least painful?
*I include this section in every post because I’m genuinely curious to hear what you think. I read and respond to every reply, so please, don’t be shy!
Weekly Observations: 3 Lessons Learned
This week our daughter turned 8 weeks old. Wild. I’ve been told, “It goes by fast.” Boy is that accurate. So today, a week after Father’s Day, I decided to share some of the lessons I’ve learned during this incredible new season.
Time is precious.⏳Owning a business has taught me a lot about time management, but being a father has taken that to another level. She’ll never be this age again, so I want to take every opportunity I can to be present. How I choose to spend my time right now, every day shapes the kind of father I will ultimately be. In the same way, you and I will never be this age again - we only have one life, lived 24 hours at a time. I’ve found myself hyper-focused on creating leverage, and gladly exchanging resources for time where I once might have “done it myself”. This focus requires me to say “no” to things that are not a “heck yes”.
Ordinary is beautiful.🌸Never before in my life have I been as excited to see someone smile as I was the first time our daughter looked me in the eyes and grinned. Over and over again the last few weeks, she’s experienced her “first.” Life, and all the distinctly ordinary things that it’s composed of - taking a bath, going for a walk, smiling - is an incredible gift that I hope to never take for granted. This has brought new meaning to the daily, ordinary tasks I get to undertake as part of my work. Writing this post each week. Meeting with our team. Talking with customers. Strategizing and planning. Even sending emails and doing administrative work. It’s all part of the game, and I love it (even if it’s exhausting sometimes).
Help is glorious.💖I am so, so grateful for the community of friends, family, and teammates that have supported us during this season. The prospect of doing this parenting thing alone sounds awful, and I’ve found myself developing a new level of appreciation for the people who choose to lean in. This applies professionally as well - the men and women who have sacrificed their precious time to lean into my journey are a gift, and I aspire to pass the favor along to the next generation.
Weekly Links: 3 Things I Found Interesting
Thanks for reading, have a great week.
-Andrew
If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.
P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.