Part 16 of 21 in A Guide for the First-Time Indian Angel Investor← Part 15Part 17 →
This chapter provides practical guidance for first-time Indian angel investors on conducting due diligence for seed-stage companies. It highlights the specific checks that are relevant in the Indian context to avoid common pitfalls.
- Focus on five key diligence checks specific to Indian seed companies.
- Avoid complex Series B diligence processes for pre-revenue companies.
- Ensure statutory compliance and check for related party transactions.
- Verify the cap table and future funding prospects.
- Conduct reference checks with non-friends for unbiased insights.
You cannot out-analyst a fund. You can check the five facts that kill Indian seed companies before the story does.
A first-time angel who tries to run a Series B diligence process on a pre-revenue company will either annoy the founder or fool himself with a model. The useful work is narrower. It is also more Indian than the template downloaded from a Valley blog.
Five checks before a wire
- Who pays, in the next ninety days, with a name you can call. A pilot with a cousin is not revenue.
- Statutory hygiene: GST, PF, professional tax, and whether the company has filed what it claims. A messy ledger at seed becomes a deal-breaker at Series B.
- Related parties. Promoter entities, family vendors, and a founder salary that is either zero or absurd. Both zeros and absurdities are facts.
- The cap table, including the pool, the notes, and anyone promised shares in a side letter. Verbal promises become lawsuits.
- The next round’s buyer. If you cannot name the kind of fund that funds this company eighteen months from now, you may be the last money in.
Maher’s value angels did the numerical version of this. The Indian addition is compliance and related parties, because those are how otherwise decent companies become uninvestable. You do not need a forensic accountant for a five-lakh cheque. You need the founder to send the filings and to be unsurprised that you asked.
The reference that is not a friend
Call a customer, a former colleague, and one investor who passed. The pass is often more informative than the yes. Ask what would have to be true for them to regret passing. Ask what the founder is like on a bad month. Do not ask “is he good,” which produces a testimonial. The Mom Test applies to investors as much as to founders: ask about behaviour, not about opinion.
What you may honestly skip
A forty-tab model of year-seven revenue. A trademark search in twelve classes. A lecture on total addressable market copied from the deck. Skip these. Do not skip the bank balance. A company that will not show cash is a company that has already answered you.
Diligence is not a performance of seriousness. It is a short list of facts that, if missing, make the sleep test fail on their own.
Frequently asked questions
What are the key diligence checks for Indian seed companies?
The key checks include verifying revenue sources, ensuring statutory compliance, checking related party transactions, reviewing the cap table, and identifying potential future investors.
Why should a first-time angel investor avoid Series B diligence processes?
Series B diligence processes are too complex for pre-revenue companies and can mislead investors or annoy founders. A simpler, more focused approach is recommended.
What is the importance of checking related parties in due diligence?
Checking related parties is crucial because transactions with promoter entities or family vendors can affect the company's investability and financial transparency.
How can an investor conduct effective reference checks?
Investors should contact a customer, a former colleague, and an investor who passed on the opportunity to gain unbiased insights into the founder's behavior and company potential.