Can you fall so in love that you ignore a CEO Fraud conviction?

Private investigators use skills to stop irrational investing, push emotional detachment.

Part 3 in the Stealth Research Series

Before Margo Evashevski, a licensed private investigator with an MBA from Stanford University became a PI, she worked for Garage.com, a due diligence company that assisted angel investors “back in the days of the bubble.”

“I’ve worked for some pretty small investors to large groups,” she said. “It’s the best money you can spend so you don’t make mistakes that bite you later.”

Due diligence is one of those words that means a lot of different things for different people. There are some third party companies that act like a broker or middle man and take a large percentage for their services.

Evashevski, who worked on the Sex.com domain dispute, doesn’t fall into that category. As a private investigator for 360 Investigations, she charges $150 per hour, to run background checks on executives and employees, “to make sure there isn’t anything there that will cause a liability” like a history of bankruptcy, fraud or other criminal activities.

“I find people with those backgrounds all the time, absolutely,” which is why a third party can be helpful to an angel that has already invested his/her heart.

“The hardest thing for angels once they’ve done their due diligence is that they get personally involved and when they run a background check on a founder and find some shady stuff, they tend not to want to hear that,” she said. “Once they’ve committed emotionally, I think that’s really dangerous.”

John McDonald, president of Rampworth Captial Services in Vancouver, said he has been hired many times by angel investors.

"What appears very clever to me is when an angel uses a service like ours and says, ‘OK, I’m interested but I want you to go through [the due diligence] process with this group and in exchange I want warrants or shares,'" he said.

In his assessment, a typical angel can spend anywhere from $1,000 to $5,000 depending on what kind of research he/she needs.

Other companies like Softsearch and TruGroup charge much higher prices for their services, but most of the deals they work on are $5 million or higher -- more than a typical angel invests.

"We track over 80,000 products in the software industry, so we’ve actually been contacted by investors to do due diligence on competitors in the same space," said Kathy Woolverton, president of Softsearch. "So it’s a case by case situation."

Softsearch services can cost anywhere from $400 (for a list of players and products) to $60,000 for all the lists and the digging.

“To be honest, we’ve never been hired by angel,” said Ed Anderson, CEO of TruGroup, who said he works mostly with venture capitalists. “We charge $50,000 for due diligence – it’s kind of steep. We work on a transaction fee.”

Charles M. Elson, author of “The Art of M&A Due Diligence,” said investing in a company without checking off every item on a due diligence list is “akin to getting into a car and closing your eyes and driving. You have to do due diligence to assure what you’re doing will create value. To invest without asking those questions would be foolhardy.”

Elson agreed that most angels prefer to do their own diligence, even though researching a private company can be tricky. “There’s a lot more leg work,” Elson said, since a private company has no audited or publicly reported financial reports like there are for a public company.

He suggested using advisors, talking to the company’s officers, bankers, customers, suppliers, and revising the accounting books to determine financial or legal issues that could compromise investments.

Or, if an angel wants to be as thorough as a paranoid New Yorker before a first date, the private investigator may be the way to go.

“I think angels and VCs do like to do their own due diligence which I think is great, but what we offer is the ability to search for things the average things person is not going to find,” said Margo Evashevski. “We have proprietary databases, access to court records and other documents that show history of fraud – those are things that are a little bit harder to find. I like to think I supplement the investors.”