An angel investor’s evaluation of a potential deal is a complicated process. Some angels might take two minutes, and others may take months to say no to an agreement. Although there are many considerations to the evaluation of a deal, there is no exact science. Many investors will rely on their instinct to evaluate the entrepreneur and his team (or lack thereof), industry, product, business plan. Good judgment comes from experience, and experience comes from making bad judgments (Pg 75). Never the less, Amis and Stevenson discuss in this section a roadmap to evaluating a startup.
Winning Angels (Amis and Stevenson 2001) suggest that many successful investors use The Harvard Framework. This method of evaluation involves four considerations: people, business opportunity, context, and deal.
People are the most critical piece of the puzzle. Execution of an idea will not happen without a good management team. According to Mark Lamoriello of Startup Nation, Rather than focusing on your idea, there’s a good chance an investor will want to know more about you and your team. The team’s importance to an angel investor was confirmed during one of my subject matter interviews by Kevin Meinecke of Venture South. According to the famous Greek philosopher, Heraclitus, change is the only constant in life. A good management team will recognize this fact and adjust to changing market conditions not considered in the original plans. The product or service may need to change to meet the demands of the customer.
Business opportunity considers the idea and business model. If the business has customers is a consideration. Investors will want to see that the firm has customers. Most do not want seed-stage companies to make their investment. Since my business is hypothetical, this is the stage I am currently in. Investors will also consider the potential for gains. The entrepreneur needs to show the potential investor that their business has the potential for exponential growth either through market share gains or market growth.
During the context stage of consideration, the angel analyzes the industry and outside factors that might affect the business. The methods discussed in Understanding Michael Porter (Magretta 2011) will come in handy for this step. Porter’s five forces and Value Chain Analysis will undercover details in the industry and within the business for consideration in congruence with each other. Competition, new entrants to the market place, technology, and government regulation are all factors that predict a new venture’s potential success.
The Deal is the final step in the framework. Here we look at the details of the arrangement. Consideration either ends or negotiation begins with this step. Equity stakes might be a negotiating factor during this step.
As noted, there are many steps to examine when an angel investor is looking to make a deal. One step that I did not mention is profit. Early-stage investors are not looking at a profit at this point because they realize that if they have the right idea and team in place, profit will take care of itself as the business scales. As entrepreneurs, we need to keep this in mind. Long term planning is what big picture thinking is all about.
Amis, D. and Stevenson, H., (2001) Winning Angels the 7 fundamentals of early stage investing, Pearson Education Limited, ISBN 0 273 64916 7
Magretta, J., (2012), Understanding Michael Porter, Harvard Business Review Press, Boston, MA, ISBN 978-1-4221-6059-6
Lamoriello, M., (2018), Why Venture Capitalists Look at Teams, not Ideas, Startup Nation, https://startupnation.com/manage-your-business/venture-capitalists-teams-ideas/, Retrieved on May 25, 2020
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