Hello again Blog readers! As I mentioned in my last Blog post, Amis and Stevenson (2001) have a great deal of information regarding angel investing in their book, Winning angels: The seven fundamentals of early-stage investing. I will be sharing some of the valuable information (too much to share everything here…consider purchasing their book!) in this Blog from Amis and Stevenson (2001) about Evaluating.
AND Here we go…
Why is Evaluation important?
Amis and Stevenson (2001) state, “If you want to become good at early-stage investing, you need to learn how to size up the fundamental elements of an opportunity” (p. 75).
How to go about Evaluating…
Let’s discuss “The Harvard Framework” presented by Amis and Stevenson (2001) for an effective evaluating tool. According to Amis and Stevenson (2001) the Harvard Framework “…will screen out 98% of all start-up investment opportunities” (p. 142).
The Harvard Framework consists of the people, the deal, the context, and the business opportunity. Part of evaluating the people is assessing the entrepreneur (Amis & Stevenson, 2001). For the purposes of this Blog post, I will elaborate on the entrepreneur to provided insights for how entrepreneurs may be evaluated. First and foremost, Amis and Stevenson (2001) discuss the need for the entrepreneur to be honest. Amis and Stevenson state, “In early-stage deals, if the entrepreneur lacks integrity, no single aspect of the proposal can be relied upon” (p. 81). In addition, the entrepreneurs’ knowledge, capability, and goals should be carefully evaluated (Amis & Stevenson, 2001). These are some starting points that new entrepreneurs should keep in mind because angel investors are looking for just the right investment with the right people leading the venture. Ask yourself if you are ready and prepared in these areas.
Important points for angel investors to remember…
It’s important for angel investors to remember some important points. Amis and Stevenson (2001) note to expect it to take years to become good at angel investing, consider using the recommended Harvard framework mentioned as a screen, know that evaluation takes lots of time, and consider co-investing for positive outcomes.
In addition, I also recommend reading the article, “Angel Investing Handbook – VC Broken Down for Investors”, found at the following link from seedinvest.com:
https://www.seedinvest.com/blog/angel-investing
Seedinvest.com states, “Fully understanding all of the risks is of crucial importance when evaluating any investment opportunity” (para 16) and provides several tips for potential investors which include: remembering that at the early stage of investing that you will not be investing in a company but in people, making sure that the values of the potential investment matches your values, staying realistic with profit goals, and understanding the real marketing value of the product.
Finally, something else to consider would be how to evaluate pitches from entrepreneurs just starting their new ventures. Entrepreneurs take note here! Jones (2017) gives insight into what potential investors are looking for when evaluating your new venture. Jones (2017) encourages investors to look for the following: a strong team, the market, traction, the idea and how that idea will be brought to life, and what other investors are saying. Take a look at the complete article for outstanding advice on how to create a winning pitch to find investors.
The full article can be found at the following link:
http://www.angelinvestmentnetwork.net/2017/06/investors-evaluate-startup-pitches/
Take a look to make sure you are prepared to give the pitch of a lifetime to obtain investments in your new venture and good luck!
References
Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
Angel Investing Handbook – VC Broken Down for Investors. (2016, October 27). Retrieved May 22, 2019, from https://www.seedinvest.com/blog/angel-investing
Jones, O. (2017, June 12). How do Angel Investors evaluate startup pitches? And pick a winner? Retrieved May 22, 2019, from http://www.angelinvestmentnetwork.net/2017/06/investors-evaluate-startup-pitches/
Kay,
Amis & Stevenson have provided some good insight on properly evaluating before heading into an angel investment deal. I found their mention of The Harvard Framework, to be useful when in this stage of investing. It is always helpful to have tools such as this to leverage the amount of information flowing in. With evaluation being a large time consumer, it is important to hit this stage correctly. According to Amis & Stevenson (2001), Between people, opportunity, deal and context, there are a variety of multirelational issues and opportunities. Invest in companies that have outstanding elements or at least good combinations and you will hit some winners. At least, having this tool can potentially lead to some positive future deals. Thank you for your insight this week!
– Paul
I always get a chuckle when a Shark Tank investor slams the would be entrepreneur when the entrepreneur says something like “The potential is XYZ in the multi-billion industry”. Whoa. Stop right there. The entrepreneur is pitching a new venture, or something off the ground, but still relatively new. There are no BILLIONS involved, thousands perhaps. That is all they have to offer today. Billions is a dream, and of course highly unlikely. I have seen decent sounding deals go south very quickly if an entrepreneur ever describes the potential in terms of billions. The investor does look for a sound idea but also importantly is the entrepreneur. Will he/she listen, will they consider options, will they shut up with Mark Cuban is asking questions, or are they making it worse with every word from their mouths? I can see how an angel will invest in the person, perhaps as much as the idea.
Kay,
I agree with all your highlights from the chapters on evaluating early stage investment deals. If I had to pick a ‘most important’ argument from your blog post, I would say your thoughts on risk take the cake! I think many times we take a very romanticized approach as to how ‘things will somehow work out.’ However, it is extremely important to understand that even if all the proper due diligence is in place, there is still a significant amount of risk associated with early stage investment deals. Plans might look great on paper, but execution is a completely different story. Evaluating is a process that accounts for decreasing some risk, but it does not entirely eliminate it. Something that might be overlooked from time to time.
Great post!
-Jose
Kay,
Nice review and great resources included in your blog. There is a lot to digest in these chapters and many paths that can be taken. I find it interesting that as much ‘structure’ provided by the book, they also talk about those that invest based on intuition and ‘gut feel’ about the entrepreneur and opportunity. I completely appreciate your focus on honesty. I have spoken with a few people regarding business deals and investing. Each of the discussions had a trust component that truly set the tone for the potential relationships. There were some positive examples and a few negative that truly highlighted the need for honesty.
Thanks for the read.