The best way to approach evaluating early-stage investment deals (or any deals for that matter), is to think of it as an ongoing process. The idea behind evaluating investment deal is to cover all bases to determine its potential and suitability to an angel investor’s portfolio. A thorough evaluation of an investment deal will lead to an investment opportunity or a rejection. Both of these outcomes have important takeaways and are worthy of further analysis. There is no scientific formula for evaluating investment deals; however, there is plenty of steps that can be taken to assess an opportunity objectively.
The Harvard Framework
The discussion on evaluating early-stage investment deals introduces a contextual framework created by William Sahlman and Howard Stevenson. The Harvard Framework suggests a potential investment deal should be evaluated as an interconnected combination of four elements: people, context, business opportunity and the deal (Amis & Stevenson, 2001, p.77). Each of these elements can be dissected into sub-elements that would require a much longer analysis. However, the overarching idea is to conduct an encompassing review that would reveal the potential of an investment opportunity as well as areas of concern. Lauren Barley’s article, Four VCs on Evaluating Opportunities, provides some examples of how venture capitalists evaluate investment deals (Harvard Business Review, 2005). The takeaway for angel investors from Barley’s findings and Amis and Stevenson overarching ideas is there is no magic formula for evaluating an investment deal. For entrepreneurs, the name of the game is planning. Since there is no standard process for evaluating, it is quintessential that all investor’s concerns are addressed and that there are proper plans in place.
Rejection
It is important to note that not all deals are funded and investment rejections are part of the game. However, rejections are reality checks that must be seen as opportunities for improvement. The virtues of rejection are best encapsulated in this simple quote from Amis and Stevenson’s book, “It is ok to say no, along with the reasons” (2001, p. 112). After conducting their due diligence, investors can reject a deal for a variety of reason ranging from lack of interest in a project to serious structural business concerns. Entrepreneurs should seize these opportunities and request feedback as to what could have sealed the deal. Angel investors have the advantage of having reviewed numerous other projects and their input can help entrepreneurs get the project to a more desirable standing.
A Note on Entrepreneurs
Evaluating is a process that also includes an assessment of the entrepreneur since entrepreneurial leadership makes or breaks a business. While self-consciousness might be easier said than done, it is extremely important for entrepreneurs to understand their landscape. Amis and Stevenson identified the following list of types of entrepreneurs:
-Serial Entrepreneur
-Empire Builders
-Lifestyle Entrepreneur
-High-Potential Entrepreneur
-Almost-There Entrepreneur
-Wanna-Be Entrepreneur
Each type of entrepreneur presents a unique set of challenges. Angel investor must be able to identify the type of entrepreneurs in front of them and see how their goals and needs line up to those of the investor. This additional assessment will save time and resources by ensuring everyone’s objectives are an acceptable fit from the beginning.
Evaluating can be time consuming, complicated and ultimately subjective; however, it is not impossible!
References
Amis, D. & Stevenson, H. (2001). Winning angels: the 7 fundamentals of early stage investing. London: Pearson Education Limited 2001.
Barley, L. (2005, May 2). Four vcs on evaluating opportunities. Harvard Business School. Retrieved from https://hbswk.hbs.edu/item/four-vcs-on-evaluating-opportunities
Jose,
The Evaluating stage of investing was interesting to read because it provided sound insight into the thought processes and considerations for a deal. My takeaway, similar to yours was that there is no one perfect method. In fact, there might need to be more than one method applied to the decision making process. I enjoy reading your posts, as usual, keep up the good work.
Devon
Hi Jose,
I liked how you included the list of types of entrepreneurs in your post. We as master’s students of Entrepreneurship can relate to one or more of these types but also learn how we can capitalize on learning this from an investor viewpoint. I myself would fall under the high-potential entrepreneur. As someone who has not yet completed an entrepreneurial venture, I am still new to the game therefore putting me in this category. Moving forward, I can understand after doing so I hope to be an empire builder where I can build a real estate and design empire. Learning the dos and don’ts from the point of view of the investor is definitely valuable as we move along on our entrepreneurial journey. Great blog and I look forward to reading more in the future.
Carter Jones
Jose,
Wonderful analysis! I’m guessing by your reference pages you followed the suggestion of “if you know this, skip ahead to this…”
Your section of “Rejections” as being a “reality check” to the entrepreneur if (s)he still has work to do on their business plan or their approach to business in general. Getting rejected is a sure fire opportunity to get some beneficial feedback. The “reality check” is also quite comparable to the intention of this class considering we do have a project titled a “Reality Check.”
Always interesting reading your thoughts on the book,
AK
Jose,
The Evaluating stage of investing was interesting to read because it provided a lot of insight into the thought process and considerations that go into making a deal. I found it interesting to learn that there is no perfect method and you can go about evaluating it in a number of different ways.
Keep up the great work Jose.
Warm Regards,
Dani
I enjoyed reading your blog. You covered a lot of ground that was in the chapter and you added rejection in yours. I think that is in the right direction. Not everyone can win every time, but learning from your loses can be extremely helpful when investing. I also enjoyed the last part of your blog stating how time consuming evaluating can be but its not impossible to achieve. That’s a good note to add, because a lot of people give up when they don’t see any progress and its important to always stay on target and be determined to succeed. Great post!
Jose,
I think discovering the type of entrepreneur is extremely important for an investor to conduct. Pulling this from the reading was significant, and I find that a lot of these mentioned concepts that are mapped out in the book really just come along with intuition upon meeting an individual. Don’t you think it is interesting how there is a book about being an angel investor? I feel like we are getting the inside scoop. I always just assume an investor of any type would know what they’re doing. They have to learn somehow I suppose!