Evaluation

Evaluation is the lengthiest and most time-consuming phase of an investment. It requires the entrepreneur to traverse the many complexities of the business and its surrounding context to create a concrete idea of the potential gains and risk its associated with.

            One of the first and major evaluation criteria considered by any investor is the people involved. This ranges from the entrepreneur that is actively running the business, to the management team and to all relevant steak holders that contribute to operations and the broader context of the industry. The entrepreneur Is easily highlighted by angels because of their potentially large holdings in the firm and the power that subsequently gives them over business pursuits. The management team hired by this person is also a major concern for the angel. These two groups are responsible for the overall functionality of the firm and thus must be properly vetted. Some of the major components include their experience and capability in the given industry. Investors need to believe that the people that are running the firm have the required skills and knowledge to guide the firm into profitability. Another key factor is the commitment of these individuals to the future growth and exit from the venture. If an entrepreneur is not fully invested and willing to dedicate a large amount of their time and resources into the firm, then how can they expect an investor to feel confident about the project. Finally, these investors want to see that the entrepreneur has the confidence and the proven track record of success. This can come in many forms but in any given industry a competitive personality and tenacity are required in order to be successful.

            There is a framework put forward in the novel “winning angels, the 7 fundamentals of early stage investing”, that describe some of the major contributors to an investor’s evaluation of the opportunity. These are size, model, customer and timing. The model of the business is the factors that describe the business’ strategy for making money. This is a more concise description of how the business plans to gain customers, maintain them, and then generate a profit serving them. Investors like using the model because it avoids the errors that are bound to come as a result of forecasting in a business plan.  Customers are the next piece and are perhaps the most important piece of the evaluation. A business that sells a product, no matter how innovative, will fail if there are no customers that are willing to purchase it. Market analysis experimentation therefore must be done before the launch of the business. Understanding the people that you wish to serve and tailoring the business to specifically meet the unfulfilled need is the essence of a successful startup. Timing is about reaching the customers within the market at the perfect time. A common misconception by many within the entrepreneurial field is that you must be the trail blazer in order to become the market leader. Though seizing the early adopters and becoming the pioneering business in the market has its advantages, it also comes with increased risk. This new product in a new market is often viewed as high potential but has a large amount of variation and therefore discourages some investors from entering. It is therefore not about getting your product to market first but being that one that captures and provides the best value for customers at the ideal time within the emerging or existing industry.  Finally, the size of the investment and the size of the firm are codependent and key variables. Experienced investors tend to look for big investments that produce “homeruns”. These investments are often large and come with a reasonable amount of risk. For smaller businesses this may not be the correct ask for newer entrepreneurs. Smaller investments that are one-time contributions may be all that is required at a given time. These deals can be beneficial to the investor by providing them with a hands off and low capital investment and to the entrepreneur by providing additional paid in capital without giving up an unreasonable amount of equity and control within the firm. These factors should all be considered together to give insight into the risk and the overall need of the business at any given stage within their development.

            There are different types of investors that are also key to consider. This means that the chosen investor may be able to provide additional resources or key knowledge that can benefit the firm in its development. The coach or mentor for example can invest within the business and provide it with advice and support that would otherwise have to be learned through trial and error by the entrepreneur. In contrast, the silent partner can be helpful for building credibility of the firm through name recognition, without losing the control that many entrepreneurs seek to maintain. When considering which business to invest in, it is just as important to turn the camera around on yourself and ask what additional value you can bring to the firm. This can be used as a bargaining tool as well as an incentive to your contributed capital.

            Evaluating is a complex and rigorous process that takes up a majority of investor time. If you recall from the previous section on sourcing, newer investors are advised to attempt a quantity investment strategy. This allows them to see a large amount of varying investment prospects and learn quickly from these opportunities. Time is an entrepreneurs most crucial resource; this means that improving one’s efficiency in the evaluation process can become one of the best ways to boost your potential work output.