Evaluating is a typical behavior of humans. We are constantly evaluating the world around us in order to understand the impact on us and our influence in it. Consider a daily routine of changing temperatures and dressing according to the changes. The need to eat and the variety of options available that fit into our likes and dislikes. Evaluating is natural, but because we do it does not mean we are good at it in every situation. We need information and experience to help us evaluate more effectively and accurately.
Investing in startups has an Evaluating component. According to Amis and Stevenson (2001) there are structures and methods that can help us become better at evaluating startup opportunities. Using The Harvard framework (p75) an investor can look at early stage investing by evaluating People, Opportunity, Deal and Context. (See Diagram).
Framework breakdown (p77)
- People – Refers to the individuals that are a part of the overall deal.
- Business Opportunity – Includes the proposal (opportunity, model, potential value, ROI, timeframes, etc.)
- Context – The macro-world around the opportunity to help understand influences, positioning, timing, risks, etc.
- Deal – The specifics regarding the opportunity related to the financials (costs, returns, options)
While there is a lot of detail that goes beyond this high-level structure (structures within the structure), I would like to focus on the item that I feel is the most important. Honesty and Integrity.
Amis and Stevenson go much deeper into evaluation within each of the above areas in The Harvard framework. However, the starting point in assessing the entrepreneur is their character. (p81) As with any relationship, the foundation starts with trust and trust is built through acts of honesty and integrity. Without trust everything discussed and reviewed will be suspect and cast a shadow over the relationship. Also, as an investor, the risks increases as lack of honesty and integrity introduce potential bad or misleading information.
The first investment should be in evaluating the entrepreneur to establish trust that will support the engagement going forward. I have met with a few investors and entrepreneurs that talked with me about the value of trust in these types of relationships. Some of them had been burned by people falsely representing their opportunities and others by the investor seeking more than they initially revealed. In those negative situations, the opportunities typically did not perform well and the relationships between the people were beyond repair.
Honesty and integrity are a cornerstone to my own beliefs and behaviors. I focus on actions more than words and hold myself and others accountable to doing what was promised. Things change all the time, so it is expected that not all actions will be possible despite best efforts. However, it is important to me that people are open and transparent so that when these situations are appearing more real, we can all work together to understand options.
The Evaluating chapter is a great read to break down the fundamentals of properly evaluating early stage investing opportunities. It goes fairly deep and likely will take years to get proficient. Amis and Stevenson say it best, “In Both Entrepreneurship and Angel Investing, There Is Nothing Like Doing It.” (p75)
Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.