5 Steps to Evaluating Early-Stage Startups as an Angel Investor
It's a journey where personal interest meets the zeal for business
Angel Investors are in the risky business of investing in early-stage startups. They are faced with exciting startup pitches and products and will need to use very specific criteria to decide the best place to put their money. As an angel investor, your practical experience is the basic instinct that will tie all the variables together and help you weed through business plans and proposals from several startups.
It’s no easy task to identify a startup that best matches your interests as well as has great profit potential. This puzzling nature of evaluating a startup can leave room for a lot of errors. Let’s see how to avoid some of these pitfalls.
1. Use a Trusted Source
Angel investors trust their network and will often use it as the first step in evaluating any potential investment. Sourcing opportunities through a network typically provides the investor with higher quality opportunities, which often reduces the time spent in the early stages of deal evaluation. This is not to say the investor does not conduct their due diligence on the opportunity. A network-sourced opportunity can facilitate a faster evaluation process because the trust in the network can serve as the first stage of screening.
2. Check Feasibility of the Business Model
The business model and the overall potential can be evaluated more closely by an investor after the opportunity has passed the first stage of the appraisal. The entrepreneur’s business strategy is often less important than the business model, that is, purpose, processes, how to generate customer demand, how to monetize it, and much more. Typically, the business plan focuses more on the execution of the model, while the business model provides a more strategic structure for the organisation’s operations. Besides the proposed execution, the viability of the opportunity based on the business model alone can be seen by an angel with experience with that type of business or industry.
3. Underscore the Value You’ll Be Adding As Investor
If the business model’s viability has been worked out the investor will next decide what value they might bring to the company. The investor will determine how their personal experience, skills, and networks could maximize the business opportunity in addition to financial investment. Usually, an angel investor takes a hands-on approach to investments and will potentially act as a mentor to the chosen entrepreneur. As such, many angels understand how the time they spend with the entrepreneur not only leads to the success of the business but also presents the entrepreneur with personal growth opportunities.
4. Consider the Preparedness of the Founder
Considering that in a new venture, an angel investor will spend time as well as money. Therefore, when an entrepreneur is invited to pitch, the investor looks at more than the startup; they look at the entrepreneur’s personality and behaviour. The investor has already measured the market opportunity by the time of the pitch and decided whether they are interested. In the pitch, the investor will decide if the entrepreneur is well prepared, coachable, trustworthy and considered to have good character. These last factors, often considered to be soft factors in the evaluation of the pitch, will make the difference in whether the investor passes on the opportunity or decides to move to the next stage of the evaluation.
5. Exit opportunity
Finally, angel investors may want to know the venture’s exit strategy. More precisely, investors would want to know how to benefit from their time and cash investments. Since IPOs have decreased dramatically, investors may know what other exit opportunities (for instance, the purchase or sale of secondary market investment) might be open.
All things considered, this list of steps in evaluating early-stage startups is not conclusive. Nevertheless, it gives you some insights into how you can start assessing the potential of early-stage startups for investment.
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