How do angel investors evaluate start-ups before first meeting?

Before I dive into my personal deal evaluation framework, I would like to remind everyone of a must-do homework – personal risk assessment, portfolio planning and asset class allocation.

This step is a crucial one to help one ascertain one’s current financial situation and hence how much one can invest, after accounting for cash needs for day to day, as well as for rainy days. Without going into details, your answers should be “yes” to the following questions if you intend to angel invest:

  • Yes, I have set aside different buckets of money for expense needs and also for investment needs;
  • Yes, I understand the high risk (often binary) and mid-long term illiquid nature of angel investing.

If you are new to the angel investment scene, here’s an introduction to angel investing.

Backdrop

My husband and I invest out of a family portfolio, so our investment process, though informal, actually has an ‘investment committee’ component. Our selection key words: technology focused, scalable, some traction, we must both ‘like’ the founder(s).

How do angel investors evaluate start-ups? Our step-by-step evaluation framework:

  1. Business Opportunity & Context
  2. People
  3. Execution
  4. Deal Terms

Pre covid, it was a must to meet the founders in person; though now we are much more comfortable with zoom-based interactions. And with the application process I have implemented on AngelCentral, we have managed to shorten the information gathering from the startups.

  1. Business Opportunity & Context

What I look at:

  • Investment Deck
  • Quick Financials

What I think about:

Upon looking at the investment deck, I will try to figure out what problem the team is trying to solve, does the solution sound plausible, are there any potential solution in the market already and what is the competition landscape like.

I will also consider the space this business is in. Angels differ in our styles, and I have learnt that I should not invest in spaces I do not understand well, or areas that, try hard as I can, I still cannot grasp.

Our first angel investment was in an animation studio – and we did that following a trusted friend, and we were wowed by the two co-founders’ credentials (they were experienced animators with production experiences with global industry leaders).

However, we had no idea back then what a “good working business model” for a studio should look like. It’s turning out to be an ok return investment after almost seven years now, but knowing what we know now, we probably would not commit to a space that we do not understand well on multiple fronts.

Side note: AngelCentral is sector agnostic but with a scaling and growth focus. We encourage founders from all sectors to send in their decks, as long as they intend to raise from angels. When curating these decks for the club, for spaces that I do not know well, I would seek our members’ input, especially members from relevant fields.

Read also: What to include in a pitch deck when pitching to Angel Investors

I would usually have more questions, and I would email them to the founders. These questions could vary ranging from details of business tractions, product details, clarify how the TAM/SOM/SAM are derived, etc.

What I am trying to find out and assess:

  • Does the founder have the relevant insights and tractions to prove that this problem is worth solving;
  • Are the tractions for real and as claimed?
  • What kind of “moats” this business could have – any sign of the moat building, how far along are they in building/ acquiring the moat? (especially in cases where the moat could be a regulatory approval / licensing requirement)
  • What have they learned so far too, from their executions and interactions with potential customers? Have they already identified the primary profile of the customers?
  • How much thought is put behind the pricing / GTM / feature building sequence etc.

Basically, I am trying to get a sense of the calibre of the founder(s), thinking clarity, as well as their ability to communicate.

  1. People

What I look at:

  • LinkedIn profile of the founders
  • Company Website
  • ACRA

What I think about:

To me, these three are the “hygiene factors” that anyone who’s serious about starting a business should be able to complete, even if you are non-technical.

LinkedIn profiles – though I have personally encountered bogus profiles there, it’s very much the first check most people rely on to understand the professional background. Some scenarios here to ponder:

  • The CTO highlighted on the deck has multiple active tech projects/companies, with overlapping timelines
  • The core founders are still holding on to other full time commitments
  • The fundraising startup info is not listed at all on the core founders’ profiles

Remember that early stage investment is very much about the PEOPLE. So we are trying to ascertain quite a few things:

  • if the founders are really committed to this chosen problem;
  • are they the right team with the right profile with the relevant skill set for this chosen problem;
  • have they done sufficiently enough to demonstrate that they know the chosen space?

And so on. You will notice this “people” theme repeatedly throughout the different phases of evaluation for early stage investments.

I’ll also see if there’s any advisors on board, how many and if the advisors are strategic to the start-up.

  1. Execution

What I look at:

  • Prototype / Product
  • Traction numbers

What I think about:

How much have they executed to-date, progress made so far, early sales revenues, especially if a repeating pattern could already be observed over a few months, are one important feature I look out for. It’s a very strong evidence on a couple of things: the founder has found the right market, targeted the right users, the founder has figured out how to sell / market, the market is willing to pay for this particular product / service!

  1. Deal Terms

At this stage, while valuation is basically just a number, I would look at it to get an idea if the founders are of the right expectations. If this is a pre-product company, and already expecting >5M valuation, I would usually stop here. Reason being, I don’t like to haggle, and I know this is above my investment comfort zone so there is no point going further already. (To founders: know the market sentiments and do not “price yourself out” prematurely by stating unrealistic valuations)

Conclusion

Once the start-up passes the above framework criteria, I will invite to speak to them personally and understand more.

Quite often, I make my decision to meet up with founders ONLY after receiving and assessing their replies to my follow-up email.

They are times that founders send a very brief reply that they would prefer to talk through these questions rather than replying via email.

I shall be very candid here: my email is also a screening process, to help me assess the founder, and the founders’ email replies help me to decide if the founders have insights etc. As we review at least 10+ companies a week, founders who do not reply to these queries will be left under the “pending reply” as I have no info to assess / make a decision if to meet.

Otherwise, with all these in place, I reach out and organise a chat. Ideally in person, and with the core / key founders.

Read on: What do angel investors look out for during the first meeting with start-up?

 

This post is a part of an angel investor’s evaluation framework, you may read the following posts for the full version:

About AngelCentral

AngelCentral is the most active and fastest-growing community of angel investors in Southeast Asia. We organize regular pitch sessions, angel education workshops, and provide syndication services. Since Inception, AngelCentral has trained >300 angels and our members have invested >S$18m into the startups.

If you are a startup and would like to raise funds from our members, send in your application here!

If you are an investor and would like to find out more about Angel Investing and what AngelCentral does, we have a coffee session hosted by the AngelCentral team. These informal chat sessions are held twice monthly where we will share about what we do, our membership offers, and/or what Angel Investing is all about. Secure your slots here.

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