Early Stage Investing- Evaluating
Week 3: Evaluating
Evaluating a deal can be a long process that overlaps many of these other stages including sourcing. When doing a deal, you want to make sure that the deal is the right place to put your money in order to see some kind of return on investment. Amis/Stevenson outline the elements to review are: people, business opportunity, context, and deal. These elements can be broken down even further.
Not only is the business analyzed, but so is the entrepreneur. I can definitely understand why having someone you trust and believe in would be someone to invest in. Without trust, you have nothing, and you definitely don’t want to give your money to that person. Although most companies are team-based- the CEO or founder is the person of evaluation. According to Amis/Stevenson “when assessing an entrepreneur, there are three “bases” to cover: their goals, their knowledge, and their capabilities.” All three of these bases must be covered in order to invest your money in to that company.
Currently, I work for a company owned by a PE firm. The initial CEO did not have expertise in the field and unfortunately could not succeed in the position because of this. Today, our CEO is from the same field, and has been for over 10 years and our company is growing. The management team is everything. I have first handedly seen the impacts of people who fit in the role vs people who think they fit the role. The difference of these two is enormous and the impacts on the company follow suit. Although there are many factors to weigh when evaluating a company, to me the people seem the most important. No matter how great an idea is, if the person in charge lacks goals, knowledge, or capabilities, the idea is useless.
What really stood out to me in this chapter was the list of “Behavior and personality characteristics found in great achievers.” Although they were stated as male, these traits should be genderless. I find it interesting as to why these traits were only stated as “profiles of male creative genius.” What about females? Anyway, the trait I found most interesting was “first-born males.” Again, I think this can pertain to women, so let’s just say “first-born.” Being an only child, this one is hard for me to grasp entirely because I have no other siblings to reference. What happens if you are only a first born? Does this still count? I do find the behaviors associated with being someone who is successful at something not random. Outliers: The Story of Success by Malcolm Gladwell is a great example of how traits/factors can contribute to success. One example is that players on hockey teams are mostly born from January to June because those are the players who end up being oldest on the team. It is not that players born in December are worse players, but that they are the youngest and therefore physically haven’t developed as fast creating a team whose birthday are mostly from January to June.
Evaluating an opportunity is a major step in the process when deciding if to invest. Not only does the business need to be evaluated, but the people too are an important piece to the puzzle. Through a long and though process, each venture should be vetted and discussed before moving forward.
References: Amis, David, and Howard H. Stevenson. Winning Angels: The 7 Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.
Gladwell, Malcolm. Outliers: the Story of Success. Back Bay Books, Little, Brown and Company, 2013.