The best angels and angel organizations have a lot of investment opportunities, whether discovered on their own or directed to them. They have the high-class problem of getting those opportunities down to a manageable number for true consideration. It’s a two or three-part process, screening deals into a smaller group of “semi-finalists” who can go through a deeper vetting process that lead to “finalists,” who then present to the investors and are selected for due diligence.
Screening has its own set of challenges for angels. You want to make sure you don’t miss truly great opportunities, but you also want to build in efficiencies to minimize the most important resource angels have: time. I’ve seen several great ways to screen deals from Angel Capital Association members, but I recently ran into a framework that provides considerable clarity for investors. It helps them decide whether companies have the potential to meet the criteria that matter most to investors for success, and therefore deserve more investor time.
Thanks to Rob Go of NextView Ventures for explaining his criteria – which I’ll call “Awesomeness Screening” - earlier this year. What he may not know is that angel investors and groups are adapting this VC framework into their own screening processes.
One angel group I know is working on adding Go’s framework to the middle of its three-part vetting process: 1) quick 15-minute screening to ensure a business meets the group’s basic requirements, 2) a larger set of investors invites the company for a 20-minute presentation and Q&A session, and 3) if enough investors are interested in learning more, the founders are invited for a one-hour presentation and detailed Q&A. Investors then vote on whether to start due diligence with the startup.
The beauty of Awesomeness Screening is that it brings the angels together on their key success factors for companies - and it does so quickly through numeric scoring by all participating angels on four main criteria in 15 minutes. The key criteria are easily understood:
- Stellar Founder/Team –The CEO is not just good or in the top 5% of performers in his or her field – but is clearly the best. This is true whether the CEO has lots of entrepreneurial experience or if he or she is starting their first company. In addition, they bring uncommon skill to something that is important to their company, and have a way of bringing together the founding team with a strong overlap of skills and attributes that will build the company in the short to medium term. Of course, the founders need to be smart and also be tough enough to lead everyone through a journey with plenty of adversity. And whether or not the CEO is a true salesperson, he or she must have a way of convincing angels (as well as customers, employees, partners and others) that the company is going places.
- Jaw Dropping Value – The most successful startups have value propositions that literally blow customers away. This may be a more colorful way of saying the value is better, cheaper, faster or more convenient. Just as important, there is very clear explanation of why the product is jaw droppingly better than what’s already out there.
- Competition-Crushing Business Model – This is all about scaling. As Go says, “…in order to capture the immense value you create by creating jaw dropping value, you need to have a business model that has strong increasing returns to scale. The question becomes, if a company is able to get off to a great start, are there multiple things about the business model that will make it harder and harder for competitors to keep pace?”
- Distribution Advantage – This one is a little harder for me to explain, but basically it means that the startup has an unfair advantage or head start in getting its product to market and getting customers to buy, leading to a velocity others can’t match. It includes the logistics of literally producing and distributing the innovation in the market, as well as strong marketing and sales capabilities, approaches and strategies.
Not every company will address these factors the same way, as advantages are different by sector, but this framework can help angels get a great consistent start in screening investment opportunities. Using a 1 to 5 scale for each for the four criteria and providing angels the ability to write down other positives, concerns, and questions to ask will easily help a group of angels decide whether spending an hour or more with an entrepreneur is worth everyone’s time.
That next part of vetting is a great time to dig into a larger set of important issues – a seemingly unending list such as deal terms, capital efficiency, intellectual property protection, true exit possibilities, how the investors and founders align… But I like the idea of a clear way to narrow the field for deeper review. Think awesomeness.
This article was first published by Forbes and was written by Marianne Hudson.
"I am an angel investor and Executive Director of the Angel Capital Association (ACA), the world’s leading professional association for angel investors. ACA is focused on fuelling the success of accredited angel investors who support high-growth, early-stage ventures, and has more than 12,000 member angels across North America. I know one thing for sure: there is a method to the madness. In shaping ACA professional development programs and public policy advocacy, I have the opportunity to hear firsthand from experienced angels and the ecosystem at large—what works, what doesn’t work, and strategies to consider for everything from getting started as an investor, to finding great deals, to supporting the companies you invest into growth and exit. I know about trends and impacts of angels and innovative startups too. Earlier in my career I ran the angel initiative at the Kauffman Foundation, which led to ACA and the Angel Resource Institute, and where I also oversaw entrepreneurial education and mentoring progra designed to ensure that more entrepreneurs develop sustainable, innovative businesses. I love entrepreneurship and have worked in supporting fields for more years than I will admit. I am a member of two angel groups in Kansas City and also connect with several accredited platforms."
HBAN pre-screen investment opportunities for its members - if you would like access to qualified deal flow you can register here or call 01-669 8525 for more information.