How to quickly screen startup decks as an angel investor (Step 2 - the journey)
A simple two step method for making better decisions more quickly
Step 2 - evaluating the journey
In the first part of this guide I described how you can screen decks more quickly using the concept of ‘vehicle and journey’.
If the startup ‘vehicle’ (Step 1 - Problem, Solution, Go To Market and Team) doesn’t work then there’s not much point analysing the journey!
If the founder’s reasoning and the core components of the business still look attractive then we can see if they pass screening in Step 2.
Beware my bias
I lean towards a founder / operator view of how to build and operate the business. I’m also not only looking for potential unicorn scale (£1bn+ valuation) startups. As an early stage angel I can take a broader view of what good returns look like than a VC fund can.
This points matters for screening purposes, as depending on the context some investors would screen out decks on the basis of potential market size or speed of growth that others would leave in.
How to analyse the journey
Here we evaluate the journey - How big a business do they plan to create? What will hinder or help their growth? Does the risk/reward feel attractive?
Use of funds and financial model
As with Step 1 we’re accepting that the startup’s plans will evolve and adapt. But do the plans even make sense now? If they are successful in raising enough investment then this is the plan they are going to be following.
1. Business model
It might change but it should be attractive now
Only time can tell whether the business model will really work but there should be a compelling starting point. Has there been any traction testing? Do they charge customers on a model that will retain customers and encourage ongoing use?
Subscription revenue is preferable to one-off transactional revenue
A subscription means they have found a way to provide ongoing value to their customer. Retained customers also make it more likely that the Life Time Value (LTV) of the customer will be greater than the Customer Acquisition Cost (CAC).
Software as a Service is a popular business model for a reason
Selling a subscription to a software package has almost no marginal costs. Everything else is less profitable than this and has lower margins per sale. Any labour required to sell and provide a product slows growth and hurts margins.
2. Market size
Top down TAM, TOM, SAM is just a sanity check
Outlandish and unrealistic handwaving here makes me wonder what else has been exaggerated. But realistically for screening purposes this a common sense check, not the point you start researching an independent market sizing model.
Bottom up analysis is more useful at early stage
At early stage it’s unusual to see any verifiable market sizing research that is material to the investment decision. For an existing category (e.g. accounting software) they may identify their niche’s size, for a new category it’s often inferred from elsewhere.
Innovation makes direct comparison hard
The startup might be describing an entirely new category of product. Or a radically different pricing model. It will be difficult to objectively disagree with the numbers but evaluating how they came to them will reveal more about their wider thinking.
Competition is a blessing! (sort of)
Hear me out. Direct competition means that people are spending money on similar solutions. This removes the significant risk that people don’t care enough to spend money on the solution at all, which is pretty common for entirely new products.
But beware ‘red ocean’ markets
Very competitive red ocean markets are expensive to enter and operate in. The startup will require a huge amount of money and go to market expertise to even create the opportunity to tell customers why their product is 10x better.
Products don’t just compete on their benefits
How well a solution works is only one factor that a potential customer will consider. Switching effort, distribution, convenience, bundling and brand awareness may play more of a role than price or features - making disruption difficult.
4. Use of funds and financial model
Good results for the next round
In twelve to eighteen months potential investors in the next round will be looking at what’s been achieved with this round’s funding. The startup should balance realism and ambition in plans that demonstrate compelling growth.
Make the thing, sell the thing
Watch out for a sensible allocation of funds between building the product and selling the product. A budget for a huge product team and one marketing intern carries obvious risks. Planning to iteratively build product and sell early can reduce risk.
Add six months delay and take 50% off revenue
Gaining investment is only one part of the jigsaw puzzle. With the money in the bank they need to start hiring and then building - this never goes completely to plan. The financial model should be able to take some setbacks and still look attractive.
If the results are positive then the next steps are often a founder pitch with Q&A, a more comprehensive deck and then on to due diligence.
There is also the competitiveness of the deal itself to consider - valuation, size and availability of space in the round, SEIS/EIS eligibility etc.
If you want to learn more about angel investing then I can recommend the excellent course at Andy Ayim’s Angel Investing School.
A seed investing framework by Check Warner of Ada Ventures. Focused on slightly later stage startups and is focused VC-only but the article has lots of further reading links.
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