Evaluating – Early Stage Investing Series

We’ve all had friends tell us about their great idea for a business, service, or product. Sometimes we’ll end up sharing their vision, but sometimes not. But aside from mere hunches about the potential for an idea, what is a better way to evaluate and better grasp what the idea is all about?

Enter the Harvard Framework. The Harvard Framework is a simple diagram that forces us to evaluate four of the key ingredients necessary to a successful venture: people, business opportunity, context, and deal. The authors of Winning Angels have the following to say about the framework: “Based on our experience in doing over 100 early-stage deals, we believe that an investment opportunity has four essential elements, that, when brought together in the right form represent a high-potential opportunity to make money.”

People

You might find out about the best deal you’ve ever heard, but if the people involved aren’t right, it’s probably best to forgo the opportunity. It’s important to notice here, however, that the range of people we need to consider extend far beyond the main entrepreneur pitching the deal. According to Winning Angels authors, this could include other team members, investors, advisors, or other shareholders. Paying attention to and researching the attitudes, backgrounds, skills, and characteristics of these people might just end up saving you a great deal of both time and money.

Business Opportunity

Arguably the place where most deals begin, the business opportunity is easy to focus on – and for good reason. It is the lifeblood of the whole show, and without a solid opportunity, there is nothing to invest in. When analyzing the business opportunity, it’s a good idea to gather estimates of how big the market size (and by application, return on investment) is. Like many things in life, there is also a window of opportunity that makes a business deal possible. Being too early or too late can both be detrimental to a startup, so it’s important to try your best with finding good timing.

Context

The context of the deal can be thought of as the operating environment from which the business will be established. Demographics, psychographics, political power, nature environment and just about any other external factor are included as context. Just as you wouldn’t purchase a vehicle if there were no gas stations, it wouldn’t be wise to start a business where there was no supporting infrastructure – let alone a hostile environment.

Deal

When thinking about the deal, you’ll want to examine the give and take of the situation. How much equity will you be receiving? Or will you receive a royalty instead? Maybe both? There are limitless ways to structure a deal, and getting creative is an effective way to make sure all shareholders feel as if they received a worthwhile and fair piece of the pie.

As the iconic Elon Musk once said “If you’re trying to create a company, it’s like baking a cake. You have to have all the ingredients in the right proportion.” And like just like baking a cake, the only way to have the right ingredients is to plan for each of them. That is really what the Harvard Framework is all about. And once we begin to intelligently shop for all of our business ingredients through evaluation, we’ll be sure to have a much better chance at baking a sweet deal.


Source:

David Amis-Howard Stevenson (2001). Winning angels: the seven fundamentals of early-stage investing. Pearson Education.

What did you think? Leave some feedback! :)

2 thoughts on “Evaluating – Early Stage Investing Series

  1. Austin I enjoyed the post. I really took to the section on people , and making sure you research the people you deal with. I am a firm believer if I can’t trust the person, we can’t do business ever. The relationship must be genuine and we must be in the deal for the right reasons. You are right its no need to waste time if the person you are dealing with has had difficulty in other relationships. My mother always said “All we have Is our name” .
    Great Post!

  2. My initial investing will be with something I am passionate about. For me it’s about building people not just my bank account. I think by looking for these opportunities will start of with smaller investments and I can learn form that to move into larger dollar ones with more experience. Timing is critical. There was one investment that I considered that was specific to a summer program, but by the time I received the information, the entrepreneurs already posted that the camp was not going to happen because of a lack of funding. Now that I know, I can contribute next year!

Leave a Reply

Loading Facebook Comments ...