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