In the second portion of Winning Angels by David Amis and Howard Stevenson the authors have moved from sourcing to examine another equally critical component in the angel’s investing chain…This time we’re discussing evaluating. Evaluating is just what you would suspect, it’s where the investors are able to further assess a deal to determine whether it would be a worthwhile investment for themselves and/or their syndicate. As my colleague Dustin Brown pointed out in his blog post on sourcing, the reality television show Shark Tank is a popular illustration of what Amis and Stevenson are exploring in Winning Angels. While the sharks are certainly able to source thousands of deals (As of May 19th, 2019 there have been 222 episodes, 895 pitches, 499 deals, $143.8 million worth of invested capital, and nearly $1 billion in company valuations! Click here for a more in depth look into the analytics associated with the show), it is notable to discuss that after these deals are “sourced,” they have to be evaluated further to determine if the organization in question has a product that can be monetized, scaled, and will provide a significant ROI for those interested in assisting with the risks associated with financing.

     While watching Shark Tank, I am oftentimes on edge as if I’m presenting the deal myself in front of the sharks! I cringe every time I hear a shark say the infamous words, “And for that reason…I’m out.” But, these chapters on evaluating have enlightened me and provided me with a more understanding perspective as it pertains to why exactly these sharks step away from the deal. As Amis and Stevenson put it, “given the potential time drain, the best angel investors are careful and strategic in their approach to evaluation.” This makes total sense and can be seen in every instance when the sharks collect information about a deal and entertain the prospect of financing entrepreneurs in their newly established ventures. If the deal does not correspond to an industry where the sharks have experience, they will typically give adequate reasoning and respectfully bow out to allow their associates the opportunity to formulate an arrangement with the entrepreneur without any further interference. Here, it does get interesting when more than one shark offers capital as well as their expertise since, “the quality of the stakeholders says a lot about the quality of the investment opportunity, as well as the likelihood that it will meet future challenges successfully.” For example, on Shark Tank, Mark Cuban is undeniably the most prolific dealmaker with 151 deals completed in the first 10 seasons. He is also undoubtedly one of the most well-known with his ties to several successful ventures, most notably being the owner of the Dallas Mavericks! Unquestionably having Cuban’s stamp of approval as well as business expertise to validate and further a deal says oodles for the budding entrepreneur looking to pave their path to success.

     Most importantly when it comes to evaluating, Amis and Sims note that, “rather than judge entrepreneurs or their business plans as winners or losers, it is most productive to look at the investment opportunity as an interconnected combination of 4 elements: people, context, business opportunity, and the deal. The right combination, which is often manageable means a high-potential opportunity. A bad combination, or the lack of any single element, is a recipe for failure.”

 

References
     Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
     Crockett, Z. (2019, May 19). Shark Tank deep dive: A data analysis of all 10 seasons. Retrieved May 31, 2020, from https://thehustle.co/shark-tank-data-analysis-10-seasons/

 

25 thoughts on “Evaluating

  1. It is important to note that the investors on Shark Tank have pulled out of deals after the camera’s turn off because they still need to evaluate a little further and discover variables of concern. I believe most of the time that has to do more with the personnel than anything else. As Amos and Stevenson wrote in their book Winning Angles it’s better to invest in an exceptional leader with an unproven business than a ineffective leader with a blossoming business. I think the investors in Shark Tank realize the individuals they initially struck a “deal” with are what Amos and Stevenson call “Empire Builders” or “Lifestyle Entrepreneurs” and it can be difficult to get a return out of either.

    • Hi Jonathan,
      Thank you for the comment. I wasn’t aware that the sharks have previously pulled out of deals (although I suspect that it is in their contracts that they are able to do so should some issue arise with the initial deal). As our section mentions, there are at least 4 components to evaluating an investment, with the individuals associated being one of the key elements! While I definitely want to build an empire of successful businesses someday, I am more interested in them having “value” and would be just fine with exiting after the company has grown to a point where I am no longer needed.

    • Travis Wolfe-Schiestel says:

      Hey Jonathan,

      Thanks for sharing that fact! I wasn’t aware of that either, but it makes a lot of sense. To me, it seems nearly impossible to properly vet someone’s personality from a brief on-camera sales pitch. Any great salesperson can make a convincing pitch, but that doesn’t automatically translate into them also possessing adequate leadership skills. Of course, the reverse is also true. Someone can prove awful on-camera, yet in reality be a natural born leader who just got a little stage fright. I now find myself curious how many entrepreneurs on Shark Tank went on to find success despite being rejected.

  2. Tiffany, It seems as though most investors are “big picture thinkers” and look at the long term potential of a business. The team, plan, and market potential are what is primarily considered. Thank you for the link on the analytics of “Shark Tank.” I found it very interesting. Next week’s section is on valuation. The article stated that “Shark Tank” entrepreneurs are actually experiencing higher valuation since the show begin and as a result are giving up less equity. Great post!
    Best regards,
    Mike Weimar

  3. I enjoyed your comparison with “Shark Tank”. It seems that the show is a great example of all of the concepts presented in the book so far, boiled down to their essential forms. I’m going to need to go back and try to watch a few more of the episodes. For me, I really liked the section in the book that focused on giving the reasons behind your rejections. As you pointed out from the “Shark Tank”, many of the investors on that show do just that. They explain what they are thinking and take the time to let the entrepreneurs know the details about the potential deal that don’t work for them. This gives exceedingly valuable information to the entrepreneurs so that they have an opportunity to go back and revisit those areas that they may not have put as much thought into. From their, they can change things up and have a much better position for presenting other potential investors with a deal.

    • Hi Colby,
      Yes, I would agree, this book has lots of similarities to the show Shark Tank! I think feedback is definitely key as an entrepreneur. When you receive constructive criticism, you are able to go back to the drawing board and seemingly “repair” those areas that may need a little additional work. Once this is done, you can confidently approach your investors and hope for a change of heart!

  4. Tina Jones says:

    I am a fan of the Shark Tank. I love to see a pitch match up with the Shark with experience in the industry. As the book expresses in the rejection section, it is important for the entrepreneurs to take the advice of the Shark Tank even if they don’t get the deal. Many entrepreneurs come back on the show and end up getting an investment next time. Great post.

    Tina Jones

  5. Jake Martin says:

    Tiffany,
    I think you did a good job comparing “Shark Tank” to evaluating. The evaluation part is of course very important to striking the right deals because when it all comes down to it, a good deal should benefit both parties involved! If you don’t know how to evaluate a deal you could get abused as an entrepreneur. One situation like this is the McDonald brothers who sold their brand and franchise to Ray Kroc, at the time the brothers valued the deal because they needed the money but they didn’t realize just how much they got taken to the cleaners until they had negotiated the handshake deal with Kroc who understood the value of the brand name more than the true founders, the McDonald brothers.

    • Thank you Jake for your comment! I am not aware of the McDonald’s story but will certainly look into it. While capital is definitely paramount in any deal, it is essential for entrepreneurs to understand their worth and specifically the worth of their venture!

  6. Tiffnay,

    Referring to “Shark Tank” was fitting and helps drive home important elements of the evaluating stage of a deal. Another important sentiment to note is how imperative it is for entrepreneurs to have their plans fully vetted and laid out in a detailed manner when presenting to investors. Investors are busy people with many seeking their contribution. As such they do not have much time to waste. This is why I love the set up of the ENT courses. Entrepreneurs are give n the chance to not only learn from peers but also be vetted and given advice on how to make sure their ventures are a strong as can be. This creates a great network experience, but also strengthens confidence in the entrepreneur and their overall venture. This ultimately strengthens their chance in securing the sought after investment.
    Best,
    Shay

    • You know Shay, you are right. I am enjoying how these classes are set up as well. Being confident about your venture and the material you are putting out there is critical to the success of the business. More importantly, knowing how to “get down to business” is even more crucial since as you mentioned, many investors simply don’t have the time to waste.

  7. I really enjoyed how you used Shark Tank to compare with the Evaluating section. I have watched the show a few time, and it looks very intimidating.
    I agree with your closing paragraph about having all of the essential ingredients or elements to be successful. I believe that the people are the most important. Without the people, you have nothing. Also, you need to have all 4 ingredients or elements to have the perfect recipe. Even one bad ingredient can ruin your success. It reminds me of making the perfect spaghetti sauce. It’s almost done and someone adds a rotten tomato to it. One bad ingredient, or lack thereof, can ruin the whole sauce.

    • Yes, Rebecca! You definitely hit the nail on the head! As a “self-proclaimed” chef, I understand exactly what you’re referring to. As we’ve learned from various lessons, the individuals we intertwine with during our business ventures are key because they will literally be our “ingredients” to establishing and maintaining a successful organization! Just like ingredients for a recipe, they can help to make or break the business if we’re not cautious in our selection process.

  8. I love watching Shark Tank. It is always so inspiring for me to see people going for their goals…I have even seen stories of people who were turned down on the show go on and still have successful businesses. I like how it is beneficial for both parties, and I normally learn something in the process. We are the company we keep so it is important to surround ourselves with good coaches, friends, and supporters. Great work.

  9. Shannon Shepherd says:

    Tiffany,
    I am an avid follower of The Shark Tank. I absolutely love the suspense and drama from the pitch through the evaluation of the business. It also has taught me a lot about investing and how it works. Each shark already knows if they are willing to invest in the company or not. At the end of the day investments are made in ventures that align with interest of the shark. Great post!
    Best,
    Shannon

  10. I also related this section of the book to Shark Tank, I think that many of us would, I think that we also learned that evaluating a deal is more than just the numbers. Its probably a good think that many angels do not review much if any of the business plan. They look for the “feel good”.

    great post!

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