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.”
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/