How Angel Groups Evaluate Deals

Friday, September 26, 2008

Don Jones, Always On, http://www.VentureDeal.com

Once you've created your summary or plan and submitted it to the angel group, the ball is in their court to make an initial evaluation.

One of the benefits of dealing with angel groups is that they usually have a process of evaluating the merits of an investment in your company. A typical initial evaluation process might be with a deal screening committee. Some angel groups have specialized deal screening committees for different sectors of the technology industry, such as general technology and life sciences.

Your summary or plan may be distributed to several group members for each of them to review and rate according to the angel group's system. Some angel groups have a formal, point-based rating system that includes comments. Others have a less formal system—something like a "thumbs up or down." Still other groups may have individual members who have expertise in your particular industry or application to review your information. Each group is different and may operate differently according to the particular situation.

The rating system usually includes things like: quality of management, status of product or service development, market size, scalability, technology, funding amount required and valuation expectations, if any.

Generally speaking, angel groups invest in technology companies in order to achieve certain meaningful milestones, so that the company can then obtain additional funding at a higher valuation to further propel them down the road to success. While every company is different, some common milestones are:

• Development completion of a beta test version of the company's
product or service
• Successful pilot test with a marquee reference customer
• For life science companies, initial proof of concept feedback
on a device or process
• Sourcing a well-regarded chief executive ready to join the effort upon further funding

The milestones must be both achievable and meaningful, so that the company is properly positioned to obtain funding from an institutional investor such as a venture capital firm. Funding amounts sought by startup companies should be enough to cover both the achievement of the milestones plus the time that it will take to obtain the next round of funding. Most often, entrepreneurs underestimate the amount of funding they need, given these two requirements. Also, an angel group may have a high opinion of your company, but decide that the parameters of your particular situation, such as higher funding amounts needed to achieve meaningful milestones, may not fit their criteria.

As for the various reasons why investors evaluate and invest in companies, entire books have been written about the subject. From a macro level, sophisticated investors want the answers to three main questions:

1. Why should I invest in this Technology?
2. Why is it important to invest Now?
3. Why should I invest in You?

There are many ways to answer these and the myriad other questions that investors may pose to you. For technology startup companies, answering these three questions in a compelling manner will take you far down the road to obtaining funding.

Lastly, since angel groups tend to review large numbers of deals, you should follow up with them according to their estimated turnaround time and not assume that they will contact you. If you pass the initial review, they will let you know what happens next. If you don't pass the review, ask for a reason why. Although some groups won't provide that information, some may do so, and you will be better off understanding why the group did not invest than just wondering why.

Don Jones is a member of a prominent angel group based in Silicon Valley, a veteran of three startups, and the founder and CEO of his fourth company: VentureDeal, a venture capital database serving the emerging technology industry.

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