How Do Investors Value A Transaction?

Angel investors were asked to rank the following factors on a scale of 1 through 9, 9 being the most important factor, 1 being the least important:

Return on Investment

Quality of management

Stage of development of the company

Proprietary product

Size of market

Growth potential

Competition

Barriers to entry

Industry the company is in

Other please specify

Entrepreneurs were asked to rank how they thought angels would rank the factors. Venture Capitalists were also asked to rank the factors in importance when they make an investment.

Factors          Angels    Entrepreneurs   Venture Capitalist

                   Pts  Rank    Pts   Rank       Pts    Rank

Quality of management         7.1    1   5.5    1         5.4     1


Growth potential   4.7    2   5.4    2         4.2     4

Barriers to
competitive entry  4.2    5   5.4    2         4.1     7


ROI               3.9    7   5.3    4         4.2     4


Competition        4.0    6   5.3    4         4.2     4


Proprietary
(unique)product    4.4    3   5.1    6         4.4     3


Size of market     4.3    4   5.1    6         4.6     2


Stage of company development
   3.7    9     5.1    6         3.8     8


Industry    3.8    8   4.9    9         3.6     9

Not surprisingly Quality of Management was the number one
factor for angels, entrepreneurs and venture capitalists.  Stage of Development, and Industry are ranked in last place by all three as well.  Growth Potential is ranked second by angels and entrepreneurs, and ties for fourth place with Competition and ROI in the VC rankings.  Product is ranked third by both angels and venture capitalists, but in sixth place by entrepreneurs.

Entrepreneurs had very little variation in rank from the top factor to the bottom, only six tenths of one point comprises the difference in the average rank from the top factor to the last place factor. The range for angels is 3.3 points.  Entrepreneurs considered Quality of Management the top factor but not by much. With each of the factors, a significant number of entrepreneurs said it was most important, and a significant number said it was
the least. Even in the case of Quality of Management, roughly 40% of the entrepreneurs ranked it 9 or 8, and 30% ranked it 1 or 2 in importance.  Well over half of the Angels rated management as the most important factor; 60% gave it a 9 or 8 and only 10% gave it a 1or 2 in importance.

The data showed that many entrepreneurs just aren't sure what factors are most important.  Many of them gave all the factors a 6 or 7, for example.

The fact that entrepreneurs, who sometimes are accused of being too much in love with their product, ranked product uniqueness lower than other key factors, was a positive thing to see.

How alike are angels and venture capitalists?

Factors            Angels           Venture Capitalists
                    Pts    Rank           Pts    Rank

Quality of
management           7.1     1            5.4     1


Growth potential     4.7     2                 4.2     4


Proprietary
(unique) product     4.4     3                 4.4     3


Size of market     4.3     4            4.6     2


Barriers to
competitive entry    4.2     5            4.1     7


Competition          4.0     6            4.2     4


ROI            3.9     7            4.2     4


Industry the
company is in     3.8     8            3.6     9


Stage of development
of the company     3.7     9            3.8     8

The top four factors for angels, Quality of Management, Growth Potential, Product and Size of the Market are also the top four factors for venture capitalists. Two of those factors have the same ranking, Quality of Management and Product.   The last two factors are also ranked the last two by VCs.  VCs ranked Growth potential, Competition and ROI in fourth place while angels ranked them second, sixth and seventh respectively.  Angels have a variance of 3.3 points while VCs a variance of 1.6.  It seems VCs don't differentiate as much as angels do.

Management is given a higher average point score by angels than by venture capitalists.  Since angels invest earlier it may be that the management team is even more important to angels than VCs.

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