Evaluating, the second fundamental of early stage investing, “is the time killer of all the stages” says Amis and Stevenson in Winning Angels. There is not one way to evaluate a deal and angel investors are as different as the deals they see. Some angel investors do a lot of due diligence before investing, some rely on their intuition, some rely on crunching lots of numbers, some work with other investors and some focus on the entrepreneur and its team. (Amis and Stevenson) Regardless of their approach to evaluating a deal, it is an important and ongoing step. In Winning Angels, Amis and Stevenson suggest that the angel investor should look at the following four elements: people, business opportunity, context, and the deal which make up the investment opportunity.
Much could be written about all the elements’ importance, but for this week my interest was sparked when reading about business opportunity and the business model. The business model is one of four sub elements within the business opportunity. (Amis and Stevenson)
A business model is defined as a way in which a company generates revenue and makes a profit from company operations. (Investopedia) It is much more than that and there are many business models out there. Here are some examples of different business models and associated companies you may be familiar with. (Muehlhausen)
Cheap Chic Target, Trader Joes, Ikea (inexpensive yet stylish products)
Bricks and Clicks Bestbuy.com (any company that also has a physical location)
Multilevel Marketing Isagenix, Amway, Avon (create a sales network out of one’s personal network)
Franchise Wendy’s, NBA, Nothing Bundt (opportunities for others to run an established business)
Subscription Model Lifetime Fitness, YMCA, or software as a service (Involves recurring revenue)
According to Amis and Stevenson, the business model distills down into a few words what the company does. For example, electronic retail store for books, obviously Amazon. (Amis and Stevenson) The business models above have been around for years and some of the most successful startups are the ones with new business models. Peter Cohan writes about three of the new business models which have certainly changed the way business is done.
- Hold a Reverse Auction: Buyers determine their price for a service and the seller accepts the price, but the buyer must agree to the seller’s terms. Think Priceline.
- Orchestrate Demand Aggregation: All the sellers and buyers are in the same virtual location. This gives both buyers and sellers lots of choices. Think eBay.
- Set up Person to Person Exchanges: Homes are used as options for travelers. Think Airbnb.
In the 7 Steps for Establishing the Right Business Model, Martin Zwilling gives the entrepreneur the steps for creating the right business model.
- Size the value of your solution in the target market: products too expensive will not work and prices too low could leave you exposed.
- Confirm that your product or service solves the problem: Do a test with real customers. Are they as excited as you? Listen to the feedback and make changes.
- Test your channel and support strategy: Pitch the whole business model to potential customers and include the pricing, marketing, distribution, and maintenance. Listen to the feedback, because at this point you can change direction easily without too much cost.
- Talk to industry experts and investors: The evaluation stage is a good time to talk to potential investors and industry experts. Again, their feedback can be critical and may produce connections for sales or distribution down the road.
- Plan and execute a pilot or local rollout: Set up a limited rollout in a certain store or city. This allows you to test the price and quality without too much exposure. Changes can still be made during the evaluation stage.
- Focus on collecting customer references: Ask those first few customers for testimonials which you can publish. If you are unable to garner their support, the business may not grow as big as you think.
- Target national trade shows and industry association groups. This is another way to expose the product(s) and business model. The feedback can validate what you are doing and may turn into a source for leads in the future.
Amis and Stevenson believe that a good business model can survive a bad business plan. The key is to have a model that clearly articulates how it will make money and why customers will buy from you.
During the evaluation stage the angel investor needs to be able to see that the entrepreneur knows which business model he or she is using or understands that a new model is being created. The entrepreneur needs to provide clarity when presenting the deal so that an angel investor who may not know the industry can still understand the intent from the business model.
Cohan, Peter S. “6 Great Business Models to Consider for a Startup.” Entrepreneur. Entrepreneur Media, 30 Apr. 2014. Web. 29 May 2017.
Staff, Investopedia. “Business Model.” Investopedia. Investopedia, 16 May 2015. Web. 29 May 2017.
Muehlhausen, Jim. “Examples of Business Models.” Dummies. Wiley, n.d. Web. 29 May 2017.
Zwilling, Martin. “7 Steps for Establishing the Right Business Model.” Entrepreneur. Entrepreneur Media, 30 Jan. 2015. Web. 29 May 2017.