Evaluating my angel investments

A couple of weeks ago I posted a tweet I was working on my yearly evaluation of the dozen of startups I have invested in. This led to a lot of people asking me questions about the way I do this. Based on this I decided to try a summarize my process in a blog-post. Although I am not a professional investor and the jury is still out if I am any good in angel investing my beta format might be useful for other angel investors out there.

Let’s start with the super short version of my evaluation. That is a very simple question:

With the knowledge I have today would I do my investment again?

In a nutshell this tells the story. However as we all know life is not always black and white and Rome was not build in one day. Things can change and once you have committed to an investment I believe you should really try to help the team on their journey. Therefore it is important to dive into the details before drawing any conclusions. I use five criteria to do this. They partly overlap with the criteria I use to decide if I want to invest in a new startup but they are not the same (also because after a full year of investing I have more historical data available; the naked truth). I call my criteria the Big Five.

1). Execution vs plan

I always start my evaluation looking back at the objectives and the plan the team had at the start of the year. Their assumptions. Their targets. Have they been able to hit these targets? Maybe even out-perform them? Has the team been able to create that second home market? Create that self service product? Maybe the team needed to make big changes or even pivot during the year. Has that been successful or not? At the end of the day it is crucial that a startup is making progress. Moving in the right direction. Putting plans into reality. Do stuff. Making mistakes is okay but you need to learn fast. Launching valuable products, making customers happy, start generating revenue, gaining market share, improving their customer acquisition channels, etc.

2). Product

Since I invest solely in tech startups (preferably online marketplaces and/or SaaS companies) I focus a lot on the product. In my opinion this is the core. The foundation. Building an excellent product that users love. Real product-market fit. Therefore I focus a lot on product KPI’s. These can be the total number of (paying) users, conversions, retention/churn, NPS-score, etc. If you really want to scale up your start-up product KPI’s are super important. Comparing the changes in these KPI’s from the start of the year until the end of the year gives me important insights on how much stronger the foundation has become (or not).

3). Team

As we all know the team is super important. Especially with early stage startups (the category of companies I invest in). In my yearly evaluation I make a scan how the team performed and how they developed. On an individual level but also as a team. Have they grown? Did they develop the skills needed for the next phase? Are they in the right roles? Have new senior people been added to the company and/or have others left (and why!)? At the end of the day I ask myself the question if I believe the team is strong enough to deliver on the promise and built a high performing company. If not; we are in trouble.

4). Financials

Early stage startups need to balance between creating super valuable products (and bringing them to the market) while having enough fuel (= funding) to move forward. At the end of the year I also look at the financial situation. How is revenue developing? What is the quality of the revenue (I love recurring revenue!)? How are the costs of the startup developing? How much cash is left (or is the company already cash flow break-even)? How does the financial forecast for next year look (and does that match the Q3 and Q4 trend)? Based on this I also get a good view if and when new funding would be needed and how likely it is that this startup will raise funding (and not run out of money).

5). The market

A good evaluation is not only looking back in the mirror. It is also looking forward. Looking at progress and the direction in which the company is heading. That means I try to make up my mind about the developments in the market the startup is focussing on. Is this market still developing in the way we hoped it would? Are the developments that need to fuel our growth really happening? How is the competition doing? Can we beat them or are the beating us (and how)? It is also interesting to look at exits or investments in the space of the startups. Who is investing or buying? What are the valuations? etc. Based on this I try to come to a conclusion on how attractive the market is. Is our wave growing or are we in the wrong place?

Based on these 5 topics I make my evaluation. That evaluation leads to the 3–5 things I believe should happen next year for this startup in order to really become the big success we are all aiming for. Once this is done there is only one important thing left.

6). My added value

Evaluating my own role and added value is also part of my evaluation. Have I really tried to help this startup become a success? Did I spend enough time with them? Did we spend that time on the right topics? Did I do enough introductions (customers, investors, staff, press, etc.)? Have I been able to get my message across the table? This last point also makes clear to me how I can help moving forward into the new year!

As said before this is my process and my format. Feel free to use them but be aware there are many other examples out there. Probably even better than mine. If you are serious about angel investing I suggest you spent some time reading about this and create your own style and format and just start working with it (and improve along the way).

Happy angel investing!