Business Angels – how to seperate the best from the worst investments

Business Angel Bill Payne, who has advised over 4 business angel networks and deliver over 100 business angel investment seminars, has developed a scoring method to allow a business angel to assess the potential of different investments.

In this article, we take a look at the criteria Bill uses to judge the best from the worst.

Equally, using this scorecard, startup entrepreneurs can ensure that i. they focus on what business angels care about and ii. they structure their presentations and proposals to reflect those.

In essence, Bill is saying that entrepreneurs massively over value their technology and as a result under value the strength of the management team.

Here is how Bill suggests you score your potential business angel investment or startup

Bill Payne’s Angel Rating System

  • Management team – score out of 30%
  • Size of opportunity – score out of 25%
  • Product & Tech – score out of 15%
  • Sales Channel – score out of 10%
  • Competitive advantage – score out of 10%
  • Size of this round – score out of 5%
  • Need for more funding – score out of 5%
  • Total 100%

 

What does this score system tell us?

The Management team is twice as important as the product or tech – and this explains why very clever solo entrepreneurs with a great invention don’t get funded – because they don’t have a team.

Next, the size of the opportunity is critically important – far more important that the clever invention. Essentially, if demand is growing for your products and services, then you will probably make money with an average to good product. If demand is shrinking, you won’t make money even if you have an exceptional invention.

As an enterpreneur, you can demonstate the quality of your management team by showing that they understand that it is the opportunity that investors care about.

The product and Tech only scores 15% – it is the third most important factor – neither first nor second. Yes, it does count, but it is not the be-all and end-all.

Business Angels also care about other things; namely, does the business have a competitive advantage? To some extent this might be reflected in a technological advantage such as a patent or it might be because you are first to market or it might be because you are able to raise more money faster and grow bigger than your competitors.

Also, business angels do care about how you will get your products and services to market and will reward you with upto 10% score if you are able to demonstrate great sales skills on board or a great business partnership that can drive sales.

However, most angels realise that this can be added on after investment, and in fact, might be one of the reasons you are asking for investment anyway.

Lastly, business angels want to understand that you are both raising enough money to take you to the next stage and that  a future need for funding isn’t going to significantly reduce the value of their holding. Between these two points, you can pick up (or lose) a further 10%.

 

What if you disagree with Bill’s score system?

Okay, Bill allows that some people may disagree with the scoring or that some businesses should be assessed slightly differently.

In which case, Bill allows that you may add an addition bonus to the following…

  • Management team – bonus 10%
  • Size of opportunity – bonus 5%
  • Product & Tech – bonus 15%
  • Sales Channel – bonus 10%
  • Competitive advantage – bonus 10%

Okay, you can play with the numbers on a case by case basis. But here is the key point, management team and size of opportunity matter far more to business angels than most startup entrepreneurs allow. Which means that, your product / technology should never account for 95% of the value nor 95% of your pitch.

Business Angels have a vested interested to help entrepreneurs recognise this fact, but at the of the day, if they don’t see what they like, they don’t invest.

Entrepreneurs, its now over to you.  BUT WHATEVER YOU DO:  Don’t Make Product/Technology 95%

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