Startup Investment Criterion for Angel Investors—the Game and How it is Played?
With the mushrooming growth of startups globally it becomes more and more confusing for the angel investors to invest subtly in a firm. Most of them are desire for an established criterion to find intelligent investments. There are many questions that arise in their minds including the ways in which the enterprise they invest is going to reap profit and also the scalability of the firm.
What Entrepreneurs Can Think in Terms of Startup Investments?
Entrepreneurs are therefore, liable for answering all such important questions raised by their investors. A successful evaluation of an enterprise provides you a transparent vision of the success and failure of your shares. The ‘Business Model Canvas’ by Alexander Osterwalder is taken as the reference by many entrepreneurs and investors for developing and evaluating business models.
Calibrating Business Models
- The analysis of the success of an enterprise can be done by calibrating their business models. A good business model incorporates the complete business strategy of the company. Different companies employ different strategies and they alter according to the business they take on. It includes company’s definition of its products and markets, their tactics in finding and retaining their customers and also their entrance to the market.
Business models also include the company’s strength in tackling their resources along with attaining a decent profit. Business models of startups are even more daunting as they are on the process of building a business model with their experimentation in the market. The business model will be evolved only after their successful testing
Brigitte Baumann Speaks on Startup Investments by Angel Investors
- Founder and CEO of international angel investor group ‘Go Beyond Investing’ and 2014 European Business Angel of the Year; Brigitte Baumann gives tested criterion for evaluating a business model on an economic approach. Baumann follows definite steps for the analysis and it starts with the division of information in to four blocks based on their economics.
- These include unit economics in which the information of the selling price of the product and the cost required is carefully noted. The second division is customer economics by which the investor checks on the company’s ability in acquisition,retention and support of the customer. The third one is market economics which concludes the firm’s ability in creating a buzz around the market and also attracting the customer to resort to their products. The last one is business economics which shows the development the company achieved like that of the additional offices opened for handling the financial data. These divisions help the entrepreneur to draw a clear idea about the funds it needs to become self-sustaining. It also helps the firm to establish financial goals. The belief of the investor could be made strong only if the entrepreneur has a thorough knowledge and belief in their business models. As Baumann puts it “The entrepreneurial team should all ‘live’ the model. They touch it every single day in every action that they do.”
The Perspective of Angel Investments in Startups There are mainly two measures adopted by the investors in understanding an enterprise’s growth. These two perspectives are-
- Break Even Point
The key indicator, which denotes the company’s chance of survival, is its scalability. It shows the firm’s capacity to acquire a valuable business and profit with minimal capital. When an angel meets an entrepreneur he should have ability to calculate the firm’s estimate of profit. The breakeven point is the definite point in which the company requires no more capital from outside. It’s the maximum point of self sustainability and financial security.
- It is the duty of every angel investors to understand the scalability of the enterprise they invest in. they need to comprehend the revenue growth plan of the company’s economics. They need to investigate about the company’s revenue and their costs.
- The angel investors need to visualize the company’s position in their road to the breakeven point. The funding they require to touch that sustainability. It is also the duty of the angels to have a diligent check on the resources the firm needs to attain scalability and also the report of the milestone they accomplish in each round.
- The angel investors must also make sure that the enterprise has got clear planning on the costs involved with the acquisition, retaining and support offered for the customers on a lifetime basis.
The companies on the other hand, must keep a transparent record of the market economics including their potential market and their competitors. These days it is much easier to acquire data on the company’s rivals on the market. This would also help the angels in having a better understanding of the success rate. It could be concluded that an angel investor for a startup must have precise comprehension about the company before getting in to the financial aspects of the investment. They should try to understand the business model and their strength to obtain an unbreakable position in the market. The investors must also concentrate on building up a market plan if the firm lacks one. It’s quite hard for an angel investor to survive in this field without the ability to evaluate a business model diligently.