On Target
The importance of clear investment criteria when screening angel network applicants
Happy 4th!
I hope everyone had a happy & safe 4th of July yesterday. Dani and I hosted some friends for BBQ (I love a good reason to break out the Traeger), so I’ll be spending the day recovering from one-too-many smoked pork ribs.
Now, on to today’s discussion…
Objectives
What are your objectives?
Earlier this year, I took the Series 65 Uniform Investment Adviser Law Exam. I learned a lot during the process, but one thing stood out this week as I reflected: recommending any investment without first understanding the client’s objectives is a bad idea. I studied case after case of differing client backgrounds and objectives, and the best investment strategy looked a bit different for each one. Is the client saving for a large purchase like a home? Is the client looking to put extra income to work? Are they seeking to preserve capital as they approach the end of their life?
Understanding what someone is trying to accomplish with their investment is essential to providing an effective recommendation. In the same way, understanding the objectives of an early-stage investment community is essential to understanding which opportunities may be a good fit.
Today we’ll consider the first supporting job within the Evaluate stage of Angel Ops: Screen Candidates. But first, let’s talk about a simple but powerful tool: the investment thesis.
What is an investment thesis?
According to Investopedia, an investment thesis is “… an argument for a particular investment strategy, backed up by research and analysis.” It’s essentially a hypothesis or belief that drives the organization’s investment decisions and serves as a core part of the firm’s overall strategy. It is common for VC firms to work from a published thesis, which helps orient both founders and staff around what is and is not of interest. In many cases, it can be specific to the company stage, geography, industry, or other factors of interest.
The point is, the thesis defines what the firm is trying to accomplish through the investment decisions it makes.
Let’s look at a few examples (emphasis mine).
Some examples
Union Square Ventures: “USV backs trusted brands that broaden access to knowledge, capital, and well-being by leveraging networks, platforms, and protocols.” (Source)
Andreessen Horowitz: “We invest in seed to venture to late-stage technology companies, across bio + healthcare, consumer, crypto, enterprise, fintech, games, and companies building toward American dynamism.” (Source)
Pioneer Square Labs: “We invest in founders with passion and heart, building tech-driven, industry-shaping businesses all over the Pacific Northwest. Most of us are founders who have built market-defining companies ourselves. We are addicted to helping other exceptional founders do the same.” (Source)
Do angel networks have a thesis?
Sometimes.
However, in my experience, it’s not usually made explicit. Since most angel networks are composed of many members who make their own investment decisions, it’s very difficult for a network to formalize a specific unified thesis. If there is a thesis, it tends to center around whatever the network’s unifying factor or cause is.
For example, a network affiliated with a university is likely to prefer to invest in deals with founders who are alumni. Geographically focused networks are likely to prefer deals in their region. Impact-driven networks are likely to prefer deals aligned with their specific impact goals. And so on.
Discovery
Having seen under the hood of this ecosystem over the last few years, I’ve realized that network operators are on a constant journey of discovery. Since the function of the network is to close deals, operators are highly attuned to what kinds of deals tend to close. What industries do their members like? What stage tends to receive the most interest? What other factors tend to contribute to member interest in a deal?
Both membership and market conditions change over time, so successful operators are vigilant about asking these kinds of questions and tracking what does and does not resonate over time. Whether or not it’s formalized, these leaders tend to operate with a functional “thesis” that helps them quickly identify which deals are or are not of interest to their members.
That’s where the first step in the Evaluation process comes in: Screening Candidates.
Supporting job #4: Screen Candidates
As a quick refresher, Angel Ops, which I introduced in this post, seeks to map an answer to the following question: What does the process at a world-class angel network look like? Angel Ops is focused on the backend process of running deals and groups the workflow into 5 core steps. In last week’s article, I introduced the second step, Evaluate. The objective of this phase is to identify which deals are a good fit for the network, which culminates in an invitation to present to network members.
Evaluate
Job: Identify which deals are a good fit for the network.
Progressive Outcome (PO): Invite - The best applicants are invited to present.
Within each core step, there are 3 “supporting” jobs-to-be-done that contribute to the primary job. This week, we’ll dive into the first supporting job within the second step: Screen Candidates.
In or out?
Last week, I discussed a sample angel network that received 1,200 applications per year and could only say yes to 24 of them. How does a group filter through this onslaught of applications on a regular basis?
The first step is to screen out any deals that are clearly not a fit. This task is often performed by some combination of network leaders, volunteers, students, or digital tools. After that’s done, the surviving applicants progress a level deeper into the evaluation stage, which we’ll discuss next week. Ok, but how do they filter out poor fits?
By comparing the applicant’s information against the organization’s investment thesis or investment criteria. The clearer/firmer these criteria are, the simpler the job becomes. Anything outside of those lines is eliminated from consideration, and anything inside the lines moves forward.
What are some examples of common filtration criteria?
Filters
Here are a few filtration categories to consider as an example, though this list is by no means exhaustive:
Location (Ex: “We only consider companies headquartered in the US.”)
Stage (Ex: “We only consider post-revenue companies.”)
Valuation (Ex: “We only consider deals with a post-money valuation between $5-$8M.”)
Industry (Ex: “We exclusively consider software companies.”)
Business Model (Ex: “We only consider B2B opportunities.”)
Structure (Ex: “We only consider companies structured as a Delaware C Corp.”)
Vehicle (Ex: “We only consider opportunities to invest via priced round.”)
Market (Ex: “We will not consider a deal if the TAM is less than $1 billion.”)
Incomplete/Unclear (Ex: “We will not consider an incomplete or unclear application.”)
Distinctiveness (Ex: “We will not consider an opportunity with no clear differentiator/distinctive/competitive advantage.”)
Missing Core Feature (Ex: “We will not consider an opportunity that does not include a feature that delivers specific and measurable climate impact.”)
Similar to the task of determining a network’s approach to managing inbound interest, network operators must also choose how firm to be on these criteria. The approach is likely to evolve with the membership over time, but taking the time to formalize a specific set of screening criteria is an excellent first step for a new network to consider. For more established networks, regularly reviewing recent investment trends and re-mapping screening criteria to align with the features of closed deals can be a worthwhile exercise.
Closing thoughts
Screening Candidates is a pivotal step in the Evaluation process for an angel network. Whether or not the group operates with a formal investment thesis like many VCs, this job must still be done. Clear and well-defined criteria based on factors like location, stage, valuation, industry, and others are a must, as they help determine which opportunities are a good fit and which ones are not. These criteria can and should be refined over time, as they ultimately help an operator maximize the network’s value to both founders and investors.
What do you think?
How does your network handle the job of Screening Candidates? Who owns the job, and what criteria do they typically use to make those decisions? Does your group perform a regular review and refresh of screening criteria?
Weekly Observations: 3 Lessons Learned
Clients don’t need to like you to be happy with you.🙂
On Thursday we (finally) got our AC up and running. However, the process of getting there was pretty stressful since we needed a major replacement. I contacted a half dozen contractors to compare options (I do run a diligence company after all), and every one of them was professional, helpful, polite, and had the capacity to get us up and running within 24hr. Except one. One local contractor was a bit more challenging to work with. He wasn’t in a rush to get back to me. He was borderline rude over the phone. His lead times were longer than the others. But his pricing was reasonable, and he took the time to explain to me, in detail, why I did not need the “full system replacement” that all the others were pushing me towards. This 50-something HVAC pro was downright unpleasant, but guess who I decided to trust with my family’s home? Lesson learned: clients don’t have to like you, they just need to trust you. (If anyone with property in the Brazos Valley needs an HVAC referral, let me know!)
A sample’s worth a thousand words. 📃
This week I spent some time consolidating representative samples of a few types of diligence reports we’ve created so far. A recent acquaintance, who I’ve had the pleasure of speaking with on a few occasions now, asked for these off-hand following our latest meeting. Within 1 business day of sharing, I found myself on an impromptu video call with him answering a barrage of questions and excitedly ideating together on what future collaboration might look like. Lesson learned: samples are super helpful for bringing things down to earth.
Talking to customers about your thing is a really good idea. 📞
We’ve been ideating for weeks on a stripped-down version of our Premium Pitch Report (a 6-page overview of a startup’s market, traction, opportunity, and team, generally most useful during Stage 3 - Engage). We had developed a decent prototype of what we thought would be compelling and were pretty confident about it. This week we (finally) showed it to a client. Guess what? They gave us incredibly helpful feedback and I spent most of Friday totally reworking the product. Lesson learned: talk to customers early and often.
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where we help angel networks conduct efficient and collaborative diligence. I'm a proud husband, aspiring father, and grateful friend. My love languages include brisket, bourbon, and espresso.
About PitchFact
PitchFact helps angel networks conduct efficient and collaborative diligence.
Learn more at pitchfact.com.