I’ve frequently been asked by other angel investors whether or not I follow a specific framework, or scorecard, when evaluating opportunities.
After six years of angel investing (and 15+ years in the world of startups) much of my process has been internalized, but it does exist. I recently took some time to try and codify how I evaluate pre-seed/seed opportunities and created the scorecard below. I view my scorecard as a work-in-progress. Like the founders I back, I aim for strong convictions, loosely held. I have attributes and patterns I look for in deals, but I try to be flexible, knowing that sometimes patterns must be broken, or altered, based on new information and learnings.
My process for building conviction always starts with the founders. Early stage investing is about the qualitative over the quantitative. There is absolutely a founder mentality I gravitate toward: a combination of grit, confidence and instinct. In addition to personality I also look at background (i.e., technical skills, someone who can sell, etc) and the problem a founder has chosen. Specifically, I find the problem space being pursued speaks volumes about the individual. Ideally a chosen problem stems from some earned secret, meaning the founder, or team, has accrued non-obvious insights from first-hand experience with the problem. The problem itself should also be meaty: meaty problems are acute and have some barrier to entry. Finally the opportunity must be venture-sized (i.e., capable of producing a massive exit) and something I’m personally excited about.
Below I lay out the key criteria I use to evaluate investment opportunities. If you have feedback, please be in touch, I’m always looking to learn and improve.
Company One Liner: There is power in simplicity, so I like to distill each company to a one-liner
Reason for Allocation? I also like to gut-check myself on why I am receiving the allocation.
Scorecard: See definitions below
Exceptionalism: In each investment I look for one area that truly stands out as elite: in some cases it might have to do with design, others distribution, or an unfair founder advantage.
Investor-Fit: My ideal investment is one where I have investor-fit: value I can add from my network, experience, or otherwise?
At the earliest stages, it’s hard to argue for the team not being the most important aspect of a deal. While some argue the market matters the most, I believe a great team will navigate to a great market. When thinking about team, two areas specifically jump out to me:
The founding team should be ‘uniquely capable’ of solving the problem they are going after. This could be because the team sees a problem others do not. It could be that the founding team’s skillsets give them an immediate upper-hand. It could also be that founder has experienced this pain first-hand and thus is uniquely passionate (in some cases borderline obsessive about the customers and problem). There is power in simplicity and clarity of vision. When an opportunity has strong founder-problem fit it makes future fundraising much, much easier.
I look for a team who can iterate rapidly and ship product. Product does not necessarily mean code, but it means the founder is able to productize and/or creatively engineer solutions. Character traits I look for are resourcefulness and a strong bias to action. I love Paul Graham’s phrase "relentlessly resourceful”. Exceptional teams complement a high velocity of product iteration with equally strong communication (i.e., high EQ + ability to sell the vision).
All great startups solve a meaty problem. The problem is the core of the business case and the greater the problem, the greater the customer urgency (willingness to pay) for a solution.
Many of the most successful startups start with a secret: the team has a non-obvious insight serving as the foundation the company is built upon. Non-obvious insights are important because if the problem or solution is obvious, it’s a red flag. Obvious problems could mean low barriers to entry, crazy competition, or deceptively difficult to monetize spaces.
Acuteness refers to how painful the problem is to customers. Solutions that address painful problems sell themselves. In B2B SaaS, an acute problem is one where the customer is willing to pay in advance — assuming the founder delivers on the promised solution. Willingness to pay is typically a good gage as to the level of acuteness.
Execution is a broad term: it’s the output of the team’s ability to get shit done. It’s the “show me don’t tell me” piece of deal evaluation. To me execution relates as much (or more) to customer development and rate of learning as it does to coding. I look for signals of a team’s ability to turn customer feedback into actionable intelligence.
Evaluating product at pre-seed can be can be tricky because it’s easy to give it too much, or too little weight to the immediately visible. I have seen teams ship a ton of code quickly, yet fail to validate the problem and thus waster a lot of time. Personally, I like to see a working prototype at pre-seed, though for a great team, with significant rigor of thought to the customer, I may be okay with Figma mocks. If there is a product, I’m interested in the time-to-value I experience as a customer.
When I think about traction, I think about customers. What have the founders done to prove customers really want this product? At the earliest stages, the most valuable signals of traction may not yet exist (i.e., revenue). Absent of specific traction, I look for other “proxies” such as LOIs, testimonials or a handful of super passionate early design-partners.
The quality of market can be subjective, but it’s is one of the most important considerations. Even great teams will not survive building in a bad market. On the other hand a great market will give even a mediocre team superpowers. Great markets tend to “pull” products out of founders.
There are three reasons to be aiming for huge returns as an angels. First, the magnitude of your returns matters within the context of portfolio construction. Having one major home run can make up for a lot of other companies going to zero. Second, institutional follow-on investors need to invest in companies that can return the fund+. Third, angels typically own a small piece of the pie, so you want the pie as big as possible to make the return material to you.
Great markets typically have a strong “why now?” The why now might be a specific trend, or technology inflection that serves as a true catalyst. When people talk about venture-scale markets, they tend to think of billion dollar TAMs. However, many of the best markets are non-obvious: they look niche, but are expanding rapidly, and ultimately become huge. When a great market meets a great solution, you get strong market pull. As an example, the iPhone + GPS enabled products like Uber/Lyft to create entirely new markets with massive TAMs. Note: Marc Andreessen has a seminal piece on the importance of markets here.
Deal dynamics is an encompassing terms meant to take into consideration the price, terms, co-investors and general vibe of a deal. Most deals at the pre-seed / seed stage use standard terms dictated by the founders like SAFEs, or convertible notes. There are pluses and minuses to each structure, but either format can work. I prefer deals with pro rata given to the investors (even with smaller checks), but I would not pass on a great deal due to lack of pro rata.
Entry price matters. The difference between investing in a company at a $5m valuation vs. $25 is a 5x order of magnitude. When looking at deals you want to get a sense for how much you are paying based on the progress, or, the strength of the “reasons to believe”. For most pre-seed deals anything above $12m is getting into rarified air (a.k.a., expensive) and therefore the investor should feel the premium is justified.
As an angel, you should never be the only investor in a round. There are many reasons to seek co-investors, but an obvious one is the more investors, the more runway. Co-investors also provide you with more confidence in the form of additional data points and signal. Keep in mind, not all co-investors are equal. Ideally a round should have legible investors participating. Legibility helps give credence (co-sign) to the founders and their vision. A great investor syndicate paired with a great team is fundraising bliss. Legible investors can act like a gravitational force helping create momentum and draw others (investors, customers, employees) into the founder’s orbit.