Business Angel and startup evaluation: what do you watch?
The parameters analysed by the Business Angel to evaluate a startup
An interview with Fabio Pozzi to understand, from his experience, what are the main characteristics that a business angel looks for in a startup. What are the main questions an investor asks a startup founder? What is the standard material to present to an investor during and after a pitch? We will answer these questions by analyzing some of the most common clauses an investor is interested in.
Let’s meet Fabio Pozzi, Business angel and Startup Mentor!
Fabio Pozzi is a Business Angel and Startup Mentor, he has an engineering degree and an Executive MBA. Today he works for the ENAV group, and he is specialized in Business Development, CRM, Finance and Marketing strategies.
Hi Fabio, you are a Business Angel, what do you look for when you attend a startup pitch?
Thank you for this question. I attended several pitches, mainly from startups that can be considered in an early stage. What do I look for? A solid Team, vertical in what they propose but with a financial vision. Storytelling regarding the idea is particularly important, but numbers and the first metrics must be solid. Moreover, I usually appreciate concrete financial proposals to the investors. This makes me feel that the startup team and I share the same point of view. There are some startups that managed to surprise me in this sense, which means that the startup movement in Italy is definitely growing.
Which are the main metrics you ask for? And what about the team characteristics you look for?
I like those teams that try to monetize their idea immediately because it means that they are testing their business model on field from the very beginning. There are many startups that obtain their first customers fighting and communicating without having budget to invest in marketing strategies. If they manage to do that, although their metrics are still not consolidated, it means that they have an incredibly good starting point. It proves there is a market and people available to spend money for the proposed product or service. Traction is what I look for. I know that Cost of Acquisition and Lifetime Value are just estimations, which can be wrong for sure (or right in that specific moment and with those specific data) but it is important to start calculating them from the very beginning, even with just a few available data.
What about the financial plan? What do you expect from an early stage startup?
The startup and the team must always be ready to talk about their idea. They must have a pitch deck, i.e., a presentation with which they can present the product or service to the investors. It must contain basic information on how the product or service works, a minimum of UX, the product market fit, the team presentation, and the requested founding. It is remarkably interesting to insert the first metrics if available, financials, and a prospect of ROI (Return of Investment) for the business angel. This kind of information is exceedingly rare to find in an early stage startup, but I always appreciate it.
What kind of material should a startup provide to convince you to invest in their ideas?
First, an attractive pitch deck, as I already anticipated, and of course a detailed business plan of 30, maximum 40 pages. The pitch deck has the goal to attract the business angel to go further and start a sort of due diligence of the startup to analyse and estimate the main assets and the consistency and profitability of the business model. The business plan must describe the idea, the marketing mix, the business model, the financial aspects together with the team characteristics. The market must be analysed in detail and the competitors must be presented with their advantages and disadvantages. A SWOT analysis is always appreciated in that case. Above all, the UVP must be clear, i.e., the startup should explain what differentiates its product/service from the ones of the main competitors. Remember to consider direct and non-direct ones. At the beginning, always insert a strong, clear, and complete executive summary with the main highlights.
How to diversify the investments?
My goal is to have a well-diversified portfolio by considering different sectors and trends where I see a gap in the market. Currently, I am extremely interested in HR Tech, Healthcare, Gaming and Fintech. I like scouting new startups and talents and discussing about different sectors. There is always something to learn and study. I do several calls, and my brain is always moving, thinking, proposing, and then investing. My investing strategy is based on a good diversification of the total amount invested and I am always looking for that 10% of startups that have interesting rounds with big corporations or Venture Capitalists. Obviously, I do not invest in startups only. I like investments in general and when I invest, I wish to hold that company forever, whatever it is, a big American tech corporation or as a startup. It is a relationship that must endure, it is a meeting made up of synergies, empathy, and chemistry. I see myself first as an Advisor, then a Business Angel and finally as a companies’ owner.
Which are the main clauses that need to be included in a term sheet?
Very good question. I am not a lawyer but when you invest, you must do your homework. This means studying the main characteristics and clauses of a startup contract or the so-called Term Sheet. As a business angel, I like no dilution clause but of course I always have to find a compromise with the startup. Drag along and tag along are other typical clauses that you can find in a term sheet. I usually look for equity, but I’m starting to take into consideration also different formulas like PFI, which is strongly used in the US but still not so popular in Italy, maybe because most investors are looking for a fast return. Anyway, I want to remind that only those who have patience make money. It is not a 100m race, but a marathon, where the most patient, prepared, and resilient win. As I said, I prefer to be a partner, providing my suggestions from the behind the scenes.
Read also the other interview with Fabio Pozzi: Business Angel and Mentor: passion and skills to help startups
If you are interested in Business Angel, please read more on: Business Angel Networks: the main ones in Italy