As , the we continue to explore Winning Angels the 7 fundamentals of early stage investing, the authors introduce the next fundamental Evaluation. Evaluating is defined as sizing up the fundamental elements of an opportunity. The reading encourages you as an investor to do your own research and suggest using the Harvard Framework to do so.
To be honest I have not done any serious investing but when I read more about this model it was easy for me to relate it to purchasing my home. Buying a house was one of my biggest transactions or investments that I have made to date. The Harvard style of evaluation requires you to evaluate your investment opportunity based on four elements and how they connect or don’t connect. Some opportunities do not have all the elements which leads to a poor investment. The four elements required are People, Business Opportunity, Context, and the Deal. Now let’s look at these elements in actual business investment such as purchasing my home as I mentioned earlier.
People: The people involved in the deal were my Husband (also an investor), the bank, and our realtor.
Business Opportunity: When looking at my home as a starter home, one that can be sold eventually for a profit. I admired that it was in a growing town, came with land, and was located in a sought-after neighborhood.
Context: The market had shifted to a seller’s market, the school district that our home was in had a high rating, the size and number of bedrooms were what buyers were now looking for.
Deal: The appraised value of the home was much lower than the sale price. The seller offered concessions, and the bank offered reasonable terms.
I think if I would have evaluated using the Harvard framework at the beginning of my home search, I would have found my home much quicker based on the 4 elements.
Another portion of the evaluating section of the book that I found interesting was the rejection section. I think rejection scares me the most, not only saying no but being on the receiving end of the “no.” As I started to read the authors thoughts on the most effective way of rejection, friendly rejection, it became apparent investors have been using some of the tactics discussed for a long time. When I was in high school I was apart of the yearbook staff. Each year we had to go to local businesses and convince them to buy a yearbook advertisement to help offset the cost of the yearbook. Looking back, some of the businesses I approached definitely gave me a friendly rejection, a plumbing business sticks out in my memory.
He let me know up front he has been asked to purchase ad space in the past and he declined. He stated that he supported his children’s former high school exclusively which was not mine. He asked me to still pitch the deal and after hearing my pleas he was very supportive and offered constructive criticism. He acknowledged I had great eye contact but needed to appeal to the customer more and let them know how much exposure the business may gain by having their ad in the biggest high school yearbook in the county. He also referred me to a local hardware store that a buddy of his owned and this business owner was known to attend all of my high’s school sporting events. This turned out to be a great lead. I am thankful for this early experience with friendly rejection and as I see it now, evaluation.