Physician, psychologist, and author Edward de Bono conceived of the Six Thinking Hats and describes how it works in his 1985 book of the same name. In this exercise, participants “put on” six different metaphorical hats that each represent a certain type of thinking.

In startup investing, evaluating a business is often complex, requiring a structured approach to capture all facets of a venture's potential. The Six Thinking Hats method offers a useful way to analyze a startup from different angles. By considering six perspectives, investors can gain insights, spot risks, and connect better with founders. Here’s how to use the Six Thinking Hats for startup evaluation. Here’s how to use the Six Thinking Hats for startup evaluation.

1. White Hat - Objective Data and Facts

• What it covers: This is the “data-driven” hat that focuses on facts, figures, and data without judgment or interpretation. Under the White Hat, investors should review the startup’s financials, market data, historical performance, and other hard metrics.

o   What are the key financial metrics?  Analyze revenue, profit margins, and cash flow numbers today and projections.

o   How big is the market? Look for data on market size, growth rates, and customer demographics.

o   What is the competitive landscape? Identify main competitors and their market share, strengths, and weaknesses.

2. Red Hat - Emotions and Instincts

• What it covers: This hat represents intuition, gut feelings, and emotional responses. Here, investors consider their own subjective reactions to the team, the product, and the founder’s vision.

o   What is my gut feeling about the founder's passion and commitment? Reflect on the founder's enthusiasm and dedication to the project.

o   What emotional responses does this deal evoke in our investment team? Gather initial reactions from team members to gauge overall sentiment.

3. Black Hat - Risks and Critical Thinking

• What it covers: The Black Hat is used for critical judgment, focusing on identifying potential weaknesses, risks, and downsides. This is essential for making informed decisions.

o   What are the potential risks associated with this investment? Identify operational, financial, or market-related risks.

o   Are there any weaknesses in the business model or execution plan? Critically assess any flaws or gaps in the proposed strategy.

o   What external factors could negatively impact this venture? Consider regulatory changes, economic downturns, or shifts in consumer behavior.

4. Yellow Hat - Optimism and Potential

• What it covers: This hat encourages focusing on the startup’s positive aspects and potential for growth, profits, and impact. Here, the evaluator looks at best-case scenarios and upside opportunities.

o   In a blue-sky scenario, how big can this be? Assess whether the business is positioned to benefit from emerging trends.

o   What are the key strengths of this business opportunity? Highlight unique selling propositions and competitive advantages.

5. Green Hat - Creativity and Opportunities

• What it covers: The Green Hat is for creative thinking and innovation. This perspective allows evaluators to explore new ideas, potential pivots, or growth opportunities.

o   How can we differentiate this venture from competitors? Discuss unique strategies that could set this business apart in the marketplace.

o   Are there alternative markets or customer segments to target? Identify potential new audiences that could be addressed.

6. Blue Hat - Process and Control

• What it covers: This is the “managerial” hat, focusing on process, planning, and structure. It ensures that the other hats are used effectively and brings all perspectives together.

o   How will we summarize findings from each hat's perspective? Plan how to compile insights from all points raised above.

o   What are the next steps after this evaluation? Outline follow-up actions based on insights gained from the analysis.

Conclusion

Utilizing the Six Thinking Hats method enables investors to evaluate startups more effectively. This technique encourages a comprehensive examination of each startup by considering various perspectives, ultimately working to reduce bias. By applying each hat, investors can balance their optimism with caution, combining their intuition with data. This flexible framework uncovers important insights, clarifies decision-making, and improves collaboration with startup teams.

Resources:

https://www.debonogroup.com/services/core-programs/six-thinking-hats/

https://www.atlassian.com/blog/productivity/six-thinking-hats