Welcome again to my Blog! I will be continuing to use Amis’s and Stevenson’s (2001) suggestions regarding angel investing from their book, Winning angels: The seven fundamentals of early-stage investing. I will be sharing valuable information in this Blog from Amis and Stevenson (2001) about Valuing. Let’s get to it!
What is Valuing?
Amis and Stevenson (2001) state, “Valuation is what you are willing to exchange for something else that you want” (p. 145) and further state, “In early-stage deals, valuation is about placing a price on a stake in a company, based on a future, potential capital return” (p. 145).
How does one go about the valuation process?
According to Amis and Stevenson (2001) there are five ways of approaching valuing which include: the “quick and easy” way, the “academic/investment banker” way, the “professional venture capitalist” way, and “compensated advisor way”, and the value later way (p. 148). The quick and easy way includes several methods including the $5 million limit which is simply the rule to never invest in any venture with a valuation of over $5 million (Amis & Stevenson, 2001). Pretty simple really. The academic/investment banker way includes two methods of which the multiplier method is one (Aims & Stevenson, 2001). The multiplier method includes finding the standard within the industry of the selected product and comparing that standard to the potential product for investment. The professional venture capitalist way includes one way which is the venture capital method of calculating how much of a company one would need to own in order to be able to obtain returns financially (Aims & Stevenson, 2001). The compensated advisor way includes two methods with the Virtual CEO method as one of them. This means that the angel investor would also provide supports during the venture’s startup. The value later method includes two methods including the Pre-VC method (Aims & Stevenson, 2001). In the Pre-VC method, the angel investor provides capital without being provided with shares. As one can see from my brief discussion of different methods, there are many methods to go about the valuation process!
What do new entrepreneurs need to know and what can entrepreneurs do about about the valuation process?
According to Angel Round Evaluation, “Valuing your startup is one of the most important parts of seeking angel investments. Because startup companies generally do not have any revenue, correctly valuating these companies can be difficult…” (para 8). There are several ways that angel investors may compare your new venture with other existing companies. Some considerations include: evaluation of your team, evaluation of whether or not the opportunity exists for success in your chosen venture, product specifications, your competition, your marketing strategies, and what other investments your new venture may require (Angel Round Evaluation, 2019). Keeping these points in mind may help you find just the right angel investor to help you with your new venture. One key would be to be prepared in these areas so that your valuation is positive.
Check out the full article at the following link:
https://www.upcounsel.com/angel-round-valuation
References
Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
Angel Round Valuation | UpCounsel 2019. (n.d.). Retrieved May 22, 2019, from https://www.upcounsel.com/angel-round-valuation
Kay,
I enjoyed your post. After reading this chapter it was clear to see that there isn’t one way to invest when considering angel investing. What I did like (and didn’t at the same time) was that there was a solid idea of laying a foundation on what to expect when being in an entrepreneurs shoes. Amis & Stevenson were able to lay out what angels look for when investing, in case allowing the entrepreneur to understand their “selection process.” This in essence can be a benefit for an entrepreneur in that it can help them develop a company to the stage of being “worthy” for an angel investor, rather than to waste valuable time trying to sell their “unworthy” project that is not ready yet. I look forward to reading more of your posts!
Hi Kay,
I think you did a great job on your blog post. I like how you described each way to assess the value of a deal without getting too far into the weeds with each way. You provided enough information to understand but not be overwhelming.
I agree with Paul in how they lay the framework for entrepreneurs on what an angel is looking for. This information will be helpful when you get to that stage in the game.
Keep up the great work.
Best,
Dani
Kay,
I liked the breakdown of your post, it was effective given the significant amount of material to cover. After reading the 12 methods/approaches to valuing early stage investment deals, I was particularly drawn to the “Quick and Easy” approaches. I think the vast majority of winning investment deals will grow to a $2m-$10m range in approximately 5 years, so these methods seem most fitting. As you point out in your entrepreneur notes, planning is not only the key to business success, but also to a fair and appropriate valuation.
Great post!
-Jose F. Saavedra