Finding startup capital has never been easy, and has become a more significant challenge over the past few years. Home equity, once the most popular form of startup and working capital, has almost disappeared with the collapse of housing prices. Bank lending has been almost nonexistent for small companies, and private investors (friends and family) have kept a tight grip on their funds. Even angel investors and private equity firms have become much more conservative regarding valuations, deal structure and investment amounts.
All of this has contributed to the slowing of our economy over the past two years, but is now finally showing signs of rejuvenation. With angel investing expected to pick up slightly in 2011, here is a “look behind the curtain” to see how one very successful angel investment group tracks and considers its investments.
This spreadsheet shows seven actual investment positions (PDF) of an angel investor friend of mine–and here are three critical insights that will help you be more effective at attracting angel investment in the coming year.
1) Pre Money Valuation
This is the value of your company before the addition of the funds you are seeking. For example, company number 4 is seeking $500,000 (current raise amount) at a $2 million valuation. This means the company will have a value of $2.5 million after the investment, and the new investors will own 20 percent of the company’s value ($2.0 million + $500,000 investment = $2.5 million/$500,000 invested).
It is worth considering the company’s 2009 and 2010 revenue numbers and customer/partners to form a basis of comparison for the value of your company. Many angels tell me they will not even consider a new company with an initial valuation above $2 million, because such companies just do not exist.
2) Liquidation Preference
I covered this in an earlier post but investor preference is 1) almost always required, 2) flexible to fit almost any situation and 3) helps attract investors.
3) Market Perspective
It is always difficult for an entrepreneur to have a proper perspective on the marketplace, investment landscape or client reactions. Keep in mind that any angel investor (or even family/friend investor) is comparing your opportunity to other alternatives.
This spreadsheet, which gives you a peek at other company investments this angel has made, should serve as a measuring stick and allow you to see how valuable all your small successes are when building a successful company.
If you are building a company worth an angel investment, it has to be worth selling for a significant profit for you and your investors. Be sure you have a clear vision of how you will accomplish your exit plan and become a successful portfolio company if you are hunting for angel investment in 2011.