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.
It’s so true that with the passage of time and the competitive world we are in, it’s becoming very difficult finding people who would be willing to invest in your company. Thanks for highlighting the three important aspects one must keep in mind to improve the chances of finding them. Great post!
Training For Entrepreneurs.com
Thanks for the spreadsheet. Not many angels are that open about their investments.
I also thought it interesting that most of the companies had received previous funding. Is your friend more of what they call a “super angel”?
It was a generous offer which is why I wanted to share (with permission) as it is a great view into the mind of an Angel. I’m not sure he would consider himself a “Super Angel” but, as you see, he dedicates a lot of time and effort to this process.
Thanks for your comments…
Thanks for your comment, the spreadsheet if a great insight to how Angel investors will view your entrepreneurs’ company. Perhaps it is something you will incorporate into your courses.
Thanks for sharing the top 3 and indeed the spreadsheet. As someone who is toying with the idea of looking at investment to grow this year, this was a useful insight. Need to go away and do some more thinking!
Thanks! We are always looking for additional information to incorporate into our e-Learning courses. Your readers may want to download a copy of our Winter 2011 e-Course Catalog at:
Training For Entrepreneurs.com
Thank you so much for letting me peek behind the curtain. Great post.
I’m so very lost when it comes to all things, VC.
The Franchise King
In many investments that we have been involved with, the owner has not thought through the value of the company. Especially if a start-up, it may be unproven and yet they could be looking for say $200k, thinking to exchange 15% of equity. That is valuing the company at $1.3m before it has sold a bean.
The more that can be done to show that a start-up company will be successful by getting some early sales will put you in a better negotiation position.
What I hear very often from early stage investors is that the initial valuation is to high. The very best way to validate your company/product/service is with paying customers. The more the better and the bigger the valuation.
Thanks for your input…