A reflection on “Winning Angels: The 7 Fundamentals of early stage investing” by: David Amis and Howard Stevenson
If I were to ever decide to be a venture capitalist, I would predict this to be the most difficult part of the process for me. Since investing goes both ways (investor to entrepreneur and entrepreneur to investor), I better figure it out fast!
One of the main reasons I think valuing would be the most difficult part of the investment process for me is that I do not predict numbers based on behavior well. I think I need to tap into other areas of my life and determine how I make those predictions and figure out how to apply it to business valuing.
The reading, valuation section, identifies 12 methods of valuation. These methods are broken down further into sub-methods or approaches.
Quick and Easy
The five (5) methods of Quick and Easy are $5mil limit, Berkus method, Rule of thirds, $2m – $5m angel standard, and $2m – $5m internet standard.
Of the five I would most likely rule out Rule of Thirds first. It is my experience that the works or value added by all parties is not equal. Depending on the investment, one third stake may not be equitable for anyone other than the founders. Between the founders and the Venture Capitalist (VC) they hold the most risk in the business. The only reason I would say that the managers would get one third is if they managers with proven records of moving the needle.
The Berkus method had great measurements for how much to invest. Basically, the better the deal, the more the investment.
Last, I must be unsophisticated or lack the vision for significant progress because my eyes popped out of my head at the thought of asking for less than $2m as a bad thing!
The two (2) methods for academic/investment banker are multiplier and discounted cash flow.
These two methods didn’t seems as different as the examples provided by the different angels, but one seems to require more experience or intuition to calculate.
The multiplier method is similar to how I calculate how long it will take my staff to complete a project OR how many staff members I will need for a project or season. It’s fairly simple math. There are variables that have to be considered based on projects (or industries in the case of investment), but it can be a great way of completing valuation.
Professional Venture Capitalist
There is one (1) method and it made me thing of Shark Tank again. As a VC, there are financial goals that they are setting. Some may set annual goals, goals per investment, goals per industry, etc. To reach their goals, this method is critical! It is an easy way to combine the other method (Multiplier Method) to determine the percentage of the company to ask for.
I would presume needing to be a numbers person to get this method correct consistently.
I stated earlier that I am not really a gambler and I am not a numbers person, but I do work extremely hard. I know how to drive results. I supervisor of mine has attributed me to taking small ideas and producing big results.
The two (2) methods of the Compensated Advisor sound more “safe” to me, but can be unappealing if you are concerned with your time. Instead of trading money (your money) for stake in the business, you are trading time.
To me these two methods sounded like short term contracts that would serves as long-term residual income.
The last two (2) methods are the Pre-VC Method and O.H. Method. These methods are for confident investors that have money, money, money! They are less concerned with the valuation of the company, but that’s because they get more in the end (provided the company is successful).