ENT640 Valuing Blog (Week 4 "Winning Angels The 7 Fundamentals of Early Stage Investing")
Updated: Aug 6, 2020
Valuing Blog Valuing are the only real numbers part of the angel investing process. Early-stage finance tools are used to eliminate or prioritize projects (Amis, 145). Chapters 21-27 were very difficult for me to process. So far this section was the shortest number of pages. It was not a fast read for me. It got kind of monotonous for me reading so many examples of formulas and all of the percentages with the ROIs (Return of Investments). I know it’s important for me to understand this. On a positive note, I have read ahead in the other sections and this book is beginning to be less intimidating. It is becoming easier for me to understand the vocabulary, investors, entrepreneurs, and the mathematics as a whole. I’m not sure if it is because I have gained knowledge over these chapters or not. Maybe these other sections are easier to read than the valuing section. I will keep on trying to stay positive and humble with this class. “In early-stage deals, valuation is about placing a price on a stake in a company, based on a future, potential capital return… Valuation is what you are willing to exchange for something else that you want.” (145) There are five approaches to valuation: 1. Quick and Easy 2. Academic/Investment banker 3. Professional Venture Capitalist 4. Compensated Advisor 5. Value Later Most successful angel investors use the quick and easy method. The quick and easy method is just that. It’s simple. It has a $5m limit, and takes the least amount of time. At the end of all five approaches listed, the approach we select from the list depends on our experience and preferences. “Anything beyond $5m limits your upside and may not make sense from a valuation standpoint.” (160). 4 levers of early-stage returns: 1. Whether you choose winners 2. How the deal is structured 3. The price you pay 4. How much dilution occurs (163-65). “If you can consistently earn above 30% across your portfolio, you will be succeeding like most of the best angels on the planet” (166). “Do you feel good about the numbers?” Go with instinct on the numbers. It’s important to keep great relationships with entrepreneurs in years to come for a successful future. Identify winners and stick with them. Tom Alberg invested in $100,000 in Amazon. The angel who referred the deal to him decided not to invest because the valuation was too high. I bet that person kicks himself in the foot every day. Sometimes you need to take the risk. Now the value of Tom Alberg’s stake at exit was $26 million when this book was written almost 20 years ago, and has only increased since then! This was 260 x his original investment (174).
Amis, David, and H. H. Stevenson. Winning Angels: The Seven Fundamentals of Early-stage Investing. London: Pearson Education, 2001.