Gust

NOVEMBER 2, 2011

We recently started a series of posts on establishing the pre-money valuation of pre-revenue startup companies for purposes of investment by seed and startup investors. He has invested in more than 70 startup ventures. Dave Berkus is a founding member of the Tech Coast Angels in Southern California, a lecturer and educator.

Valuation 79

Valuation Pre-Money Valuation Intellectual Property Southern California 79

Gust

AUGUST 10, 2014

Here are some basic rules of thumb that every Angel or venture capital equity investor uses, to help you anticipate their reactions. Aggressive revenue projections and growth rate. Revenue in the fifth year should be at least $20 million, with a growth rate average of 100% per year. Gross margins greater than 50%.

Liquidity Event 176

Liquidity Event Equity Venture Capital Merger 176

Gust

NOVEMBER 22, 2011

Angel investors typically provide early-stage funding, while venture capital firms typically come in at later stages. This is the realm of venture capital professional investors, with funding amounts of $1-10 million, often referred to as the “A-round,” or first institutional funding. Funding or rollout stage. Exit stage.

Venture Capital 171

Venture Capital Investment Bankers Angel Investor Initial Public Offering 171

Gust

NOVEMBER 15, 2011

The Risk Factor Summation Method the fifth methodology for estimating the pre-money valuation of pre-revenue companies we have described in recent posts. The Risk Factor Summation Method, described by the Ohio TechAngels, considers a much broader set of factors in determining the pre-money valuation of pre-revenue companies.

Valuation 102

Valuation Pre-Money Valuation Ohio Early Stage 102

Gust

OCTOBER 12, 2011

To provide some reference points, I surveyed thirteen angels groups in North American to determine their recent experience in negotiating the pre-money valuation of pre-revenue companies. See the 2010 data reported here: Current Pre-money Valuations of Pre-revenue Companies. Pre-money Valuation of Pre-revenue Companies.

Angel Groups 125

Angel Groups Valuation Pre-Money Valuation St. Louis 125

Gust

OCTOBER 20, 2011

Individual accredited investors in typical angel deals put personal capital at risk for an equity share of growth-oriented, start-up companies. In 2011, the valuation of pre-revenue, start-up companies is typically in the range of $1.5–$2.5 As can be seen the average (mean) pre-money valuation for recent pre-revenue deals is $2.1

Valuation 146

Valuation Pre-Money Valuation Intellectual Property Technical Review 146

Gust

SEPTEMBER 17, 2014

Me: So, you raised venture capital? Revenue multiple? On the phone …. We raised a seed round. About $1 million. Me: At what price? Him: It wasn’t priced. We raised a convertible note. Me: With a cap? Him: Yes, $8 million. So you did raise with a price. It’s just a maximum price. How will you price the next round? Your A round?

Liquidation Preference 153

Liquidation Preference Valuation Term Sheet Stock 153

Gust

DECEMBER 19, 2011

“We plan to offer it for free, and live off advertising revenue.” Free is a good short-term Internet strategy, if you have $50 million to spend on viral marketing to get your page-views up to the million per month needed for significant advertising revenue. Our patent will protect us.”

Viral 98

Viral Advertising Lead Investor Revenue 98

Gust

DECEMBER 23, 2011

So: think deeply about the nature of your competitive advantage, your basic revenue vs. expense model, and whether the perception of a well-funded venture is important or not. Then you’ll know whether you can safely bypass outside funding.

Intellectual Property 127

Intellectual Property Balance Sheet Dilution Bootstrapping 127

Gust

OCTOBER 18, 2011

You and your partner, with no startup experience, no revenues, no defensible intellectual property, and no prototypes are simply not going anywhere asking for half a million dollars at a five million dollar valuation. But, you can’t look investors straight in the eye with an absolutely preposterous opening offer on valuation.

Intellectual Property 124

Intellectual Property Valuation Partner Revenue 124

Gust

NOVEMBER 28, 2011

The most common solution is that you “bootstrap” your business, or fund it yourself, at least to the point that your “traction” is evident (you have a product, you have customers, you have revenue). Another alternative is to rely on that famous first tier of investors, called friends, family, and fools.

Startup 147

Startup Bootstrapping Social Network Internet 147

Gust

OCTOBER 21, 2011

This metric doesn’t have to be a sales or revenue figure, of course (although those are my personal favorites); but it does have to be something solid that shows you’ve got something people want. So long a way, in fact, that you’ll be expected to show very concrete results with it, proof that the business is really on its way.

Early Stage 79

Early Stage Metrics Audience Revenue 79

Gust

OCTOBER 12, 2011

To angels , prepayment defeats the entire purpose of making a convertible note investment in an early stage startup: A 6% or 10% return within a year or two isn’t worth the risk associated with making an unsecured, non-recourse loan to an unproven, development-stage company with little or no revenue.

Finance 107

Finance Term Sheet Pre-Money Valuation Early Stage 107

Gust

MAY 24, 2012

By contrast, venture capital and angel investments normally take the form of Preferred Stock with rights and preferences set forth in the company’s Certificate of Incorporation and other governance documents. Options and warrants, when issued, are also typically exercisable for shares of Common Stock.

IPO 159

IPO Equity Common Stock Stock 159

Gust

NOVEMBER 4, 2011

Although Intermix was doing well during that period, bringing in around $75 million annual revenue, all of the explosive traffic growth was occurring at one property, MySpace – the jewel for which FIM ended up acquiring the whole Intermix crown.

Valuation 98

Valuation Pre-Money Valuation Merger Vesting 98

Gust

JULY 1, 2012

These people are highly focused on investment areas they know, which have a large opportunity for growth, revenue projection of $20M or more in five years, and a high return that can be realized via an exit within five years. Early-stage these days means early customer revenue received, and early product in the market.

Angel Groups 143

Angel Groups Angel Investor Early Stage Startup 143

Gust

DECEMBER 12, 2011

OK, read the next two words slowly: generate revenue. Sorry, yes, I know how retro this sounds. The only folks who’ll be able to raise money will be those who have a rock solid, proven revenue model that they’re looking to grow. Worrying about revenues (or wolves) can slow you down. Ready for this profound truth?

IPO 70

IPO Social Network Revenue Aggregator 70