In the early stages of deals, valuation is about placing a price on a stake in a company, based on a future, potential capital return (Amis & Stevenson, 2001). Of all the phases in the angel investing process, the valuation segment is the only one comprised of real numbers. There are finance tools used to help prioritize projects and ultimately is a shortcut tool for investors to make the process less time consuming. The valuation methods used by angel investors will vary based on their experience and preference. Five of the most common approaches used are: Quick and easy, Academic/investment banker, Professional venture capitalist, Compensated advisor, and Value later. Of these options, the most commonly used by angel investors is the quick and easy methods. In this method angels resolve challenges that arise in the early stage of investing: the lack of information, the high level of unpredictability, the need to move with relative speed, and the need to garner a significant share of the upside (Amis & Stevenson, 2001).
The time requirement and somewhat difficulty associated with valuation methods does not have a direct correlation to accuracy. As such there has been the implementation of the angel standard to make the process more sensible. The angel standard exists because most angels have realized that such a valuation, with the right deal structure, positions them to get a win (Amis & Stevenson, 2001). Ultimately, this allows angel investors to share in the, financial, success of a venture that they have provided capital for.
There are also four levers of financial returns in the early stage. Each of the following four levers must be “on” in order to ensure a win: choose winners, proper structure of the deal, the price paid, and the amount of dilution that occurs. These are important things to consider when risking capital in an early-stage deal. Value is subjective to each individual. Ultimately it is up to the investors to decide how much they are willing to risk against whatever odds may arise.
References:
Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
Art is Life's Paintbrush 
Hi Shayna,
Nice post! I enjoyed reading this section as I knew very little about how company’s seemingly calculate these figures. While some of the methods seem more practical than others, I noticed from the book that many seem to inflate the value of the organization which can lead to issues later down the line. My personal favorites were the Berkus method and the Pre-VC method. I liked how Berkus had a set formula for how he determined these valuations and moreso the idea that he has been doing this since 1993. Additionally, the Pre-VC method seemed like a fair way to assess the value of the business since it allows the entrepreneur and the investor the chance to work on the company and leave the valuation to a later date once the organization has been established.
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Hi Shayna,
Angel Investors seem to not put a lot of focus on valuing. As you mentioned in your post, the time commitment and difficulty placing value on the opportunity pushes them to look at some of the other components more so than the value of the deal. That was not what I was expecting when I read this chapter. Great post!
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Shay,
You brought up one of the concepts that I had a hard time grasping. Many investors use the quick and easy method of valuing on most proposals. I understand it takes money to make money, but the way that some of these investors just breeze through proposals and make decisions is something that seems so alien to me. The amount of knowledge that an investor would need in one business sector to make a snap decision of several millions of dollars must be vast.
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Shay,
It’s crazy how an investor can drop millions of dollars on one deal. I wonder at times do they even know what they are signing up for half the time? Maybe because I have lack of experience in investing is why its so shocking to me or because that amount of money in my hand is the more shocking part.
-Marie
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