Angel Investment Journal – Angel Investing and Entrepreneur Blog

Valuation for an Exit

Posted in Acquisitions by angel on the January 31st, 2007

I have had experience in selling a company, but even after going through that experience, the only thing I learned about valuations is that they are very difficult to determine. There may be formulas out there that are based on industries, but it still widely varied depending on the deal.

One reason is because value is largely based on what it is worth to each party. If you are selling a company because you have a large motivation to get out of the business (for example, you met a hot, young Brazilian that wants you to move to South America with her) and only have one interested party, it is unlikely it will be valued as highly as if the owner is not motivated to leave the company, but there are 3 other companies bidding to buy it.

Another reason is that there are so many factors in determining value that it is not possible to weigh all factors as the same between two companies, even if they are in the exact same business. For example, Company A and Company B could have the same number of customers, revenue, and profits. But maybe Company A has had it’s customers for 20 years and has relied on them for all of their revenue whereas Company B just started 2 years ago. Company B may be worth more since it has much higher growth, but maybe Company A because it is much more stable. Regardless, it is not possible to value them the same with just a simple formula.

There are some things that can help you determine estimated values, which is nice because even coming up with an estimate is difficult. I just spoke with Jay at GrowThink and he explained one of those concepts. He said if you have a smaller company, with profits below 7 figures, it is likely considered a lifestyle business. This is the type of business someone would run in order to make a living. These companies would generally sell between 2-3 times earnings. Whereas a company with 7+ figures earnings is likely to be valued much higher since investors would be interested in this type of company. These companies could be valued between 6-8 times earnings.

“The larger the company, the higher the multiple”

Again, this cannot be categorically applied to all business and industries, but it is a general concept on where to start. Yet many companies sell that have negative cash flow. As you have seen from many acquisitions, companies that are losing money are selling for millions and even billions. These companies are valued based on future expectations of growth and additional forms of monetization.

I expect to post (probably multiple times) in the near future about valuations for a company when related to getting funding, which is a totally different ballgame.

VC Turning to Seed Capital

Posted in Funding/Investing by angel on the January 29th, 2007

Business 2.0 has a brief write-up about how some VC firms are doing seed stage funding and, in turn, investing smaller amounts of money compared to their usual investments of millions of dollars.

The article is not entirely accurate in that many VC firms do early stage investments. It is correct in that they generally stay away from the seed stage since so little money is required. According to the VC’s, it is not usually worth their time to invest in companies that are not looking to raise at least a million dollars or more (and most like to stay above the $3 million range). They have so much money to invest, it is not worth the time to do due diligence and the other work required to make an investment or else thye would never be able to invest their entire portfolio.

The article mentions how Y Incubator is investing amounts of $15,000-$20,000 and is focused on software companies. In exchange, they expect anywhere from 2-6% of your company, so don’t expect to get funding from them if you value your company at a million or more. Thsi is true seed stage funding.

First Round Capital is also mentioned even though they are not focused exclusively on seed stage investments. They invest in all types of early-stage funding and are interested in investing $100,000 and more.

Finally, Charles River Ventures is mentioned since they provide companies with a debt option, meaning the company does not give up equity. They offer a loan between $100,000 and $500,000. For this, the debt will be converted into equity at the first round of funding. But the equity options means you do not need to negotiate valuation at this point. This is a fairly interesting strategy since a lot of VC’s have to compete to get in on the first round of some very promising companies. Michael Arrington talked about Charles River Ventures back in November and expanded on what they do. He explains that the debt is converted into equity at a discount to what the first round of investors are paying.

Bubble 2.0?

Posted in Web by angel on the January 25th, 2007

The last post talked about some Podcasts for Entrepreneurs and Angel/VC investors. David Hornik, who does VentureCast, was featured in an article in the Wall Street Journal on whether or not we are in a Web 2.0 bubble. He faced off against Todd Dagres in the article and the two discussed whether or not we are in Bubble 2.0.

In his recent podcast, David talks about the interview and makes some additional points. I found it to be an interesting article and you can check it out here.

Seeing Web 2.0 companies selling for hundreds of millions and even billions of dollars does have many people wondering whether or not we could be coming close to a bubble. Dagres claims that many Web 2.0 companies are overvalued and feels there is too much Private Equity in the market, which helps inflate the valuations. One reason for claiming these companies are overvalued is because many have high valuations while not even being cash flow positive.

Hornik disagrees and states that there are plenty of Web 2.0 companies that are cash flow positive. He also syays he feels there are a lot of great ideas out there.

Even though they differ on whether or not the markets are overvalued, both agree that what makes markets thrive and the likelihood of success for any company is the quality of the people, and most importantly, the entrepreneur. This is the same thing I alluded to in another post. Great people are more important than great ideas.

Angel Investor and Entrepreneur PodCasts

Posted in Resources by angel on the January 25th, 2007

This blog is focused on Angel investment’s, but I have not found any podcasts on the topic. There are some great podcasts related to small businesses and entrepreneurs and even one focused on Venture Capital. Since many things related to VC’s are also related to Angels, I enjoy that one quite a bit. Here is a list of podcasts I recommend:

Venture Voice is a great podcast about entrepreneurs. My only complaint is that I wish Greg would do them more frequently, but I know they require a lot of time. This Podcast interviews a variety of successful entrepreneurs and discusses Venture Capital a little.

VentureCast is very professionally done and deals mostly with VC related topics. The guys can be a little dorky at times, but they are just trying to have fun and make it entertaining.

Wall Street Journal Small Business can be pretty basic much of the time, but has some interesting ideas every once in a while.

I am always searching for other great podcasts (and blogs), so if you know of any good ones related to entrepreneurs, Angel investors or even VC’s please leave a note in the comments.

Focus on the Game, not the Plan

Posted in Startups by angel on the January 23rd, 2007

Guy references a Wall Street Journal article saying that studies have showed that businesses with a business plan do not have a higher rate of success compared with those without a business plan. This helps support the idea that a great idea will not work by itself.  In fact, a lot of companies actually change their focus as they grow. As you probably know, Flickr started as a gaming site. A lot of companies get into an industry only to later find a niche. Having a business plan and only focusing on executing the plan may prevent you from finding a niche that may give you an advantage.

Great companies are usually a result of great leaders, managers, and business thinkers, which is why many investors are more interested in the Executive team than they are in the business plan. A business plan isn’t worthless, in fact you need one if you are seeking investments. But I would take a great team and a good idea over a great idea and a good team.

In sports, you can tell good coaches by what happens after half time. All coaches go into a game with a game plan. Some of them work from the beginning and don’t need to stray from it. Others need to go in at half and adjust their plan. They learn and adapt to the game at hand. Those that can make the adjustments are usually the ones that have a better shot at success.

NDA or Confidentiality Agreement

Posted in Entrepreneur Advice by angel on the January 17th, 2007

Most Entrepreneurs looking for angel money are always interested in getting people to sign NDA’s anytime they tell someone about their idea. The problem is that most Angel’s, and especially VC’s, will not sign NDA’s right away. There are too many reasons as to why they won’t. Find out how you should approach the NDA as well as what you should and should not disclose. The Post Money Value has two great posts talking about NDA’s. Another post talks about the two broad types of investments “The Black Box and the Execution Play” and when an NDA is applicable in either of them.

One piece of advice is to simply refer to the NDA as a Confidentiality Agreement. An NDA scares a lot of investors. Within the posts are also some ideas on how to protect yourself. They include filing a disclosure document relating to a patent process as well as keeping great documentation of who you meet with along with what happens at those meetings.

15 Reasons Why StubHub Loves eBay

Posted in Acquisitions by angel on the January 15th, 2007

I am sure you have heard about eBay’s acquisition of StubHub for $310 million. The funny part about it is that they were in discussions over a deal in 2002. eBay almost paid $20 million for the company until the deal fell apart because eBay thought that was too much money.

Four years later and 15 times (the original price) greater, they finally came to a deal. I think this just goes to show a couple of things:

1) Big companies are more willing to pay big money for leaders in a category as opposed to building something on their own. They would rather spend $300 million buying a leader compared to $20 million for an up-and-comer, but unproven leader.

2) 2007, like 2006 looks to be a great year for companies looking to get acquired. IPO’s are still not back in vogue, but the economy has been doing well so people and companies want to invest. Since the Real Estate Market has died down, private equity has continued to grow.

StubHub was funded almost exclusively by Angel Investors. They had one round of VC money.

Welcome Post to Angel Investment Journal

Posted in General by angel on the January 8th, 2007

The Angel Investment Journal aims to keep companies, entrepreneurs, and investors up to date on a variety of topics relating to Private Equity investing and with a focus on Angel Investing. It will also discuss other topics and hopefully educate people regarding Angel Investing as well as trends within the industry.
Business Owners – to start, you can get more information on how to find Angel Investing from CNN and Inc Magazine.

Angel Investors – The Angel Capital Association has a good list of resources to find out more information on the industry.