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Early Stage Investing- Valuing

Week 4: Valuing

Valuing a company is interesting not only to an angel investor but also to someone who hopes to one day get investment from an angel investor. I am someone who is not in a position to be an angel investor at this time. But, I do benefit from the knowledge of what an angel investor is looking for in a company and in an entrepreneur. I found the idea looking for investments of start-up deals valued under $5m very interesting. It does make sense to me that there is more opportunity for growth at this point than say a $10m company. As someone who is not an investor, the valuation always reminds me of the show Shark Tank and how they self-evaluate. From an everyday person watching the evolution does not mean much, but from an investor standpoint it tells you not only about the business but the owner who is evaluating it.

Amis/Stevenson believe there are four levers of early stage returns: whether you choose winners, how the deal is structured, the price you pay, and how much dilution occurs. All four of these levers need to succeed in order for the deal to work. Investors shoot for 30% to 100% annualized ROI when looking for an investment.

Valuing makes sense to me as someone who is not an investor. You want to put your money where you will grow it. This piece to the puzzle seems very calculated and by the book. Although no two deals will be the same, the rules one’s follow are always the same; therefore, a method to say yes or no based on numbers. This one for me is harder to discuss because it is what it is.

Valuing an opportunity is of the utmost importance when deciding whether or not to invest. As an investor you always want to grow your money and understanding how much return you might get is half the battle. Using the tips in Winning Angels: The 7 Fundamentals of Early Stage Investing by Daivd Amis and Howard Stevenson, valuing an opportunity is much easier.

References: Amis, David, and Howard H. Stevenson. Winning Angels: The 7 Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.

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