Tag Archives: Early Stage

The Facts on Deal Valuation and Structure

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Attention Entrepreneurs:  Investors at different stages have varied interests so you are likely to get different counsel from Big VCs, Big Accelerators, and other Big Shots.

I’ll keep this post brief and fact-based.  Early stage financing has supply and demand, and deal terms and valuation are determined by market factors.  When you determine valuation and deal structure for your company, consider the current data on Angel financing.

66% of Angel financings are done at a pre-money valuation of $4.5 million and under.60% of angel financing is done with Preferred Stock.

The source of this data is the Angel Capital Association’s new Angel Funders Report, dated August 2018 and released October 2018.  Drawn from 432 investment rounds in 2017 across 393 companies totaling $102 million invested.  Companies were located in 36 US States, Canada, and Israel.

So when you set your terms, the closer you can price your deal based on its merits relative to other angel deals getting funded, the faster your funding round will go, and the quicker you can get back to your business fundamentals.

Winning

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Winning.

A path to market leadership.   I look for this in every investment I make.

“It’s a big industry…there will be many players…we just need a x% slice and we will be a success.”  What b.s.   That a prescription to be one of the 9 in 10 early stage companies that fail and fail soon.

A great idea is the first step, but  there are lots of smart people out there and their attention is often focused on the same problems at around the same time.  At the dawn of search, there was Infoseek, Alta Vista, Dogpile, Excite, Lycos and others.  Now google dominates.  When it comes to profitability, the winner takes it all, and the runner ups are burning cash trying to catch up.

number one“Winning isn’t everything; it’s the only thing.”  So said Vince Lombardi.*

Information and intelligence can spread like wildfire. Network effects are an accelerant.  The biggest network quickly becomes the most useful and shortly the only one needed.  Market share and profitability correlate.  The premium to being #1 is increasing all the time.

Sure, there exceptions, like when the relevant market is just your local neighborhood, and there is a dry cleaner on every block.  But the most attractive markets are national and global.

 

What does this mean to an early stage investor?  That is a full topic for another day, but I’d rather hear “We want to be #1 and here’s how” instead of seeing an entrepreneur wave a giant red flag with “We just need our share.”

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*And UCLA’s Red Sanders…read “What it takes to be Number One” if you are interested.

A Venture Capital Recession in 2012

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The National Venture Capital Association data from Money Tree is out, and the VC industry is in a recession:

  • For the full year 2012:
    • VC funds invested declined 10%, to $26.5 billion
    • The number of VC deals done declined 6%, to 3,698.
  • Double-digit decreases in investment dollars across most industries, specifically the traditionally capital-intensive Clean Technology and Life Sciences sectors, offset the increases seen in the Software sector in 2012.
  • Stage of investment shifted from Seed to Early Stage as venture capitalists overall began engaging with companies later in their life cycle than in previous years. Investments into Seed Stage companies decreased 31 percent in terms of dollars and 38 percent in deals with $725 million going into 274 companies in 2012, the lowest annual seed dollars since 2003.
  • Internet-specific companies experienced a 5 percent decline in both dollars and deals for the fullyear 2012 with $6.7 billion going into 976 rounds compared to 2011 when $7.1 billion went into 1,033 deals. However, the year still marked the second highest level of Internet investment since 2001. These companies accounted for 25 percent of all venture capital dollars in 2012, up from 24 percent in 2011.
  • Investments in the NY Metro area held at 11% of the total number of deals, with 397 companies funded, but the dollars deployed declined 18% to $2.3 billion

More details here.

Angel Valuations Inch Up

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How much to Angels typically invest and at what company valuation?  Angel valuations are inching up per the Halo Report for Q2 2012:

  • Company valuations for early stage financing rounds with Angels are $2.7 million in Q2 2012, up from $2.5 million in Q1 (median, pre-money valuations).
  • Typical angel investment rounds total $550,000 for Angel-only rounds and $1.5 million with VC’s involved (these are median values; the mean values are higher at  $1 million and $4 million.
  • And VC’s have Angels co-invest in 72.5% of their deals.
  • And half of Angel  deals are in tech-related fields  (Internet, Software, Mobile, Telecom).

You can download a 16-page pdf of highlights here.