I thought it might be useful to post this excerpt from a reply I sent to one person who contacted me as it may help entrepreneurs understand when it makes sense to approach the Band of Angels
“Please note that I do not sign NDA’s. The Band of Angels requires executive summaries in a particular format which is attached. Generally the Band looks for businesses that have high barriers to entry and can grow to be large. The exit valuation has to be well north of 100 crores. The band will generally take 25-33% of the equity of the company for its investment of 50 lakhs to two crores. In some cases where the company is more mature but yet not ready for a VC round the band may find other co-investors so that the total amount invested could reach 5 crores. The Band seeks to provide advice/mentorship in addition to money so its members are likely to invest in businesses where they have expertise. The quality of the management team is important. The band is very selective and funding may never close or take time. Generally however if an angel agrees to sponsor a company to present to the full band the company gains a lot by interacting with the angels even if the angels choose not to invest.”
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My understanding is that no one would seriously consider any discounting method for valuation in start up. It’s obvious too, as its based on certain assumptions and no one can be too ceratin of those. Nevertheless, all that exercise proves that there is a market opportunity and what possibly the startup may stand to gain. If you are looking at mathematical side of valuation, you may find following lnks useful on valuation:
http://www.ventureblog.com/articles/indiv/2003/000200.html
http://www.tdbellenterprises.com/blog/2005/09/08/valuation-executives-versus-venture-capitalist-2/trackback/
http://www.infobaseventures.com/valuation-model.html
Also checkout followings:
http://www.feld.com/blog/archives/2004/07/venture_capital.html
http://avc.blogs.com/a_vc/2004/07/valuation.html
http://www.startupventuretoolbox.com/Valuation%20Advisor.htm
Understand what your funding needs are and your valuation is almost = 1.5 times the money that you raise. For a same company raise $2M and you are going to have a $3M pre-money valuation, and raise $5M and you will have a $7.5M valuation. No matter how your maths is done, VC will take some equity between 20 to 25% for whatever money you raise. Also it’s very important that you should remain reasonably flaxible in this valuation game or a VC would not like deal with this unreasoning attitude.
So forget all about valuation in first round and focus to build a valuable comapny. Anyways, as founder you’ll have major chunk and will make huge fortune, if yuor startup is successful and if not valuation doesn’t matter at all. And your conpany is not worth just what a VC firm values it at, don’t get carried away by that.
Alok, thanks for your comments.
I was wondering if there is a site or someone on this forum can throw some light on valuations in case of startups. I understand there would be a lot of online material on these. However, what I’m more interested in is how to value an idea based on future projections. Say, if I’m working on a plan (services industry) which has future potential and I’ve worked up some numbers for revenue projections for the next 3-5 years starting with some investments. Now, is there some formula or equations that can be used to back-value (if thats a term) a company based on future projections. Also, is there a way to include sweat value and opportunity cost of the entrepreneurs.
I believe this would be a common concern among entrepreneurs and any comments from those who’ve “been there done that” would be appreciated.
Regards,
SureV
Few things you need to factor in:
1. By the time the exit happens, the angel investors will get diluted by further rounds of money raising — perhaps down to 1/3-1/4 of their initial holding. So the exit stake might be around 8%. (also, the entrepreneur will get diluted by further rounds — a study by saratoga ventures in US showed that in successful companies, the founder CEO owned less than 4% post-IPO on an average — the study is a bit dated, dont know how it has moved recently). So BoA might make 8 crores from a successful 50 lakhs investment.
2. At least 50% of the deals we do will fail completely. 2 may succeeed. Rest will return back money. If you load this in on an average we will make around 3 crores on a weighted basis.
3. So its 6x weighted return over 6-7 years — an annualized return of around 30% — this is typical of return expectations in this asset class.
VCs will look at their returns much the same way. Since the failure rates go down at that stage, and time period may be 5 years instead of 7 years. The cost of capital may be around 25%. So a 6-8x return on successful investments may work.
Going by the above post by Sanjay, if the BoA invests say Rs. 50 lakhs for a 25% stake in a company and the company goes on to fetch Rs. 100 crore (ref: above post) in say 3-5 years. By these standards, the BoA is asking for a 50X returns. Now, is this a standard ratio or a bit too high? Just my curious thought. Any response will be appreciated.
Thanks a lot Sanjay. Sanjay, I tried looking you up on Linkedin but found a few entries that could have been you. I might need a bit more information so that I can get the right Man!!!
Ananth