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Pre - revenue valuations - how an Angel Determines Value

Raising capital for the first time is always a daunting experience, even more so if the venture is yet to make money! Before getting into the fundamentals of raising capital at this early stage of the cycle, let’s first explore why an investor would be interested to begin with. To do that we have to enter the mind of an angel investor, understand their ambitions and clarify what makes them tick.


Angel investors are characterised as individuals with discretionary funds who have made the financial decision to allocate a section of their portfolio towards assets within the high - risk category. High risk investments, that have the off - chance of returning a high reward at a later stage.


It is in the best interest of an angel investor to purchase equity in your business well before other investors start to catch on to the underlying value of the asset you are building, why? To attain a discounted price for enough equity to make an exciting return.


If you purchase a property in an unpopular town, but have the insight and knowledge of the future growth of that particular area, you will make the calculated risk of purchasing a block of land whilst still in the undesirable state, yet with time and growth be able to re - sell it in a market that now realises it’s true value at a much higher price.


The same goes for startups, as a founder you may know your value more than anyone else, you find investors when they too see what you see.


So how do angel investors calculate the worthiness of this risk?


Now we’re talking about comparing two new cars without the ability to take them for a test drive, which has the engine more worthy of fuel (your cash) - and in business terms how do we analyse the engine of a pre - revenue startups.


Turns out there are a few ways to go about this ;


The Berkus Method


David Berkus, a successful American angel investor and venture capitalist renowned amongst angel investors as a “super angel” created what is recognised as one of the most credible methods of pre - revenue valuations.


It uses a combination of qualitative and quantitative methods, when explaining why Berkus stated ;


“Pre - revenue, I do not trust projections, even discounted projections…”

The calculated valuation is based on five elements, the idea is that depending on how good each section is, will help calculate the amount of corresponding risk ;


  1. Sound Idea (basic value)

  2. Prototype (reduces technology risk)

  3. Quality Management Team (reduces execution risk)

  4. Strategic Relationships (reduces market risk)

  5. Product Rollout/Sales (reduces production risk)


Each element is attributed a value of USD$500,000, with the maximum summation being USD$2.5 million. Here is a table outlining each individual risk :



Component ExplanationMaximum Value Attractiveness of Idea Evaluation of the severity problem being solved and effectiveness of the solution created.$500,000PrototypeThe technology behind this idea, has it been fully developed, is there an element of risk the technology won’t work? Is there a prototype or MVP for this idea?$500,000Quality Management TeamWhat are the chances this startup executes their strategy, factors such as the quality of the founding/ management team need to be considered.$500,000Strategic Relationships Are there strategic partnerships in place, which reduce risks from competition and the market.$500,000Product Rollout/SalesFeasibility of the go - to - market strategy, production roll out, marketing/sales plan? This risk is best analysed by detailing all strategies and budgets associated with the planned go - to - market strategy$500,000



The reason the Berkus method is so popular is simply due to the fact that it empowers angel investors with a framework to critically analyse prospective investments...without depending on fantasy projections and modelling.


From the P.O.V of a founder, it is in your best interest to not only come to a conclusion of a fair value based on this method, but to also come armed to the negotiation table with justification. This can be achieved by answering the questions in the middle row of the above table.


To get you started on this method we’ve created a calculator which will give you a rough understanding on where you stand click here.

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