What’s Your Value?

What is valuation? “Valuation is what you are willing to exchange for something else that you want.” (Amis, D., & Stevenson, H). In other words, how much of your company are you willing to give up in order for an angel investor to be attracted to your venture?

First I would like to point out that I am a strong believer in shopping your business to the right investors. The right people will always see more value in your company than per say someone who just wants to make a return and does not scrutinize the details. Finding someone who is vested in your vision or idea always makes for a better outcome when looking for the perfect match.

As mentioned before, networking plays such a huge role when finding the right angel for you and your business.The bottom line is there is no way of really putting a realistic number on any start-up ventures simply because no one can predict the future. G2N is in the stages of building a serious financial plan  but it is still based on anticipated numbers. Until we have a year of operations and generate some sort of income with actual tangible numbers to discuss, all financial growth and value is just a prediction.

Through-out  our organically creating business journey,  I have stressed the most important selling point in this whole business venture, which is… YOU!  Yes there is a number that will show the value of a business, but the most value an investor will ponder over, is the Entrepreneur. If the angel investor and entrepreneur do not click, then it is almost assumed the deal with not move forward.

But its okay! There is an angel meant just for you!

A well thought out financial plan is always the first key to attracting a serious investor. It must show drive, self confidence but also make sense in regards to growth and productivity.  An angel investor wants to know how much your business is worth, how much is it predicted to grow and is the plan realistic?

Many people believe that most angels will only want to invest if the return is huge and/or they own a huge percentage in the company, which can be true. But, if you learn how to network and use your resources correctly, you can find the perfect fit for your business.

It is good to know the different approaches that angel investors take when putting value to your business. This will give you the ability to have the foresight that is needed to prepare yourself for a successful valuation.  Please note this again is a summary and each method should be researched thoroughly to gain a greater insight.  There are five approaches touched on in The 7 Fundamentals of Early Stage Investing which I will describe briefly:

Quick and Easy – this approach uses methods that resolve early challenges in investing and moves quickly in regards to the decision making process. It also includes the $5m limit method and Berkus method.

Academic/investor banker– this approach uses the multiplier method using the business plan times the industry standard and DCF (discounted cash flow) which can sometimes overvalue a company.

Professional venture capitalist – this method adds onto the multiplier and DCF methods  which help determine how much money needs to be invested for a good return.

Compensated advisor( this is true organic business growth) – this method is basically time for money. Your angel  guides you as a virtual CEO to provide support in the growing stages meaning he/she gets a percentage of the company based on the professional time she gives to your start-up. This is ideal for the investor and entrepreneur as it is low risk to everyone involved.

Value later – this is a newer method in which angels actually invest money without shares exchanging hands and no value set for the company. As crazy as this might sound, some investors find the decision to be a lot easier and they don’t have to worry about the valuation process.

These are some basic methods that most angel investors will use to determine the value of a business. Keep in mind angels want to feel good about the business they plan on investing in. Building a strong structure along with a plan of value will hope to encourage your angel to see that you are a winner, the deal is structured effectively and the price he/she pays is fair and will make a good return.

Going 2 Natural is in the throws of finalizing our business plan along with valuing our cooperative. It has not been an easy task, but one that will only enhance our endeavor and help to attract just the right investor for our business.

Amis, D., & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: FT Press