Valuing in Early Stage Investing

The last installation of this blog was about Evaluation, understanding Valuing is another imperative aspect of early stage investment that will allow you to think in the same terms as angel investors. If you can understand exactly how your business idea will be scrutinized by potential investors it will certainly be intelligent to present your information to them as clearly as possible to help answer those questions before they even ask.

In the book Winning Angels: The 7 Fundamentals of Early Stage Investing the authors walk you through 5 different models that Angel Investors use to value your business. The five different models are certainly worth taking a look at and they seem to be the industry standard for valuing ideas. However, these models can be a little wordy and hard to understand without having a financial background, so I’d like to paraphrase a great article by Brian Perry on TheAngelInvestor.com (an online Angel Investment publication).

He explains that there are 3 basic approaches to valuing a company:

Asset Based

Investors will look at all of the physical assets of the company and do an inventory of the value of those assets. Then they would look at the earnings that the equipment could produce.

Market Approach

This matches up the business model to other similar businesses and creates a parallel comparison about how well the business could do based on similar figures. This is difficult when the business is completely innovative and unlike any other business.

Income Approach

This focuses on the numbers that business is currently putting up. Factoring in the ability for the company to earn money and then putting equations in place to dissect the amount of money that will be spent versus the amount of money that will be coming in.

 

 

Overall you need to understand that the angel investor is looking to make a smart decision when it comes to handing money out. They are looking for ideas that will succeed and if you can show them that you are a safe bet while backing yourself up with numbers you are more likely to get their attention over the hundreds of other business jockeying for funding. Also remember that the value of your company can also be summarized as what someone would be willing to pay you for it.

For more information on these three basic forms of valuing look at Perry’s article http://www.theangelinvestor.com/article/100028;jsessionid=27A08521BE15DE213B925471FB093494/Valuations:-Understanding-The-Pieces-Of-The-Puzzle/

Or purchase Winning Angels: the 7 Fundamentals of Early Stage Investing