Monday, May 13, 2013
The Pre-Money Valuation of Angel Deals in 2012
This post was written by Bill Payne in conjunction with Angel Capital Association. Bill is has been actively involved in angel investing since 1980. He has funded over 50 companies and mentored over 100. Bill is also a founding member of four angel organizations: Aztec Venture Network, Tech Coast Angels, Vegas Valley Angels, and Frontier Angel Fund.
Perhaps the most difficult and contentious negotiations between angels and entrepreneurs develop over the valuation of seed stage deals. Most angels decided long ago that the answer is not convertible debt, which only postpones the valuation negotiations until a subsequent round. The best solution is a better understanding of the appropriate valuation for these risky seed stage deals and a proliferation in the use of sound methodologies for valuing early startups. Furthermore, the key to many
valuation methods is a comparison to the median valuation of similar deals, that is, startups in the same region and comparable business sectors. Much like the real estate asset class, the valuation of comparable startups is an important consideration.
On April 25, 2013, Jeff Sohl released Center for Venture Research’s The Angel Investor Market in 2012 that reported, “The average angel deals size in 2012 was $341,800…with a deal valuation of $2.7 million.” According to Jeff, this is the average pre-money valuation of angel deals in 2012.
In CVR’s long history of reporting angel activity, this is the first time CVR has published the average valuation of angel deals.
The three broad surveys of the US and Canada angels agree remarkably well on the pre-money valuation of seed/early stage investments (CVR = $2.7 million, Halo = $2.5 million, Payne - $2.75 million). It is not surprising that the Fenwick & West survey found somewhat higher pre-money valuations, since most of the surveyed firms were in Silicon Valley and I assume most were funded by venture capital funds, not angels. Furthermore, the F&W definition of seed stage deals includes rounds
sizes as large as $2.5 million which is rare for angels and angel groups outside of Silicon Valley, Boston and New York. We have also noted that larger round size tends to increase the pre-money valuation of those deals because angels prefer owning 20-40% of the company after the seed round.