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.

Until recently, we angels had a paucity of data on the valuation of seed stage ventures, but our eco-system is changing. In the past three or four years, several surveys have emerged, and here are the most recent data points I have seen:

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.

On April 17, 2013, the Angel Resource Institute, in collaboration with Silicon Valley Bank and CB Insights, released the 2012 Halo Report which stated in part that the “Pre-money valuations in early stage companies remain steady at $2.5M for both 2012 and 2011.” This report was based on input from 783 deals collated by ARI from American angel groups.

On March 25, 2013, Barry Kramer and Steve Levine of Fenwick and West reported in their Seed Financing Survey 2012 of Internet/Digital Media and Software Industries that “the median pre-money valuation in preferred stock financings increased from $3.8 million in 2011 to $4.6 million in 2012.” This is the third annual survey published by Fenwick and West and shows that valuation for their deals have steadily increased over the past three years. The 2012 data was based on 61 transactions by professional investors (angels and VCs) in which the company raises between $250,000 and $2,500,000,

In October 2012, I released a statistically insignificant survey of 30 angel groups in North American 2012 Valuation Survey of Angel Groups with the following results:

  • The median pre-money valuation of pre-revenue companies for the previous year or so was $2.75 million. This was an increase in the average pre-money valuation reported in 2011 of $2.1 million and in 2010 of $1.7 million. (Note: We asked for average valuation in 2011 and 2010 and median valuation in 2012.)
  • The median pre-money valuation of pre-revenue companies in the life science and clean tech sector were somewhat higher ($3.2 million and $3.0 million respectively) while a bit lower ($2.5 million) in the software/internet vertical.
  • As we noted in 2011, valuations in Silicon Valley, Boston and New York were somewhat higher than elsewhere in North America.

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.

So, it would appear that the current pre-money valuation of seed stage deals across the US is approximately $2.6 million. In my next blog, I will provide a look at several valuation methodologies for seed stage companies and discuss how to use median valuation data adjusted for the business vertical in your region to arrive at appropriate pre-money valuation for target companies.