This week's RVI meeting (Wednesday 11/21, 8:00am, offices of TechSpring) included three presentations to see if we are interested in starting due diligence:
Sistine Solar - Solar with curb appeal - the world's only solar designed to blend in with your roof, no matter what color, pattern, or style.
CourseStorm - SAAS registration and marketing platform that streamlines access to informal education.
Walch Education - We are developing an intelligent "Curriculum as a Service" platform with resources and tools so that school districts and teachers can edit and develop their own coherent, aligned and effective instruction.
Western-Massachusetts based angel network River Valley Investors (RVI) completed an investment in a Launch413, local company founded by RVI’s manager Paul Silva and RVI member Rick Plaut.
Launch413 takes startups from Launch to their first $10 million in revenue. The company is made up of serial entrepreneurs and veteran executives who accelerate entrepreneur’s progress by investing their expertise & networks to provide strategies and introductions that would have taken years to acquire otherwise.
“I deliberately didn’t bring Launch413 to RVI, feeling it it was inappropriate for me (as the group’s manager) to take up a presentation slot. However, individual members of the group kindly insisted that Rick and I present. We closed the round that afternoon thanks to the support of many RVI members. Now the real work begins!“ Said Paul Silva, Launch413’s Managing Partner.
This is River Valley Investors’ first investment in Launch413.
Western-Massachusetts based angel network River Valley Investors (RVI) completed an investment in Freedom Wind Tunnel, an indoor skydiving company from Boston.
Freedom Wind is installing a brand new indoor skydiving facility at Patriot Place in Boston. The company is planning to provide an entertainment experience to patrons of all ages. With the help of Freedom Wind, Boston may soon give Chicago a competitor for the title of “Windy City”.
“This is not a ‘normal’ deal for angel investors. Neal’s depth of knowledge and ability to build coalitions took an idea that we would have avoided into one we were excited about. His model for financing and absolute commitment to keeping us informed closed the deal,“ said RVI Manager Paul Silva.
Freedom Wind CEO Neal Gouck said, “River Valley's Leadership in this round allows for the construction and commissioning of the facility at Patriot Place.”
This is River Valley Investors first investment in Freedom Wind Tunnel.
This week's RVI meeting (Wednesday 10/17, 8:00am, offices of TechSpring) included four presentations to see if we are interested in starting due diligence:
Southie Autonomy - Tell a robot what to do, let the robot figure out how to do it. Boost ROI for high-mix repetitive kitting tasks
Prolific Works - reduces the time spent and out-of-pocket cost for self-published authors to write more and better books.
Emerging Artist Network - Early-stage music technology company creating interactive mobile / fantasy games powered by our existing proprietary data analytics platform
Traction Technology Partners - We connect large enterprises to emerging technologies through innovation discovery services and our startup relationship management platform.
This week's RVI meeting (Wednesday 9/19, 8:00am, offices of TechSpring) included four presentations to see if we are interested in starting due diligence:
Defendify - We make cybersecurity possible for Small Business with our all-in-one cybersecurity platform.
Zyppr, Inc. - the first Artificial Intelligence driven complete Real Estate Sales, Marketing and Transaction Platform for Offices and Brokers.
Groupize - an easy to use end to end platform for planning, sourcing, managing and measuring simple corporate meetings and events.
Launch413 - an alternative venture fund investing our expertise, connections, and passion in fantastic entrepreneurs so they can execute & scale.
We are pleased to welcome Richard Tillberg as our newest member of RVI.
Richard Tillberg comes to RVI with 25 years of consulting experience, primarily in mediation and real estate development. For the past ten years, he has been running his own consulting company called Richard Tillberg Consulting. His company provides mediation services in all areas, concentrating on real estate, business and legacy disputes. He also facilitates public input or citizen decision-making, primarily with local municipalities.
Before starting his own venture, Richard was Vice President of Urban Futures Inc., Where he consulted for local municipalities relating to public/private real estate development projects.
Richard holds a certificate in Mediation from UC Irvine, an MA in Urban Planning from Morgan State University, and a BA from The College of William & Mary in History and Philosophy. To learn more about Richard, check out his LinkedIn profile here.
Please welcome new sponsor Rick Kosakowski (Ware Fressola Maguire & Barber LLP) to RVI!
Rick Kosakowski is a registered patent attorney with 30 years of Intellectual Property legal experience working in law firms and at various business units of United Technologies, including being Chief IP Counsel at Pratt & Whitney and Hamilton Sundstrand. Prior to that, Rick worked for 10 years as an engineer and technician. Currently, he is a Partner at the Connecticut boutique IP law firm of Ware, Fressola, Maguire & Barber LLP.
Rick counsels clients in all aspects of IP law, including patents, trademarks, trade secrets and copyrights. He has prepared and prosecuted hundreds of U.S. and foreign patent applications in a wide range of technology areas for clients including IBM. Rick also focuses on emerging technologies such as AI, Blockchain, IoT and Cybersecurity. Many inventions in these technologies and in more traditional technologies are embodied in software, which is of significant current interest given the recent case law involving subject matter eligibility for obtaining patents on these inventions. Rick helps clients navigate through this rapidly-developing area of law and secure patent protection for their software-based inventions.
Rick earned both his law degree and his B.S. in electrical engineering from Western New England College. He is a mentor with Valley Venture Mentors. Rick resides in East Longmeadow with his wife, Nancy. To learn more about Rick, check out his LinkedIn profile here.
We are pleased to welcome Nick Gardner and Aarush Manchanda as RVI's newest members.
Nick Gardner is the Owner/President of NGM Services Inc, a mechanical services company specializing in plumbing, heating, welding, construction, and Residential, Commercial and Industrial equipment installation.
Nick is a certified Master Plumber and Welder, and has twenty years of experience in mechanical contracting. Nick is an alumnus of Westfield State College and Greenfield Community College.
To learn more about Nick, check out his LinkedIn profile here.
Dr. Aarush Manchanda is in the trenches of heart disease and precision medicine every day--and has been for over 10 years. After receiving his medical degree from most prestigious Medical College in India, he immigrated to the United States where he completed his internship and residency at George Washington University in Washington, DC.
He earned many top awards as a student, resident, and researcher, including the Resident of the Year Award from George Washington University and the Veterans Affairs Hospital in Washington D.C., and the Best Resident Research Award from Geisinger Medical Center in Danville, Pennsylvania for consecutive years. He continued to be a leader amongst this colleagues serving as a chief fellow at Geisinger Medical Center in Danville, Pennsylvania.
After graduating from fellowship in 2010 and being board certified in five specialties: internal medicine, cardiovascular disease, nuclear cardiology, cardiac computed tomography, and echocardiography., he took the role of Medical Director of Cardiovascular Services at Intermountain Cedar City Hospital--in Utah.
In this role, he brought comprehensive cardiology services including state of the art multimodality cardiology, once thought to be only a fantasy for the rural community of Cedar City, into the realm of everyday practice. Dr. Aarush Manchanda has made it his life's work to facilitate a health-conscious community and is at the forefront of shared decision making and personalized medicine. He strongly believes this to be the mantra for "precision cardiology", a term coined by him. His first step towards precision cardiology is educating people about the heart and how it works (https://www.theartisansapproach.com) and continuously seeks ways to make understanding complex health issues accessible to everyone. Aarush published a book in 2016 entitled “Your Heart House: An Artisan’s Approach™ to Understanding Heart Health”.
Dr. Aarush Manchanda (https://www.linkedin.com/in/aarushmanchanda) is an active investor with widespread interests, ranging from healthcare and wellness tech solutions using digital health, genomics & precision medicine, telehealth, artificial intelligence, iOT, biosensors, nanotechnology to fintech and ride sharing companies. He is a Board of Director at Portable Genomics, an adviser at Massive Bio, Fruitstreet, and sixsents, and a Co-Founder of a telemedicine startup called This American Doc.
He currently works as a cardiology faculty at Baystate Medical Center in Springfield MA, affiliated with University of Massachusetts.
Dr. Aarush Manchanda lives with his wife, two daughters and son in Longmeadow, Massachusetts and spends his leisure time skiing, playing golf, and meditating. To learn more about Dr. Aarush Manchanda, you can find him on LinkedIn, Instagram, Twitter, Google+, and Facebook.
Due diligence (AKA “doing your homework” on a startup to see if investing is the right call) should clearly take time… but how much? Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article on this topic. Her full article (with her permission) appears further below.
One of the biggest debates in the angel industry is how much due diligence investors should do before they invest. From “rank and file” angels to rock star investors like Ron Conway or Mark Cuban, opinions differ vastly from literally doing none to conducting formal processes that take months. So how do you decide what the right amount is for you? And what are the factors you really need to check out?
Count me in the camp that believes that doing due diligence is a very important. For me, it is about being comfortable as an investor that the team, market and product have a chance for success, that there are no red flags pointing toward failure, and better understanding the company’s capital needs over time.
As I’ve posted before, angel investing is risky. Due diligence doesn’t completely “de-risk” a deal, but it helps eliminate deals in which there are clear problems that lead to failure – things like products with no real customers, CEOs with integrity issues, and no true right to sell the innovation.
A 2007 study found that angel investments in which at least 20 hours of due diligence was done were five times more likely to have a positive return than investments made with less due diligence time. Put another way, while 45 percent of investments in deals with 20 hours of diligence resulted in a loss, 65 percent of the investments with less diligence took a loss. That is pretty compelling.
The point here isn’t that an individual must do at least 20 hours of due diligence for every opportunity you seriously consider. Instead it is to understand that due diligence can help you make better decisions and increase chances for a good return. And you don’t have to do all of the work yourself – many times you can access diligence information conducted by other investors you trust.
Getting Started – Key Factors
There are some very good practice resources for angels to learn about comprehensive due diligence, including questions to ask, checklists that angel groups use, best practice papers summarizing recommendations from top angel investors, and courses on investment best practices.
Although I always recommend using background resources like these, if you lean toward a faster approach, here are my top three due diligence questions to address:
Is the entrepreneur and team up to the task – and do they have the integrity you need?
A starting point is to ask the entrepreneur a lot of questions and of course check their references. As you talk with those references, get them to suggest additional people for you to talk with. Sometimes these are the most important interviews you will do. In these discussions, Internet research and possibly a background check, you can also find out if the person has had issues in managing money or has been arrested – the kind of red flags that make investors walk away.
Rick Vaughn, leader of the Mid-America Angels in Kansas City, provides some good color about what you’re looking for in assessing the entrepreneur. “It goes back to that old saying that people get funded, not business plans. To some degree we are looking at the entrepreneur and thinking, does this person have the vision, patience, courage, creativity and integrity necessary to lead a successful venture?
“Investors are going to be thinking about how they will feel about working with the entrepreneur and the rest of the management team. Do they feel good about forming a relationship? Investors want our level of trust to increase with each interaction we have with the CEO and the team. If it doesn’t, that can be a deal-breaker.”
Are there customers or strong potential customers for the product or service?
A company can only grow and make money if they have customers who will pay them money. If you prefer an early-stage company that has a product ready for sale, then it is important to ensure the company has established customer relationships. If you like startups that are still developing their innovation, then you need strong evidence that potential customers really see that the startup can solve a pain point that they will pay for. Generally having two established customers who will confirm that they are buying or will buy the product is a decent hurdle. Understanding the customer situation also helps confirm or reveal important things about the market for the product and length of the sales cycle by interviewing customers.
Also, as the due diligence best practice paper notes, “Customers need not just the will but also the ability to pay (for these products). If the venture targets customers without sufficient budget for the product, it won’t matter how badly they want it.”
How much capital does the company really need to get to an exit?
While it is important to dig into the potential exits for a company, it is also critical to get a beat on how much capital the company needs now and in future rounds of growth. This provides a sense of the hurdles the company will face and how much your ownership stake may be diluted over time. Many companies tend to underestimate how much money they will really need. Ask lots of questions of the entrepreneur and financial team to get an idea of how realistic their financial plans are and mine data on companies in similar industries to see their financing and exit trajectories.
So what is the right amount of due diligence for you? Every angel will personalize the process for their own needs. However, if you are new to angel investing, you can gain a lot by reviewing the wealth of resources available and talking with experienced angels about what is important to them and the processes they use. Although you’re likely to adjust your approach as you make more investments, you will definitely increase your odds by incorporating due diligence into your investment decision making.
This week's RVI meeting (Wednesday 7/18, 8:00am, offices of TechSpring) included three presentations to see if we are interested in starting due diligence:
- Gideon - A messaging and predictive analytics platform powered by AI that helps law firms put lead conversion on autopilot.
- MedKairos - 1 out of 5 biopsies fail to return a diagnosis. The company's technology intervenes during the procedure so the patient will only undergo the procedure once. A Valley Venture Mentors accelerator alum company.
- Fame Intel - Provides end-to-end software solutions for companies who are growing fast, but waste hours trying to keep up. Started by a Valley Venture Mentors alum.
Terms term terms! Angels, new and veteran alike, agonize over what terms are to ensure the proper incentives and to properly compensate for risk. Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article on this topic. Her full article (with her permission) appears further below.
An essential part of angel investing is setting and agreeing to the terms of the deal. Many angels recognize the importance of deal terms, but often wonder which components of the term sheet to prioritize. I’ll reveal the answer, but first some background about term sheets.
A term sheet outlines everyone’s intent for a deal. It is typically provided by the angel with help from their attorney. For this article I worked with angel investor Katherine O’Neill and attorneys, Ben Straughan, Partner, and Jim Carroll, Counsel, for the Perkins Coie Emerging Companies & Venture Capital practice. They also shared their insights in a recent Angel Capital Association webinar, The Key Points of Term Sheets.
A well written term sheet is critical because it leads to a great contract and creates investor-entrepreneur alignment needed for a positive relationship because it delivers the returns everyone wants, assuming the company is successful. O’Neill, executive director of Jumpstart New Jersey Angel Network, underscores this point: “This is the time you have the greatest opportunity to really control the main factors that allow you to make a good exit.”
So what deal terms are most important to angel investors? Tapping their years of experience, Carroll and Straughan suggest five critical terms for a series seed preferred investment (otherwise known as a priced angel round):
Pricing: This represents the value of the company and helps determine how much of the company you will own. It is important to get the valuation of the company right in the beginning, which can be an art with startups and early-stage companies with few assets and short track records to build on.
Participation Rights: These define an angel’s right to invest in future funding rounds, often providing the angel with a better chance of a good return. “Angels should focus on participation rights,” Straughan said. “It allows you to double down by continuing your right to invest in future rounds.”
Board and Information Rights: These rights outline whether you (or someone from the investing organization) will be on the board of directors or be an observer at company board meetings. They also determine the information you will receive from the company and how often you will receive it. For example by explicitly asking for quarterly financial statements and annual budgets, everyone can keep their eye on the ball on the status of the business while ensuring the company doesn’t have onerous requirements (because these are documents that a company needs to produce anyway). Related to these, I like the idea of shareholders having the right to vote or at least have veto rights on key strategic issues such as selling or liquidating the company or developing entirely new lines of business.
Liquidation Preference: If the company is sold, these preferences define what preferred shareholders are paid e.g. X times the original purchase price before any other assets are paid common stockholders. 1X liquidation is normal for angels.
Redemption Rights: These rights can help angels to achieve liquidity by selling their shares back to the company if management wants to continue running the company but investors want out.
Although these five components provide an excellent guideline for what to prioritize, term sheets can quickly get more complex, and most include many other terms which are also important.
Most experts recommend that angels start with a standard term sheet to help simplify the process and to reduce legal fees. I’ve provided sample term sheet examples in this article and there are a wealth of other online resources. These are a few of my favorites:
- Angel Resource Institute – Their term sheet resource center includes both example documents and helpful insights. They also offer workshops on understanding term sheets.
- FundingPost Venture Capital Glossary – This is a glossary of financial terms for angels and entrepreneurs to understand.
- Hyde Park Angels – How to Read a Term Sheet (and several other great blog posts)
- Investor IQ – The Kauffman Foundation, ACA and ARI provide a wealth of video and materials on all facets of angel investing from experienced investors
- Seraf Investor – Angel Fundamentals: Understanding Equity Deal Terms (Introduction), and many other great and important insights into being an angel investor
Term sheets are critical and that is exactly why they can sometimes be overwhelming. Beyond these resources I always recommend talking to other angels and learning about new approaches, trends and ideas at regional and national angel events. With resources like these there’s no reason to sweat the terms on your own.
This week's RVI meeting (Wednesday 6/20, 8:00am, offices of TechSpring) included three presentations to see if we are interested in starting due diligence:
- OmPractice - Live, interactive online yoga classes for individuals and companies that can be taken or taught from anywhere. This company is a new graduate of the Valley Venture Mentors accelerator program.
- Akumina - A software company based that empowers enterprises and system integrators to create personalized, contextual and scalable digital experiences to any audience. Based in Nashua, NH.
- Knox - A b2c FinTech brand that's going to change the way people build wealth. After a successful exit with Boston Logic, Co-Founder David Friedman is presenting his next venture to RVI.
Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article with tips for analyzing startup business models. Her full article (with her permission) appears further below.
Can the company you are considering investing in scale and get to a good exit? How is it going to make money, really? These are some of the most important questions every angel investor needs good answers for from the entrepreneur. Successfully evaluating a startup business model can make the difference between success and failure of your investment.
Business models can be stated simply – like “razor blades” (offering a high margin shaver at a good price in order to increase sales of razor blades) and “freemiums” (offering basic services for free and charging for premium services) – but they involve the detailed overall strategy of the company. A business model is how the company defines the market and its products, along with how it gets and keeps customers, how they get to the market, and how its resources are set up, all while eventually making a profit. Startup business models are even more complicated because most startups are essentially experimenting with their strategies and will evolve their model as they test it out.
Many entrepreneurs and investors use the Business Model Canvas by Alexander Osterwalder to develop and evaluate business models. Brigitte Baumann, founder and CEO of international angel group Go Beyond Investing and 2014 European Business Angel of the Year, takes more of an economic approach. I’ve been working with Baumann to develop a set of free resources for new angels to get started successfully and connected with her recently on how angels evaluate business models.
When Baumann reviews a business model her first step is to sort the business plan information into four economic-focused building blocks:
- Unit economics: the hard data that include the selling price of the product or service and the costs involved.
- Customer economics: customer acquisition, retention and support).
- Market economics: what it will take for the entrepreneur to actually create the market buzz or demand needed to acquire customers who will use the units.
- Business economics: the development and overhead; this includes anything from additional offices that might open to support for handling finances, etc.
Thinking about a business model through these four lenses helps to get to an understanding about how much money an entrepreneur needs in order to become self-sustaining. It also makes the financial goals for each round of funding more obvious.
Knowing how entrepreneurs think about the business model is very important. To quote Baumann, “The entrepreneurial team should all ‘live’ the model. They touch it every single day in every action that they do.”
Naturally getting to those important answers requires analyzing the business model from two crucial perspectives: scalability and the break-even point.
Scalability – is a key indicator in whether or not a company will go public or be acquired and investors will get returns on their investments. It is about a company’s ability to multiply revenue with minimal incremental cost, creating a profitable and valuable business. Baumann suggests that when angels meet an entrepreneur, we need to understand whether he or she is planning for 3x, 10x or 100x growth from where they are currently.
Knowing which level helps investors understand the amount of money the entrepreneur needs to raise and in how many rounds. A company that is planning for a 100x growth is likely further along in their development and has the chance of a great exit for all involved.
The Break Even Point – Beyond scalability it is important to understand the company’s break-even point, when it becomes self-sustainable and doesn’t require more outside capital. Baumann has a chart to determine break-even, incorporating fixed and variable costs, as well as the incremental costs that come with increased scalability in a new video.
To understand scalability and break-even points in due diligence, angels need to understand the economics of the company’s revenue growth plan and when they are a “real business.” Questions to investigate how revenues will grow and all of the involved costs. Make sure entrepreneurs are realistic about how much money they will need to get to break-even by asking them where the current round of funding will take them, how many rounds of funding they think they will need, what resources they need to get to each level of scalability and what milestones they accomplish in each round.
Many scalable business models involve big margins between true product costs and selling prices and/or pricing mark-ups. But angels need to make sure the entrepreneurs have thought through all of the relevant costs, including the costs of customer acquisition, retention and support over the lifetime of the customer relationship.
Other critical things to check into during due diligence are the market economics, particularly whether they are using the true accessible market and whether their potential share of the market is possible. These days, it is easier and easier to get data on the company’s existing competitors to get data to compare to.
The bottom line is it is key that entrepreneurs and investors understand the business model before reviewing the financials. Entrepreneurs need to know the drivers that capture market share, outmaneuver the competition and make the business succeed. And investors need to know how to get that information out of the business model or help entrepreneurs build a business model that provides those answers. Without this knowledge it’s difficult to properly evaluate a startup and to make a wise investment decision.
This week's RVI meeting (Wednesday 5/16, 8:00am, offices of TechSpring) included two presentations to see if we are interested in starting due diligence:
- Freedom Wind Tunnel - Indoor Skydiving at Patriot Place. This company is based in North Attleboro, MA.
- Bank Startup - RVI Member Jeff Sullivan's new company
Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote this article on a growing techqniue used by angels to evaluate companies. Her full article (with her permission) appears below:
Scorecards are ubiquitous in baseball, helping coaches, players and fans understand the factors that led to a victory or defeat. It turns out that scorecards come in pretty handy for startup business investing, too.
This past October, I enjoyed watching my hometown Kansas City Royals become the World Champions of baseball. Their scorecard was easy to understand, what with runs, hits, and great pitching stats. Those stats were the factors that led to their World Series win.
Angel investors are using a similar concept for determining the value of the startups that approach them for financing. They look at the factors that make a new business more or less valuable in a valuation scorecard. The factors are just different, like industry sector, market size and quality of the management team.
Before we jump into the details of the scorecard, it’s important to understand first why company valuation is so important to angels and entrepreneurs. The bottom-line is that it is part of the critical calculation of determining how much of the company the investor owns for their investment. Marcia Dawood, an experienced investor and board member of the Angel Capital Association, walked new investors through the important calculations in a recent webinar.
Dawood explains there are two types of valuation – ”pre-money” is the company’s value before an investment and “post-money” is after the investment. And an investor’s percent of ownership equals the size of the investment divided by the post-money valuation. We use both to determine percentage of ownership.
For example, if a company has a pre-money valuation of $2 million and raises $500,000, then the post-money valuation is $2.5 million. The investors own 20 percent of the company (by dividing the $500,000 by $2.5 million).
Sometimes entrepreneurs back into a valuation when they know how much they want to raise and how much of their company they are willing to give up. Investors can do this too. Dawood says, “Think about Shark Tank. Mr. Wonderful says ‘I’ll give you $200,000 for a 10 percent stake in your company.’ Divide the $200,000 by .10 and you get a $2 million post-money valuation and after subtracting the $200,000 investment, you get a $1.8 million pre-money valuation.”
The numbers in the calculation can have a huge impact on your success in an investment, so it is important to be comfortable with the final pre-money valuation and the elements that get you to that number. You don’t want to buy company stock for too high of a price. So how do you do that?
There are several ways to value startups, but the most popular method used by angels to determine a pre-money valuation is the Scorecard Method. Bill Payne, a long-time angel who also led the webinar, uses a real estate analogy to explain the method: it appraises startups using comps.
The Scorecard Method is used for comparing target companies to similar startups, such as business sector, stage of development and geographic location. You compare your target company to the norm for several factors and then adjust the median by your appraisal of the target. These days it is easier to find data on investments and valuations of entrepreneurial firms on the Internet.
The main parameters, or criteria, of the Scorecard Method, in order of importance, along with their respective weights, are: entrepreneur, team, board (30%), size of opportunity (25%), product/technology (15%), sales/marketing (10%), need for more financing (5%) and other (5%). You can change the percentages according to your own preferences about what is important to a startup’s potential. Put them into a column.
Next , approximate how the company you’re trying to determine a valuation for stacks up in each of those parameters against similar startups. If you think the management of the target startup is 20 percent stronger than the other similar companies, for example, then use the number 120 percent in the comparison column for the parameter. Do the same for the other criteria. When you are finished, multiply the two numbers in the row and post that number in an adjusted weighting column.
Tally the numbers in the adjusted weighting column and multiply that sum by the pre-money valuation for similar startups. You end up with a chart with a final valuation scorecard like this:
This should be fairly accurate as long as you have a good starting value and use a similar stage of development, a comparable business sector and a like location.
Obviously, you want to keep in mind that if the seed stage valuation is too low, entrepreneurs are going to eventually be diluted after multiple rounds. As a result, their interest in driving the company is going to be diminished. If the seed stage valuation is too high, the entrepreneurs and the investors have undervalued the financial contribution.
The Scorecard Method, along with the Venture Capital Method and the Dave Berkus Method, are only three of the many methods used by angels in appraising a pre money valuation of a startup company. It is best to use multiple methods, then make a decision from there as to what you think is appropriate for your company and the company you are investing in.
Besides these methods, the Angel Resource Institute offers other ways to learn valuation. There are also some ACA webinars which are chock-full of good information.
Payne recommends that angels try multiple valuation methods for each investment opportunity. Essentially, establishing benchmarks helps make something that is very subjective more objective.
Angels who get a 10X plus exit return have hit one out of the park. Hitting it out of the park goes a long way toward establishing a winning portfolio. And, with a quality business model, good management and a scorecard, it is a whole lot easier to tell if you are winning, in finance – or in the World Series.
Interested in angel investing? Consider applying to join the River Valley Investors.
Marianne Hudson, executive director of the Angel Capital Association (the trade association for angel investors in the US) wrote an article making the case for wealthy to consider becoming angel investors. Her full article (with her permission) appears below:
With angel investing being so risky, eventually most smart angels wonder – is there a way to increase my odds for good returns? And how else do I make investing a good experience for me?
Here’s the good news. Studies show that angel investors can make good returns, on par or better than VC or other types of private equity, when they follow some good investment practices. The studies put proof behind what was previously just common sense. On top of that, many angels are having a blast investing in startup companies and are happy to share their secrets for fun.
Let’s start with the largest study and what we can learn from it to enhance financial returns. Rob Wiltbank, CEO of software company Galois and professor at Willamette University, collected data on exits – good and bad – from hundreds of angels in the Returns to Angel Investors in Groups. The study found that the overall return for the 1,100 plus exits in the dataset was 2.6 times the invested money in 3.5 years, or about 27% gross Internal Rate of Return.
More important than the average return for this “portfolio” of 1,100 exits, was the very wide and unbalanced distribution of the exits, with 52% of the exits losing some or all of the investment and 7% providing nearly all of the return. This means the average in the study didn’t describe the performance for most of the angels who participated. But there are some good takeaways that can lead to better returns:
- Look for the home run opportunities. As Wiltbank says, “The returns are massively skewed. Ten percent of all of deals produce 90% of the returns.” Really sophisticated angels have paid attention to this. A few top angels have told me they started out looking for singles and doubles, thinking they could make most of their returns in those deals. Now they have changed their game – it’s all about hitting home runs.
- Diversify your investments. Not only does a small percentage of deals deliver the biggest returns, but there a 50-50 chance that each individual investment will be a failure or a success, so you need to make many investments to find the one that will be a home run.
- Take your time and be patient but persistent. The 52% of the exits that lost money did so in an average of three years, while the big returns took an average of six years. As you wait for the bigger returns, learn from your experience by watching others and enjoy the process and the angels and entrepreneurs you meet. (More on this later.)
- Do due diligence. Just looking at amount of time in due diligence, angels who did more than the median amount of diligence on a deal (20 hours) did significantly better than those below the median. The overall multiple difference was almost six times – 5.9X compare to 1.1X! This is mostly about reducing failures. Said another way, 65% of the below-median due diligence angels lost money, compared to 45% for the above-median group. Now, there’s a reason to roll up your sleeves to check the companies out!
- Invest in what you know. Putting your specific industry expertise into your investing is common sense. The study showed that when the investor had expertise in the company’s industry, the exit was three time higher than for others (3.7X compared to 1.3X, both in around four years). Use your entrepreneurial experience too. Wiltbank says that “angel investors are well suited to early-stage investing because many have been entrepreneurs themselves.”
- Stay connected to the entrepreneur after you invest. Investors who met with company leaders often to mentor, coach, or offer strategic consulting and that monitored the company’s progress saw an overall multiple of 3.7X in four years. Conversely, those who took a more passive approach reported an average lower multiple of 1.3X in 3.6 years.
Angel investing is about financial returns, but it is so much more than that. As top angel David S. Rose wrote in his recent book, “…investing in startups has so many other dimensions that, for quite a few angels, the external rewards may be even more important than then financial ones.” He sees a number of non-cash benefits that come with your “angel wings,” from “entrepreneurship without responsibility” to giving back and developing life-long friendships.
My organization, the Angel Capital Association, gives an annual award to one person who makes a big difference to angel investing and one of my fondest memories is watching the first winner receive his award in 2005. Bob Goff, leader of the Sierra Angels in Nevada, won not only for his active investing and support for the entrepreneurial community, but for his total embodiment of angel investing as “doing good, having fun, and making money – not necessarily in that order”.
That phrase has stuck with me and so many other angels I know. Many angels enjoy spending time with other smart investors, meeting remarkable entrepreneurs and learning about interesting and innovative ideas. Beyond the personal experience, it’s wonderful to know as an angel that you’re helping build the economy, creating jobs and life-changing innovations, and giving promising new businesses a chance.
And I can’t leave Rose’s “entrepreneurship without responsibility” without another comment. One of my favorite angels has said how much he loved starting his very successful company and selling it for a great return, but not so much the part in the middle (running and growing the company). As angel investors, we know the responsibility for the company’s success is with the CEO and we can enjoy being involved with the company without taking the responsibility “in the middle” of getting to a great exit.
Angel investing offers many returns. What could be better than doing good and having fun while employing good investment practices that make money at the same time?
This week's RVI meeting (Wednesday 4/18, 8:00am, offices of TechSpring) included four presentations to see if we are interested in starting due diligence:
- Treaty LLC - Developed FogKicker, a high performance anti-fog solution for mirrors, diving masks and goggles. A University of Massachusetts, Amherst based-team, now headquartered in Springfield, MA.
- Premama - The fastest growing company in Rhode Island. They create products for pre and postnatal nutrition, with 10 products sold in over 7500 store.
- Zippity - Provides full service, onsite car maintenance with our mobile service garages and tech-enabled user experience.
- New England Breath Technologies (10:20am) - Fast, quick, non-invasive diabetes screening using breath analysis. This company is also based in Springfield, mA.
Western-Massachusetts based angel network River Valley Investors (RVI) completed an investment in a Valt, a Western Massachusetts-based cybersecurity company.
Valt makes it easy for anyone to have a truly secure and unique password for every website they visit, without the impossible task of needing to remember them all. Their solution competes with other password management systems like those from LastPass and 1Password.
“The existing password management solutions aren’t easy for normal people to use, they are products created by programmers, for programmers. Valt’s intuitive solution offers the opportunity to bring strong security to us mere mortals,” said RVI Manager Paul Silva.
Valt CEO Brent Heeringa shares, “Valt is thrilled to have support from investors in Western Massachusetts and looks forward to a strong and fruitful relationship with RVI.”
This is River Valley Investors’ first investment in Valt.
The Angel Capital Association put out this interesting piece on a new method for startup valuation, the Saraf Method.
- The first step is to consider the exit practicalities for the company (see full article for details),
- The next step is to think about the financing requirements,
- The third step is to look at the current fund-raising market conditions and current deal details and
- The fourth and final step is to look up your valuation on the adjusted “curve” on the Valuation Look-Up Table.