Valuation Trends

US Seed Stage Valuation Trends Dublin April 18, 2012 BILL PAYNE

Bill Payne is an active angel investor, board member, and advisor to entrepreneurs.He assisted in founding four angel groups: the Frontier Angel Fund (2005), TechCoast Angels (San Diego – 2000), Vegas Valley Angels (2003) and Aztec VentureNetwork (1999).For three decades, Bill Payne has successfully founded or invested in over 50 start-up companies. He served as an Entrepreneur-in-Residence to the KauffmanFoundation for twelve years. While there, he directed the development of thePower of Angel Investing education series for entrepreneurs and angel investors.He has served as lead instructor for over 100 seminars in seven countries.In 2009, Bill was named the Hans Severiens Award winner as the “outstanding angelinvestor in America.”

AGENDAImpact of Valuation on ReturnsImportance of comparables but scarcity of dataData from VCsAngel group surveysInferences from surveysMethods for Valuation of Pre-revenue Startups Copyright © BillPayne.com 2012

Stage of Development: Seed/Startup• Valuation increases with maturity• Valuation at the earliest stage is most difficult• Focus of this work: Pre-revenue companies • Product or prototype can be shown to customers • Some customer validation is available • Revenues zero or less than $0.5 million annually • Earliest stage most angels would invest• All data reported here is for pre-revenue ventures

Valuation Impacts Returns Terminal Value Year n ROI Year n = (Valuation at Exit)(Cash-On-Cash) Post-Money Valuation (Valuation at Investment) Assume No Dilution

Pre-money Valuation of VC Deals $89.6 $90Median Premoney Valuation ($M) $60 $36.5 $40.0 $34.0 $30 $19.7 $13.8 $6.7 $7.3 $2.6 $2.1 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1H09 Later Stage Second Round First Round Seed Round Source: Dow Jones VentureSource

Angel Data on Valuation (before 2010)

Survey of Angel Groups (Summer 2010)• Contacted leaders of 15 angel groups• Asked for average pre-money valuation of recent pre-revenue deals• Asked for recent trends in valuation• Collected and reported data (13 of 15 reporting)

2010 Angel Valuation Survey (Pre-money Valuation of Pre-revenue Companies) Pre-money ANGEL GROUP Valuation*Tech Coast Angels Southern California $1.25Phenomenelle Angels Madison, WI $1.30New York Angels New York City $1.30Frontier Angel Fund Northwest Montana $1.40DC Dinner Clubs Washington DC Metro $1.50Vancouver Angels Vancouver, BC $1.50Midwest Groups (Okabe) Chicago region $1.50RAIN Funds Midwest region $1.65Ohio TechAngels Columbus, OH $1.75Band of Angels Silicon Valley $1.75Life Science Angels Silicon Valley $2.00Alliance of Angels Seattle $2.10CommonAngels Boston $2.70 MEAN $1.67 MEDIAN $1.50 * in Millions of DollarsFrom: Bill Payne, August 2010

Alert• This data is statistically insignificant• All conclusions are solely those of the author

Valuation Trends in 2010• Market at the earliest stage was soft• Many groups doing some deals at <$1 million• (Having been an angel since 1980 my first sub $1 million deal was in 2009)• Valuations of pre-revenue companies were down in most regions, flat in others• Boston and Silicon Valley were seeing some competition for deals (higher valuations than elsewhere in North America)

Reaction in the Angel Community• Rather universal • Good stuff • Show at ACA Summit • Use in workshops and seminars • We need more data• No good deed goes unpunished

Survey of Angel Groups (Summer 2011) • Contact Leaders of 46 angel groups • 26 states (plus DC) and 2 provinces • Ask for average pre-money valuation of recent pre-revenue deals • Ask for recent trends in valuation • 91% response rate • 35 groups from 20 states (plus DC) and 2 provinces • 7 additional groups had insufficient data

2011 Angel Group Valuation Survey Pre-money Valuation of Pre-revenue Companies Current Average Organization Location Valuation Trend (in millions)Boise Angel Alliance Boise $0.8 up slightlyFargo/Morehead Angels Fargo, ND $0.8 flatMaple Leaf Angels Toronto, ON $1.0 flatNew Mexico Angels Albuquerque $1.3 up pressureDesert Angels Tucson $1.5 flatHawaii Angels Honolulu $1.5 flatRAIN Funds St. Paul, MN $1.5 sl lowerTech Coast Angels San Diego $1.5 flat to downValley Angels Grand Forks, ND $1.5 flatVancouver Angels Vancouver, BC $1.5 decreasingAngel Forum Vancouver, BC $1.6 decreasingAtlanta Tech Angels Atlanta $1.6 sl downOhio TechAngels Columbus $1.8 flatQueen City Angels Cincinnati $1.8 flatSeedStep Angels Oklahoma City $1.9 flat to upMid-Atlantic Angel Group Philadelphia $2.0 unchangedPasadena Angels Pasadena $2.0 increasingDC Dinner Clubs DC/Virginia $2.0 up slightlySierra Angels Incline Village, NV $2.0 flatSt. Louis Arch Angels St. Louis $2.0 unchangedWilmington Investor Network Wilmington, NC $2.0 down 10%Launchpad Angels Boston $2.1 unchangedGolden Angels Milwaukee $2.3 up slightlyAlliance of Angels Seattle $2.5 flatHub Angels Boston $2.5 up pressureSand Hill Angels Silicon Valley $2.5 up ~ 20%/yrVirginia Active Angels Charlottesville, VA $2.5 decliningGolden Seeds NYC $2.9 down 10%Central Texas Angel Network Austin $3.0 upCommonAngels Boston $3.0 unchangedNY Angels NYC $3.0 risingS. Valley Angel Fund ND $3.1 flatLife Science Angels Silicon Valley $3.3 flatBlue Tree Angels Pittsburgh $3.3 increasingBand of Angels Silicon Valley $3.4 up MEAN $2.1 Bill Payne October 2011 MEDIAN $2.0

Alert• This data is probably statistically insignificant• All conclusions are solely those of the author

Valuation Trends in 2011• Median valuation = $2.0 million (mean = $2.1)• Two-thirds of groups between $1.5 and $2.0 • Four groups below this range • Eight groups above this range• Reported trends • 14 groups reported valuations as flat • 12 groups reported valuation as higher • 9 groups reported lower valuations• Perceptions may differ from reality • Groups reporting in both years: 8 up, 1 flat, 1 down

Comparison of Data: 2010 versus 2011 • Great response rate – groups hungry for data • Median valuation increased from $1.5 to $2.0 • Range much broader for larger group • Especially at the upper end of the range • Most groups participating in both years reported higher valuation, significantly higher in some regions

Why the Huge Range in Valuation?• Some verticals command higher valuation (and some groups focus on those verticals) • Capital intensive sectors, such as biotech and clean tech tend to see high valuations than software and IT• Some regions syndicate very large seed/startup rounds ($2 million), which drives up valuation (keeping ownership below 40%)• Most press reports on valuation come from Silicon Valley – a region of high competition• Competition

Competition for Seed/Startup Deals• Regions with substantial competition report higher valuations • Boston (3 groups) - $2.5 million • New York (2 groups) - $2.9 million (up 2.5x in 1 year) • Silicon Valley (3 groups) - $3.1 million (up 2X in 1 year)• More investors are back into early stage investing• Super Angels (and their new seed funds) • Driven to invest in a large number of deals • Some are not negotiating valuation • Only looking for huge home runs

Summary• Reporting on two statistically insignificant surveys of angel groups on pre-revenue valuation of pre- revenue companies• Median valuation in 2011 is $2.0 million, up from $1.5 million over 2010• Competition increased over 2010, back to normal??• Many groups still doing seed/startup deals at $1.5 million or less• For angels, it is nice not to be in NYC, Boston or Silicon Valley

Next Steps - 2012• Ask for median pre-money valuation of pre-revenue companies, not average.• Ask for data by business vertical (providing a small selection of options) • Life Science/Biotech • Energy • Medical device • Software/IT/Internet • Other or ???• Look for a bit more geographic diversity• Expand the number of groups somewhat (60-70) • Consider including seed stage VCs from around the North America

Valuation Trends

by Xcellpartners on Apr 25, 2012

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