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Pre-revenue Business
Investment & Valuation

Julian Ranger
www.jranger.com



  H2O Group
Basic truth
• To an investor a business consists of
   • 50% team
     • because they WILL have to tack & veer as business...
Investment Steps - 1st
• Presenter only has one head ...
• Does idea resonate?
  • Is it expressed clearly with a compelli...
Investment Steps - The Pitch
• Min items:
  • Idea; wow me with idea; why great; why better than
   competition; IPR & bar...
Investment Steps - Final
• Due diligence
  • Does everything said stack up under investigation
    • So put in best light ...
Pre-Revenue Valuation
• A key part to the process   • Formal methods?
                                • Public Company
• E...
Pre-Revenue Valuation
• A key part to the process   • Formal methods?
                                • Public Company
• E...
Pre-Revenue Valuation
• A key part to the process   • Formal methods?
                                • Public Company
• E...
Valuation - Return based
• First call is to work backwards from required return
  • Aim is 10x
    • But depends on risk ;...
Valuation - variance
• Accept that there is a large variation in acceptable valuations
  • Tightly tied to perceived risk ...
Valuation - Dislike factors
• Every investor has personal dislike factors that reduce
  valuation, or puts to zero
• For m...
Valuation - market price
• Its a market and have to price to the market
  • If no interest then
    • either team, product...
Greed ratio
       Investment Sum x Owners%
      Owner’s Investment x Investors%



• Usual range is 5 to 8
• Over 10 is ...
Greed ratio - DAD calculation

                  £750K x 70%
                                   = 3.5
                  £5...
Valuation - Conclusion
• An art form versus an exact science
  • Looking for high IRR
• Only one part of the overall inves...
Entrepreneur’s Checklist
Exits - is it all worthwhile?
• Set up STASYS in 1986; sold in 2005 to Lockheed Martin
  • Plan for the long term - not ev...
Marketing
Marketing
Marketing




       www.dadapp.com
Marketing




       www.dadapp.com
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3 cs investing and valuation

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A presentation on the angel investment process and how to value non-revenue start-ups.

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3 cs investing and valuation

  1. 1. Pre-revenue Business Investment & Valuation Julian Ranger www.jranger.com H2O Group
  2. 2. Basic truth • To an investor a business consists of • 50% team • because they WILL have to tack & veer as business progresses • if team is weak, idea is irrelevant • 25% idea • idea is important, but it WILL change as market changes and as gain experience in the market • 25% revenue plan • so often see proposals with a team and an idea, but revenue plan is weak or non-existent • hope is not a plan
  3. 3. Investment Steps - 1st • Presenter only has one head ... • Does idea resonate? • Is it expressed clearly with a compelling need identified • Investment need clearly explained with reasonable valuation • All OK then move to pitch • Why valuation at this stage? • More of a negative than a positive • If way out of line then lose confidence in decision making of the team
  4. 4. Investment Steps - The Pitch • Min items: • Idea; wow me with idea; why great; why better than competition; IPR & barriers to entry • Team - enthuse me with what makes team special; done it before? • Re team past history helpful, but quality of pitch content and presentation ability will form significant element • Market - how market & sell; how become dominant: revenue plan; believability - research • Financials - state today; range of projections; clear punchline - investment required and %age on offer (& other needs)
  5. 5. Investment Steps - Final • Due diligence • Does everything said stack up under investigation • So put in best light when pitching, but don’t over- embellish • Legals, particularly, Shareholder’s Agreement • Min. is Drag & Tag and approval of Director & Senior Management service agreement • Keep costs low by using standard templates • Initial Investment - success! • but ensure have element available for follow-on investment
  6. 6. Pre-Revenue Valuation • A key part to the process • Formal methods? • Public Company • Easy to spot over- comparables valuation • Discounted Cash Flow • e.g. £50K of founder’s • Similar transactions money, worked on • Balance sheet valuation project for 3 months and • Berkus Business Stage want £1.5M valuation • Rule of Thirds • Put off till later • Greed Ratio
  7. 7. Pre-Revenue Valuation • A key part to the process • Formal methods? • Public Company • Easy to spot over- comparables valuation • Discounted Cash Flow • e.g. £50K of founder’s • Similar transactions money, worked on • Balance sheet valuation project for 3 months and • Berkus Business Stage want £1.5M valuation • Rule of Thirds • Put off till later • Greed Ratio
  8. 8. Pre-Revenue Valuation • A key part to the process • Formal methods? • Public Company • Easy to spot over- comparables valuation • Discounted Cash Flow • e.g. £50K of founder’s • Similar transactions money, worked on • Balance sheet valuation project for 3 months and • Berkus Business Stage want £1.5M valuation • Rule of Thirds • Put off till later • Greed Ratio
  9. 9. Valuation - Return based • First call is to work backwards from required return • Aim is 10x • But depends on risk ; low risk, then maybe 5x • (Though what is truly low risk pre-revenue?) • e.g. • Business may be worth £3-5M in 3-4 years • Put in £150K for 30% • So on exit get £4M*0.3 = £1.2M • 8x return
  10. 10. Valuation - variance • Accept that there is a large variation in acceptable valuations • Tightly tied to perceived risk in the investment • 50% team; 25% idea; 25% revenue plan • Tick all the boxes and perceived risk goes down • Therefore return can go down and hence valuation higher • Weak on one element, valuation comes down as risk higher • Weak on 2 or more then valuation is ZERO • or should be!
  11. 11. Valuation - Dislike factors • Every investor has personal dislike factors that reduce valuation, or puts to zero • For me one is founder’s effort • If founder has put money in and effectively free effort there is a value to that • BUT if founder wants investment for a comfortable salary whilst building a business this is a strong warning sign • i.e. if business fails, well founder got paid anyway • & if it succeeds founder gets the bonus of an exit too • Win/Win for founder, but not investor • Investors want founder motivated and not overly comfortable (but not in penury either)
  12. 12. Valuation - market price • Its a market and have to price to the market • If no interest then • either team, product or plan is not right • and/or valuation too high • Iterate; ask advice; listen to feedback; iterate; etc • However, I am constantly amazed how often the answer is 25%-35% whatever the level of investment is
  13. 13. Greed ratio Investment Sum x Owners% Owner’s Investment x Investors% • Usual range is 5 to 8 • Over 10 is greedy • Provides a good sanity check for small business valuation
  14. 14. Greed ratio - DAD calculation £750K x 70% = 3.5 £500K x 30% • Usual range is 5 to 8 • For DAD below usual range = good value
  15. 15. Valuation - Conclusion • An art form versus an exact science • Looking for high IRR • Only one part of the overall investment decision • Perceived risk is a key factor • Must ensure founders/management remain incentivised • Advice for those seeking investment • Kiss a lot of frogs to find your prince!
  16. 16. Entrepreneur’s Checklist
  17. 17. Exits - is it all worthwhile? • Set up STASYS in 1986; sold in 2005 to Lockheed Martin • Plan for the long term - not everything is 3-5 years • Key factors • Learning disposition • Year 19 v different to Year 1! • Innovation • Honesty & Integrity • The details matter too
  18. 18. Marketing
  19. 19. Marketing
  20. 20. Marketing www.dadapp.com
  21. 21. Marketing www.dadapp.com

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