Charlie O’Donnell has a great post on getting momentum in a seed financing round. He is talking about momentum, but an understated undercurrent is how to get a higher valuation. I’d like to elaborate on one of his points, which is “understanding the social graph of the investors.” Charlie’s point is a great one – that if you can get a group of investors who talk with each other (and invest with each other) to talk about your company then you dramatically increase the chances of closing a deal with them. Thus, he recommends focusing and lighting a fire under one of these groups and using that to push toward a close. He is 100% correct.
However, I’d like to point out that this strategy does not maximize the chances of a higher valuation. I’ve found that angel investors who regularly invest with each other tend not to like to compete with each other – instead they like to co-invest with each other. While this is great if you can get things going, since you are likely able to raise enough capital to hit your fund raising target, it does not help you create an auction type environment where you get a higher valuation. As I’ve said before:
Once one group (an angel group) sets a pre-money valuation I don’t think the other angel groups are going to get into an auction type-process. These groups need each other to fill in bigger financing rounds. One group can’t outbid another aggressively, or they will not be able to find enough capital to meet most startup’s financing needs. A startup can get different syndicates of venture capitalists in a bidding war; I don’t know if this is as easily possible in the angel financing world. It may be a better idea to try to pit a VC against the angel groups if you are really valuation sensitive.
(That quote came from my post on how angel groups are professionalizing)
So, I will moderately disagree with Charlie’s last point of not pitching in too many places. If you are going to get a decent valuation, you probably need a couple of different groups interested – groups that don’t naturally invest together or information share with each other.
December 31st, 2009 at 6:33 am
You know, I really don't have any sound words of advice on maximizing your angel round valuation–mostly b/c I feel like it's VC rounds where competition drives price increases.
When you're talking angel groups acting as a bigger check, it's really a lot more like a VC round. With true angel rounds, where you're getting a bunch of individuals together and if no one is more than half the round, potentially bumping others out, additional groups don't really move the price.
December 31st, 2009 at 3:20 pm
I'd like to believe that it's possible to influence the valuation of your seed round. It would be very depressing if there was nothing you could do to move the needle higher during an angel round.
January 4th, 2010 at 1:27 pm
We have found that entrepreneurs have the most control over their valuation if they can be successful in raising a seed round from an affinity group of investors that are emotionally tied to their success, and using that money to launch their company, patent their product, produce a prototype, before going in front of angel investors that have a higher expectation. Angel groups, although risk tolerant because they actually play in the high risk game of early stage investing, are subsequently risk adversed if the company is more of an idea, a start up, than an actual company fully commercalized. To increase the valuation during an angel round a company needs to fill in its gaps….management team, advisors, joint venture partners, LOIs from customers, or actual customers, commercialized product and actual strategy to bring it to market.
January 4th, 2010 at 2:33 pm
I would very much agree that hitting value creation milestone can/should increase a company's valuation – assuming these are milestones/metrics important to that particular startup's business and industry. I'm not sure what to say about the affinity group angel investor idea. I'm not entirely sure what you mean, but if the affinity group is also a less sophisticated group (less sophisticated in terms of their investment experience) I'd be more than a bit wary. I've seen companies that are doing well have their first professional venture rounds destroyed/blocked by inexperienced angel investors demanding impossible terms or unrealistic valuations. All in all, if you need the capital to get going then you probably have to do whatever you can, but I'd sacrifice a bit of valuation to end up with a savvier investor.
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