- Valuation of early stage businesses is difficult due to lack of comparables and transparency. - Angel investors typically see median returns of 0% but average returns of 20% due to most returns coming from 10% of investments. - Lower valuations may increase potential returns for angels but there is little data on what valuations should be or if valuation impacts returns. - Reasonable to determine valuation by considering what exit value is needed for investors to achieve desired returns given assumptions about investment amount, dilution, and exit share.

1. Valuation
of
Early
Stage
Businesses
(An exercise in futility)
(c) Loon Creek Capital Group, LLC 2016

2. The
answer
is…
$1 million
(c) Loon Creek Capital Group, LLC 2016

3. What
do
we
believe?
All other things being equal…
which they are not...
a lower valuation increases the potential for higher returns to angels
(c) Loon Creek Capital Group, LLC 2016

4. What
do
we
not
know?
(Does
value
matter?)
• Do convertible note result in higher returns?
• Do lower valuations result in higher returns?
• Do higher valuations result in higher returns?
• What is a fair valuation?
• How much is an idea worth?
• What constitutes a good idea?
• What constitutes a good deal?
(c) Loon Creek Capital Group, LLC 2016

5. What
do
we
know?
• Sale of property
• Price negotiated in private transaction
• Between willing buyer and seller
• No reliable comparables
• Not transparent
• Not public
• No appraisals
• Economic power sets price
• In money centers, competition to invest = higher valuations
• In Idaho, competition to raise money = lower valuations
• Discounted cash flow does not work
• Lot’s of theories, but little research
(c) Loon Creek Capital Group, LLC 2016

6. Returns
to
angel
investors
• The median return is 0%
• The average return is around 20% IRR
• 10% of investments produce 90% of returns
• 50% will be completed losses
• 40% will be 1 to 2 X
• Implications:
• Every deal must have home run potential
• You must be diversified
• You must invest for the exit
(c) Loon Creek Capital Group, LLC 2016

7. Data
From Rob Wiltbank talk to NW Chapter of Angel Capital Association,
Seattle, March 9, 2016
(c) Loon Creek Capital Group, LLC 2016

8. (c) Loon Creek Capital Group, LLC 2016
Public Acquisi+on of Private Firms from ‘96 to ‘06
Only
15% > $50M

9. (c) Loon Creek Capital Group, LLC 2016
$500k
$500k
$510k
$850k
$833k
$829k
$835k
$1,164k
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
2012
2013
2014
2015
Median Round Size
Mean Round Size
Mean Ownership Percentage
Median and Mean Round Sizes – Angels Only
2015 Shows Round Sizes Increasing,
Mean Ownership of Angel round is Rela+vely Stable 20-25%

10. (c) Loon Creek Capital Group, LLC 2016
Median Seed Stage Pre-Money ValuaCon
Median Valua+on Up 53% From 2014, Highest Valua+on in HALO History
$0.22M
$23.5M
MEDIAN :
$4.6M
3rd Quar+le:
$7.5M
1st Quar+le:
$3.1M
$13.5M
3rd Quar+le:
$4.4M
$3.0M
MEDIAN :
1st Quar+le:
$2.0M
$0.30M
2014 2015

11. What’s
wrong
with
this
picture?
• Median valuation $4.6 M
• Mean ownership 20% = $.92 M investment
• Mean exit $20 M
• Dilution = 50% (no data to support)
• Then angels will receive at exit:
• 20% X 50% = 10%
• 10% of $20 million = $2 million, ignoring preferences
• $2 million/$.92 million = 2.2 X return
(c) Loon Creek Capital Group, LLC 2016

12. Valuation
Math
General
Assumptions
• We want to make 10X on our investment
• We will be diluted 50%
• The company will exit at $20 million
(c) Loon Creek Capital Group, LLC 2016

13. Valuation
Math
Question
1:
What
is
a
reasonable
pre-­‐money
valuation?
Worksheet
(c) Loon Creek Capital Group, LLC 2016

14. Valuation
Math
Question
2:
Given
the
entrepreneur’s
requested
valuation,
what
exit
value
will
the
company
have
to
achieve?
Worksheet
(c) Loon Creek Capital Group, LLC 2016

15. Some
thoughts
for
the
entrepreneur
• Angels must have potential to make big money
• Exits in excess of $20 million are scarce
• Don’t set yourself up for
• A down round
• High or contingent preferences
With too high an initial valuation
(c) Loon Creek Capital Group, LLC 2016

16. Conclusion
• No good data on what valuations should be
• Intuitively, lower seems better
• Reasonable to back into valuation by looking at exit potential
• The answer is $1 million!
(c) Loon Creek Capital Group, LLC 2016

17. Berkus
–
Maximum
of
$2,500,000
If Exists
• Sound Idea
• Prototype
• Quality Management Team
• Quality Board
• Sales
Add to Valuation
• $500,000
• $500,000
• $500,000
• $500,000
• $500,000
(c) Loon Creek Capital Group, LLC 2016

18. Payne
–
Apply
to
norm
• Standard weight on six factors
• Management (30%)
• Size of opportunity (25%)
• Product or service (10%)
• Sales channels (10%)
• Stage of business (10%)
• Other (15%)
• Overweight or underweight as you judge
• Sum and apply to norm
(c) Loon Creek Capital Group, LLC 2016

19. Payne
Model
Worksheet
(c) Loon Creek Capital Group, LLC 2016