Valuation for Angel Investor

Valuation is the procedure by which a startup’s potential worth is determined, alongside the ownership stake an investor will have within the business.

Why valuation matters for angel investors?

It is often tricky for angel investors to allot a meaningful value to early-stage startups, particularly without existing revenue. Hence it becomes imperative to make a dedicated attempt at the valuation process, as it directly correlates to the profits you will earn at the time of successful exit. It will facilitate you to decide whether — and to what extent– an investment is worthwhile. Furthermore, it provides insight into similar companies and the market on the whole.

Pre-money valuation methodologies used for startups

There are different methods of valuing a business, and no one method, in particular, is ideal for any given investor. Many angel investors make use of more than one method to be precise, while some adhere to a specific methodology which they find dependable.

Scorecard

It is one of the commonly used valuation methods and derived from Bill Payne. The Scorecard method weighs different criteria before estimating how the startup fares concerning similar businesses. It then takes the adjusted weight and multiplies it by the average pre-money valuation of comparable startups to reach the target company’s valuation.

The Berkus Method

Derived by Dave Berkus, the Berkus Method focuses on four risk factors, namely technology, execution, market, and production.

The Risk Factor Summation Method

It is similar in methodology to the Berkus method. But while Berkus method takes under consideration only four important risk factors to assist review valuation, this method considers a higher number of risk factors.

The Risk Capital Method

Professor Bill Sahlman introduced the risk capital Method in 1987. It focuses on how much an investor wants to profit on their investment. Unlike the previous two methods, this doesn’t take under consideration risk factors.

Nurseli Kultufan

Angel Effect Team

Angel Effect is a platform bringing the global world together by meeting entrepreneurs with value-creating investors, partners and mentors.