ENT640 – Winning Angels – Valuing
The five stages of early investing as proposed by Amis and Stevenson in Winning Angels are:
- Quick and Easy
- Academic/investment banker
- Professional venture capitalist
- Compensated advisor
As a novice angel investor, I want to dive into the quick and easy method, not just because of the name, but more so because of the description- “…to resolve the challenge of early stage investing: the lack of information, the high level of unpredictability, the need to move with relative speed, and the need to garner a significant share of the upside.” (2001, pg. 148) I want to consider venturing with the $5m limit and the rule of thirds method.
You may have $2,000 – $2,000,000 to invest, but one thing should be established…what is your threshold to invest and stick with it. The bottom line will focus your investments. The amount is irrelevant because “…the end value of the company determines your return as a multiplier of the amount invested.” (pg. 149) The upside, a one out of ten ratio will allow you to recoup your initial investment. The downside is determining how much is too much to invest.
With this method you don’t waste time. My mind goes back to vacation time share presentations. You sit through this hour and a half spill even though you either are not going to buy into the great escape, or you know how much you are willing to invest. I have been to enough of them to know that after all the packages, they go speak to someone with authority and power to make that $5000-$7000 deal with deferred maintenance fees every other year. Bingo! Now it’s attractive and affordable. But it took almost three hours of your life to make the deal; time wasted. The quick and easy approach doesn’t even let you step in the building or give an ear to what is over your risk tolerance point.
How much time do you have for a due diligence recliner? “‘Angels don’t have as much leeway to do due diligence that would get them comfortable with high valuation.’ ” (pg. 150) The rule of thirds method gives you a reasonable gain measure and yet it is still not time consuming. You don’t want to get lost in the numbers unless you like crunching them or have someone on your team with the skillset. The upside, fewer moving parts. The split is between founders, investors and management. The downside, “the line between founders and management is not always so clear and founders often have high personal value perceptions.” (pg.150) The perceptions skew the reality of the truth-this is not worth what you think it is; there is clearly a plank in your eye.
Your approach fit will depend on your risk tolerance, which can change with your upside experiences. The most important factor is to begin. Learn to swim in the angel investment waters then try diving then flipping. Your experience will increase your depth and return on investment.
Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.