Angel financing – Valuation (part 2)

In the first part of this article series, I discussed reasons why valuation is important. In this article I will talk about how to come up with a valuation. Unfortunately there is no clear cut formula you can use. As with trying to value anything that is unique, such as a work of art, valuation ultimately comes down to a meeting of the minds of what the holder agrees to sell at and what the purchaser agrees to buy at.

Practices used to value mature companies generally do not work for start-up companies in their early stages. This is because there are too many unknowns if the company will be viable and how much revenue it will make. This makes using a discounted cash flow method of valuation very subjective as you can support a wide range in valuation by the assumption you make on the company’s terminal cash flow. Using a comparables method of valuation is also problematic as you will probably only have data on VC or IPO deals which deal with companies that are at a later stage of development. The value for these companies is going to be higher as they have proven they have a viable product/revenue stream.

In terms of practical guidance based on experience, a rule of thumb is to expect that if your company is looking for its first round of angel financing, then it will have pre-money valuation in the $1m to $3m range. This is based on the assumption that your company is pre-revenue or in the early stages of revenue, has a product that is close to going to market, has a partial management team assembled, etc.

The main advice I can give around valuation is to be reasonable and be flexible. As I discussed in the previous article, having a high valuation for the first round of financing makes it harder for investors to realize their ROI objectives. So unless there is something really special about your company, it is not a reasonable expectation to get an eight figure valuation. Since valuation is so subjective, your best strategy is to be flexible in the early stages of the pitch. You will not be able to convey the full value of your company during a 20 minute investment pitch. You should state your valuation expectations but say they are open to negotiation. During the more detailed due dilligence meetings, you will be able to spend more time with the interested investors and have the opportunity to have more serious discussions on valuation & the aspects of your company you feel support your valuation target (i.e. strengths in management, product, barriers to entry, IP, market potential). You will also get to know your potential investors better.

Successful companies generally look for ‘smart money’, meaning investors that are willing to contribute money as well as their knowledge & expertise to help the business. You may find your investors can provide expertise to help fill out areas on the management team or can open doors for the company to potential clients. In this case, the value that the investors bring to the table is far more than just money so you may need to accommodate this via a lower valuation to entice them to get on board.

A final point of advice is to separate the valuation discussion from control. A lot of founders approach valuation along the lines of: I need to raise $X, I want to maintain 51% control of my company, therefore I’ll set my valuation to ensure that after I get the money, I will still have over 51% of the shares in the company. This is flawed logic as its fairly easy to structure a financing deal where investors get control of a company without owning 51% of the shares outstanding. If control is an important consideration, then as a founder your best option is to get the company as far as possible before requiring outside financing. As soon as you take on other financial stake-holders you will have other people?s money involved in your company so you will need to ensure they viewpoints & opinions are managed.

In my next article I will talk about the due dilligence process. To view an organized index of all angel financing articles as well as see a roadmap of future articles, click here. If you have any comments or suggestions for future articles feel free to contact me: craig at

StandoutJobs raises $2m from iNovia Capital

The news is finally public that StandoutJobs, a Montreal, Quebec company who we mentioned in our earlier post about DEMO08, has raised $2million from iNovia Capital.

standout.pngWith this announcement and their launch at DEMO, StandoutJobs is taking back the veil on their business model. When we first saw them almost a year ago, StandoutJobs looked like a recruiting company that did videos, and we didn’t find it very compelling. I got to hear more a few months ago however over supper with Ben Yoskovitz, and it started to make a lot more sense. StandoutJobs will be providing a SaaS solution to companies that essentially lets them build a complete hiring page that is much more rich and user-focused than the normal “email”. The pages are fully customizable and seem to be focused on helping the company display much more current and directly useful information to the potential hires. For a more detailed overview, check out this post on Mashable.

inovia.pngiNovia Capital bills itself as a “seed and early-stage venture capital fund” with offices in Alberta (Edmonton and Calgary) as well as Montreal. They seem to be increasingly active with their investments and I am impressed that they took the entire $2million round to themselves, which likely speaks to the solid team that StandoutJobs has in place as well as iNovia’s willingness to get out there and shoulder some risk.

In case you think you are being hit with a case of Deja Vu, you are right: StandoutJobs did previously announce that they had raised funding from Garage Ventures Canada, but this seems to have fallen apart. On the StandoutJobs blog:

“As well, it?s time to announce a bit of news with respect to our financing. Although we announced some time ago that we raised money with Garage Technology Ventures Canada, that did not in fact come to pass. As we got deeper into the process with Garage, it was clear that it was not the best fit for us. We wish Garage the best of luck.”

It seems that whatever came to pass with Garage did not take away from the credibility of StandoutJobs or the team there, as iNovia seems to have quickly seen the opportunity.

Congratulations to everyone at iNovia and StandoutJobs.

Canadian Companies at DEMO08

demo08logo2.jpgThere are 5+1 Canadian companies on the slate at DEMO08 today and for the next 2 days.

DEMO is a sort of launch pad for companies who want to make a big splash with a launch or an announcement. It boils down to 2 days of pitches.

Up front, DEMO has never made a lot of sense to me. You pay ~$18,000 just to get up on stage, and spend at least another $10,000 getting yourself ready. So, $20,000 to get up and pitch to a room full of people there to see a few dozen other presentations as well, all from difference industries and disciplines. The place probably isn’t crawling with customers, and my guess is that most of the presenting companies are funded already to some degree.

That said, have spoken to a few people who have presented, or will be presenting this week, it is more obvious what DEMO is selling.

Polish – To demo at DEMO, you have to have a polished and perfected pitch. You have 6 minutes to make a huge auditorium more excited about YOUR launch than all the others who will take the same stage.

Exposure – Everything at DEMO is recorded and available on the web. I can personally admit to watching almost ALL the DEMO pitches every year. Some of them are just incredibly terrible while others inspire and impress.

A Deadline – Once you launch at DEMO, you are going to get enough exposure that you have to have something for the public that is worth talking about. It is better to release early, and DEMO seems to drive a lot of startups to do that.

Good luck to all the Canadian startups. I will post links to their presentations here when they are online.