Sunday, November 25, 2012

Valuations Rising throughout the Country but not Texas

The Angel Capital Association surveys select angel groups throughout the country each year regarding valuations.  For those who are new to angel investing, valuation is the price the investor pays to take an equity stake in a company.  The higher the valuation of the company, the lower the percent ownership the angel investor receives.  You can see the current survey results here. The Baylor Angel Network is listed in the survey.  While their number is higher, it represents a limited number of deals and doesn't necessarily reflect valuations overall.

In short, the survey says valuations are going up in angel groups throughout the country.  During the last Angel Capital Association Summit which is the annual gathering of angel groups, I spoke with several group leaders about what they saw in valuations.  Most of the group talked about how valuations were going up.  Some attributed the lower starting point to the depressed stock markets from 2008 and as the stock market recovers so too would valuations.  Others pointed to the lack of other alternative investments.  There appears to be a definite move away from venture capital funds and private hedge funds.  In talking with investors, they are tired of paying the management fees and carry on what has turned out to be mediocre if not outright disappointing results. Many investors are opting to make investments directly into startups which is pushing up the price.  

Watching dealflow throughout the state of Texas, I haven't seen a strong increase in valuations, yet.  I say, "yet" because I predict the valuations of startups will rise in Texas.  It may be 2013 will be the year that valuations will take a step up.  While there are many deals seeking funding there are a limited number of deals that are attractive to investors.  So what is attractive to investors?  Deals that can pay out sooner in the form of revenue-sharing or dividends are quite attractive.  Fo entrepreneurs who have 40% gross margin or better  I now talk with them about paying back investors through cash flow.  This is called revenue based funding because the investor gets a piece of the revenue rather than equity.  Five years ago, if you offered this deal to investors they would have said no thank you, wanting to see a large return through the sale of the company. since then, buyouts have stretched from a 3 to 5 year window to closer to 9 to 11 years.  The average life of a company today from startup to exit is just under 12 years. This is why investors today find the revenue model much more attractive.  

If you are raising funding, consider a model in which you offer a share of the revenue rather than or in addition to equity.  You'll find an attentive audience with the investors.

Best regards,
Hall T. 

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