[VICTOR V. BUBUIOC] Winning Angels: Insight Into Entrepreneurial Financing: Part 3: Valuing

[BUBUIOC INC.]

Continuing with our seven part mini blog series on Entrepreneurial Funding, we will take a look at Valuing (Part 3).

How do you know the value of something, whether that is a person, idea, object, or anything else? One popular way is to compare “it” to something similar (if possible). Generally speaking, value is often associated with price. Specifically, the price the buyer is willing to pay the seller.  Of course we know that this is a generalization. Often times, value has nothing to do with a “dollar” amount.

In the book Winning Angels by Amis & Stevenson we are exposed to Five Approaches to Valuation generally used by angel & venture investors:

· Quick and Easy: combination of methods developed by angels to resolve certain aspects of early stage challenges.
· Academic/Investment Banker: traditional financial tools developed for valuing public companies.
· Professional Venture Capitalist: based on traditional methods of multiplier and discounted cash flow.
· Compensated Advisor: stake in exchange for involvement.
· Value Trader: wait until further development (late stage involvement).

Amis and Stevenson maintain, that most investors look for “substantial returns”. This makes sense most of the time. Nevertheless, there are times when “a small piece of a larger pie is proffered to no pie”.

Going back to the aforementioned point that value is not always a function of dollars: We learn that that there are, in fact, other things to think about. One important factor, especially when it comes to investing in new ventures, is the Value of The Entrepreneur. It’s well known that the best player doesn’t always win, but we also know that he/she is our best bet: “I don’t know if this is going to be your big win. But I do believe you will have one and I would like to participate in that” (Craig Burr, 167). In earlier articles we mentioned how very few deals have a chance at succeeding. Investors know and understand this very well. They also know that having one BIG winner can pay off for all the others. So what is a good benchmark? An investor with a 30% average return across the entire portfolio is considered to be doing very well (remember this is an average).

Investors, have to forecast/value in to the future. This presents a rather difficult challenge because of the time factor. Value is a moving target. The further in time we look the less accurate we are likely to be. Think about a funnel – wider in one end. If we tried to value an opportunity at this point in time it is challenging. However, if we tried to value that same opportunity one, two, five, or more years in the future, our estimates are likely to be considerably off the target, hence more difficult. The idea is to acquire something of great value in the future wile giving up something of equal (perceived) value today.  Now you can see how the Professional Venture Capitalist (above): based on traditional methods of multiplier and discounted cash flow makes sense.

In a recent episode of Brain Games by National Geographic, subjects are asked to rate 5 items based on preference. The participants did exactly that, and provided rationalizations for the ranking. As you might have guessed by now, all the items (jeans-for males, and stockings for females) were exactly the same. How did this happen?  There are complex decisions and biases we make on a subconscious level. However, the simple answer is that value, like beauty, is in the eye of the beholder. This is huge. Since most investors work with lots of assumptions and try make way through personal biases. Do you bet on the team you like, or the one that is likely to win?

For more on this topic please see:

Winning Angels: Insight Into Entrepreneurial Financing: Part 1: Sourcing
Winning Angels: Insight Into Entrepreneurial Financing: Part 2: Evaluating

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Posted By BUBUIOC INC. to VICTOR V. BUBUIOC at 6/08/2013 09:56:00 PM