The Importance of Valuing
As I continue to read Winning Angels-the 7 fundamentals of early stage investing by David Amis and Howard Stevenson, I really consider what I would look for in an investment. How do you value an investment? The value of an investment goes beyond the numbers. Many times the value of an investment is connected to the relationships that you make in a deal.
The section on valuing in this book leads off with methods of valuation. These methods help you arrive at the “numbers”. As far as which method is best, this decision is left up to the investor. The book emphasizes that an early investor should focus on companies with valuation of 5 million or less. When investing in these companies, you are more likely to earn five times your money in five years.
Out of all the methods, I like the Berkus method formula. With this method, a value is given to entrepreneur assets.
Putting the numbers aside, some of the other values of a company are the relationship with the entrepreneur, the knowledge that the investor can gain from the industry, future investments into the company, and building relationships with other entrepreneurs.
When I am buying for my business, it is sometimes hard to know how much product to invest in to sell. I have always said that I buy until it feels good. The same is true for investing. You have to feel good about the deal. Many times it just boils down to give and take with the entrepreneur. Naturally, the entrepreneur will feel that their business or product is valuable. As a business owner, I know that I would think that my business is worth more to me than anyone else. An investor has to understand that the entrepreneur does have this heart connection. The entrepreneur has to realize that the person investing and believing in their idea or business has to make money. The relationship that is made between the entrepreneur and the investor is the key to being successful.
Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.
Nasser, Stéphane. “Valuation For Startups – 9 Methods Explained.” Medium, The PARISOMA Review, 28 Apr. 2020, medium.com/parisoma-blog/valuation-for-startups-9-methods-explained-53771c86590e.