Angel investment and valuation

Bangalore has many angel investors these days. In the last six months, I have come across several persons and groups who have expressed interest in funding start ups in the city. While this is good news, an entrepreneur needs to tread carefully before accepting money. In addition to the quantity of money, the quality of investment may also be important. Entrepreneurs need to understand what they need. Sometimes it may be more than money; they may need customer contacts and advisory inputs.

Entrepreneurs also need to view this from the angle of the angel investor. Why would the angel be interested in putting some money in the start up? Are they looking for great financial returns? Do they understand the risks involved? Will they get involved in the day to day operational affairs or will they just look at the overall business model and strategy?

Entrepreneurs need to be clear about what they are willing to give up in their business. Are they willing to give up equity and if yes, how much? Much of this is also linked to valuation of the start up. And therein lies the problem! In the case of a start up, the value is driven by the perception of the future. In an early stage venture, perceptions of the future can be varied. Some more thoughts on valuation:

Valuation is based on:
– intangibles and
– tangibles
In the case of a start up, the tangible (land, building, cash on hand etc.) is very limited and much of the value is in the intangible, driven by the promoters background and networks, business idea, potential market opportunity and ability of the new firm to capture this opportunity.

Valuation can be computed in multiple ways, the popular methods:
– multiples of revenue; profit etc.
– multiples of key drivers, e.g. user base
– cash flow based

Here one would like to look at comparable transactions in the market, to bench mark the valuation of the company. In most cases, when one wants to get data on the comparables, there is a practical problem. Much of this data and related information is not available and is out of public domain. Here is where one should leverage on one’s networks to get some information about current transactions.

Different persons can value the same business differently because they may
– use different methods of valuation
– use variations in the methods
– have different inputs in the methods

Thus, valuation perceptions can vary, and we do have situations where there are divergent views on valuation. Deals can sometimes be structured in such a way that the differences in valuation perception are factored, e.g. linking valuation to performance in the future. This is of course assuming that the promoters and investors are keen to work together and strike a deal. Negotiations play a key role in this process. It is good to identify the strong points and the risks in the business as these will impact one’s bargaining power.

The two sides need to remember that they are not planning to be on two sides of the table; they will become collaborative partners in the start up if the investment is made. Valuation is the start of this process, not the conclusion.


  1. Pranav Bhasin says:

    Very true. In our case, we have some data of comparable transactions, but most of it is about transactions in US. Is there a standard factor that can be used to translate this data to be relevant for India ?

  2. Anjana Vivek says:

    Hi Pranav, there are some discounts one uses to translate this data. This again varies from industry to industry. Some VCs have taked about this; as a rule of thumb, if an early stage venture in the US is valued around 8 m USD, it may be about 50% of that or even less in India. Again this is not standard, it depends on the nature of the company, markets addressed, size of the company, quality of key team etc. Discount factors are also applicable when one is comparing a start up with a listed company. This is actually why negotiating is an important part of the process.

  3. Raghu Kanchustambham says:

    whats the typical stake that an angel investor would like to have? I know it will depend on a spectrum of factors, but could you provide some indicative numbers?

    And, lets say I do not necessarily need money – but I want to build a sales team and I need help there. Can that qualify as a reason to look for a VC? Or am I better off just evaluating a suitable ‘marketing agency’ and outsource ‘sales’ to them?

  4. K Khakhar says:

    Angels like to have between 5 to 30 percent; depending on spectrum of factors as you mentioned.

    Look for VC’s when your fund requirements are atleast million (single digits) USD plus . Angels are also a great source for market development, company foundation and industry network – I usually recommend to look for angels who can bring more than just money on the table.

  5. Anjana Vivek says:

    Yes, as mentioned, stakes taken by angels vary. This also depends on the stake you are willing to give up and the ‘angel’ in question. Some angels are comfortable with a 5% stake. Then there are those who want about one third of the company they invest in. There are also some aggressive investors who look for much higher stake, sometimes even more than that of the promoters, as they want to be in control. This may actually be counter productive as it can demotivate the entrepreneur rather than motivate.
    Early stage valuation is quite fluid and this is also reflected in the wide variance of equity stake in angel investment. As an entrepreneur you need to do a due diligence on the angel investor just as they would review you and your company. The due diligence need not be formal; you need to check the background of the investors and their track record. If they have invested in companies before, do try and get some feedback on this. Then use your judgment because the feedback could be biased. Do not just accept money blindly without thinking through the pros and cons.
    Re money for the sales team, there is no standard answer. Initially if you are not in a position to raise funds from angels and VCs (see my previous post on being ready for VC investment) you may want to just outsource the marketing on a commission basis or some such arrangement. Once you grow to a certain stage, you may want to do this in house. This is part of your business strategy for execution and you could review these decisions for time to time.

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