Valuing

The value of a company is a premise looked at from a number of angles.  The balance sheet for is usually the best place to start with respect to a business's financials, but other intangibles also hold value.  Patents, copyrights, trades secrets are all things to consider when giving value to a company.  Sometimes these variables are hard to label with a certain monetary worth.  Ultimately, it’s the experience and wisdom of the investor to make a determination of their own using the information they have at hand. 

Aside from a gut feeling based on the product and intellectual property, there are many ways to evaluate the value of the business as a whole.  The Academic/Investment Banker Method uses financial tools to assess the worth, such discounted cash flow calculators and concepts such as the multiplier method.  The Professional Venture Capitalist method is prevalent among angel investors.  If an Angel assesses a speculative value, rather than donate pure financial contributions, a Compensated Advisor can lend support to a business in exchange for a percentage of equity or future profits. 

When approached with an elevator pitch or in a scenario where quick decisions must be made, The Quick and Easy Method is, well, an easy method!  This early stage of investing is defined by a lack of information, a high level of unpredictability, need to move with relative speed, and when approached with a deal that appears to have a significant upside by making a quick decision.  Investments in this stage can be approached using a couple of different evaluation methods.  The first, The $5M Limit, created by Howard Stevenson, equates to never invest in a start-up deal valued over $5M.  The reason for this is the likelihood of seeing a significant return or viral growth is very weak at this stage of investing.  Stevenson’s methods aim at investing in home-run investments rather than safe bets.  The Berkus Method is similar in that it is also based valuation on variables unrelated to the company’s financial performance.  Rather, this method values the company based on many criteria; the soundness of the idea, an existing prototype, the quality of the management and board of directors, as well as whether or not the start-up has proven itself through product rollout or sales.  Lastly, The Rule of Thirds is admittedly one of the most popular methods utilized by venture capitalists.  This rule requires that Angel’s investment has a specific purpose; 1/3 of a new company's equity should go to the Founders, 1/3 to management, and 1/3 to the Seed Stage investors.

There is no right or wrong way when it comes to placing value on a company.  Ultimately, it’s a gut decision!