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Ask YC: I'm pitching to an angel. How do I value my startup?

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Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#11

Post by hacker64 »

iamelgringo wrote: post #7

[disclaimer]Mind you, I'm on the outside looking in. I really haven't started the startup funding shuffle yet, but I've read compulsively. And, this is what I've gleaned. YMMV.[/disclaimer] First, a few important questions. Do you have revenue? How many users? How fast have your been growing? Proprietary patentable technology, or a user focused tool built on open source? I'd say that how many people are on the team,…

I'd say I'm at stage similar to what an 'average' YC startup would've been at after about 3 to 5 months. Not hugely populr, and not at a deadend either. It's a consumer, social, Web site. We don't have a lot of users yet, and we don't have revenue, but the concept seems to be a good one, and I think that's how the investor heard of us and approached us.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#12

Post by mrtron »

mattmaroon wrote: post #5
hacker64 wrote: post #3

Earlier quoted context omitted.

We have a low burn rate, so a $100K should be enough to allow the two of us to continue working on it for another year, including a small marketing budget, and occasionally bringing in a consultant for the things we need help with (graphics, marketing consultations, legal, ..etc).

I'd also shoot for more than a year's expenses. I've found investors like to hear you're aiming for 18-24 months. Consider that you have to essentially start seeking funding 6 months before running dry. If you aim for 1 year's expenses you work 6 months, then start on fundraising. Raise 18 months' expenses and you work for 12 before fundraising again, so you get double the progress for only 50% more money. And if you…

I would go one step further.

If you need 100k, why are you looking for VC funding? They will give a horrible valuation and take a large part of your company. First phase funding in the ~100k range I would look for angel investors or get the people involved to contribute the money. Either raise 500k from a VC and have a much more aggressive growth strategy if that is the route you want to go, or raise 50k from friends/angels/yourselves and minimize costs as much as possible.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#13

Post by skmurphy »

Don't get locked on the pre-money valuation: the other terms tend to have a much bigger impact on how much you actually make.

What's your plan for paying the investor back? Will you need a follow on round? How much, when, and why. What risks about your startup will you have reduced before you need to raise another round. Can you be acquired based on what you will achieve with this first round.

Have you talked to other teams this investor has worked with? You have to assign a value to the expertise, advice, and connections that this investor will bring. Most angel investors supply more than money. That's one of the reasons teams want to take money from Ycombinator, they have a well defined methodology and a constellation of other folks they can connect you with who can help you succeed.

You are negotiating the start of a relationship that will normally only end when your firm goes bankrupt or is sold: this is not a transaction this is a long term partnership.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#14

Post by hacker64 »

mrtron wrote: post #12
mattmaroon wrote: post #5

Earlier quoted context omitted.

I'd also shoot for more than a year's expenses. I've found investors like to hear you're aiming for 18-24 months. Consider that you have to essentially start seeking funding 6 months before running dry. If you aim for 1 year's expenses you work 6 months, then start on fundraising. Raise 18 months' expenses and you work for 12 before fundraising again, so you get double the progress for only 50% more money. And if you…

I would go one step further. If you need 100k, why are you looking for VC funding? They will give a horrible valuation and take a large part of your company. First phase funding in the ~100k range I would look for angel investors or get the people involved to contribute the money. Either raise 500k from a VC and have a much more aggressive growth strategy if that is the route you want to go, or raise 50k from friends…

I'm not looking for VC funding. He's an angel investor.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#15

Post by skmurphy »

hacker64 wrote: post #6
mattmaroon wrote: post #4

Don't. Say something like "I want to keep x% of the company". Thus if you end up getting more funding than you initially expected (happens often) you'll essentially get a higher val.

That's an interesting twist. Thanks. Is it common?

It may be common but the more important question the investor will have is how soon and for how much you can sell the company (in other words how will you use the funds to create more value / reduce risk in the startup). There will be other terms associated with a funding that will have a significant impact on how much you make when you sell (for a reasonable range of exits). A couple of good sites for background on funding:

http://venturehacks.com/

http://www.feld.com/blog/archives/cat_term_sheet.html

http://www.startupcompanylawyer.com/?s=term+sheet

http://www.paulgraham.com/guidetoinvestors.html

http://www.skmurphy.com/blog/2007/12/01/three-points-about-s...

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#16

Post by mrtron »

hacker64 wrote: post #14
mrtron wrote: post #12

Earlier quoted context omitted.

I would go one step further. If you need 100k, why are you looking for VC funding? They will give a horrible valuation and take a large part of your company. First phase funding in the ~100k range I would look for angel investors or get the people involved to contribute the money. Either raise 500k from a VC and have a much more aggressive growth strategy if that is the route you want to go, or raise 50k from friends…

I'm not looking for VC funding. He's an angel investor.

Well then. Good move.

(friday night, beer and a looming all nighter...and other excuses, read the YC as VC...)

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#17

Post by brett »

iamelgringo wrote: post #7

[disclaimer]Mind you, I'm on the outside looking in. I really haven't started the startup funding shuffle yet, but I've read compulsively. And, this is what I've gleaned. YMMV.[/disclaimer] First, a few important questions. Do you have revenue? How many users? How fast have your been growing? Proprietary patentable technology, or a user focused tool built on open source? I'd say that how many people are on the team,…

I think you mean:

value = $15000/20% = $75000 at the low end

or

value = $15000/5% = $300,000 at the high end

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#18

Post by mig »

mattmaroon wrote: post #5
hacker64 wrote: post #3

Earlier quoted context omitted.

We have a low burn rate, so a $100K should be enough to allow the two of us to continue working on it for another year, including a small marketing budget, and occasionally bringing in a consultant for the things we need help with (graphics, marketing consultations, legal, ..etc).

I'd also shoot for more than a year's expenses. I've found investors like to hear you're aiming for 18-24 months. Consider that you have to essentially start seeking funding 6 months before running dry. If you aim for 1 year's expenses you work 6 months, then start on fundraising. Raise 18 months' expenses and you work for 12 before fundraising again, so you get double the progress for only 50% more money. And if you…

$100K is not enough to sustain two employees for an year. $50K is less than the annual average living expenses for a person. (Just do the Math, housing, insurance, etc.). I would strongggggggggly recommend to try raising something between 0.75M an 1M. I have noticed a lot of fellow hackers seriously undervaluing the time they spend building a product. Two strong hackers, working for 6 months is eaily $140K expenses(and I am including just the salary an employer would pay). Please, please do not undervalue your time and expertise.

With the oncoming recession and all, you do want to have enough in the bank for at least 1 to 2 years, if you are serious about your startup.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#20

Post by car »

lisper wrote: post #19

You might want to consider punting on the question altogether by taking angel money as convertible debt instead of equity.

I agree. Convertible debt financing delays the valuation question until it becomes reasonable and is a common way to do seed rounds.
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