Angel Investor Sophistication: Increasing Application
of Pre-Revenue Venture Valuation Methodologies

Abstract

There was a time when angel investors committed funds for market research and later, when the Internet boom hit, entire deals with entrepreneurs were sketched out on cocktail napkins. This relationship started to fall apart with down-rounds, dilution, changes to board representation, a general lack of appreciation regarding the early-risk assumption, and a number of other factors. However, over time, they both realized they needed each other, and what the angels developed was a greater understanding of the investment process. Angel investors, becoming more sophisticated, began to adopt some of the strategies and valuation methodologies employed by the venture capital community. Though varied, these methodologies often serve as the framework for the pre-money valuation negotiations for a pre-revenue venture. Research suggests that today’s angel is focused on return on investment, investment timelines, dilution, and other assessment factors that were historically reserved for the venture capital community.

TOPICS: Private equity, fundamental equity analysis, portfolio construction, equity portfolio management