"It depends on your point of view," is a universal principle. I have been reading some technical valuation papers lately and one author points out that the first time entrepreneur frequently "decides they need $2M and will 'give up' 25%, so the 'valuation' is $8M" without considering the investor's interests or point of view.
Here's a "guest essay" from John Huston, manager of the Ohio Tech Angels that adds a point of view (tongue in cheek) from the angel's vantage point on "How to Avoid A Successful Exit."
SEVEN STEPS FOR PRECLUDING PROFITABLE EXITS (aka “WORST PRACTICES”)
1) Acquiesce to the entrepreneur’s requested stratospheric valuation in the first round (because you can’t build a friendship if you start by being disagreeable).
2) Don’t bother to estimate how much additional dilutive capital might be required to orchestrate an exit (because crafting a Capital Access Plan involves too much imprecision to have value.)
3) Base your potential return calculations on an IPO exit versus a company sale (because the enterprise is less likely to re-locate post-IPO).
4) Disregard data about historic M & A exit proceeds for VC-backed enterprises in the same industry (because today’s market is obviously in flux, as evidenced by one recent transaction).
5) Base your investment decision solely on who has already committed to invest (because this avoids wasting time on boring due diligence which they probably have already performed).
6) After making your initial investment move to the “mute money mode” (because by spurning opportunities to assist the entrepreneur you can retain your objectivity).
7) Only participate in the first round (because by being a “Willie One Check” you not only will have invested all your money at the lowest valuation, but will also avoid haggling over term sheet provisions regarding Pay to Play or Pre-emptive Rights).
Note: The efficacy of these steps can be vastly enhanced if angels will just make the following assumptions when reviewing a business plan:
a) The founder/inventor deserves to remain CEO until the exit (besides, this horse is such a winner any jockey can ride it to the finish line).
b) It is unlikely the enterprise will encounter any challenges not covered in the business plan (since it is so thorough).
c) When new investors are needed they will grasp the value I have provided the company to date (so they will surely respect my existing terms).
d) The level of detail in financial forecasts is highly correlated with accuracy (so the more complex the financial forecasting model, the higher the likelihood its predictions will be achieved).
e) There are some transformational ideas which truly do “sell themselves” once they are made available to the marketplace (and fortunately this is one of them because “great science can trump any sales strategy”).
f) If cash flow break-even can be achieved with just a tiny market capture percentage, then sales will not be a daunting task (especially if the forecasts haven’t even considered penetrating possibly gargantuan international markets).
g) For medical devices: If a device obviously improves patient outcomes the medical community will embrace it (because physicians are solely concerned about enhancing patient experience).
© 2008 OhioTechAngels; John O. Huston (jh@OhioTechAngels.com)