Active angels invest in a diversified portfolio of 10 or more companies, usually spreading their investments over a few years. Experience proves that half of these companies will fail (returning nothing or less than capital invested), another 3-4 will provide a modest return on investment of 1X to 5X and one or hopefully two of the ten companies will return 10X to 30X on the initial investment over a five to eight year period of time. In the end, such a portfolio might yield the angel investor a total return on investment of 25% per year or more.
Scorecard Valuation Methodology
This method compares the target company to typical angel-funded startup ventures and adjusts the average valuation of recently funded companies in the region to establish a pre-money valuation of the target. Such comparisons can only be made for companies at the same stage of development, in this case, for pre-revenue startup ventures.
The first step in using the Scorecard Method is to determine the average pre-money valuation of pre-revenue companies in the region and business sector of the target company. Pre-money valuation varies with the economy and with the competitive environment for startup ventures within a region. In most regions, the pre-money valuation does not vary significantly from one business sector to another.
As can be seen the average (mean) pre-money valuation for recent pre-revenue deals is $2.1 million and the mode (middle number) for this data set is $2.0 million, indicating a somewhat normal distribution. The range of the data is from a low pre-money valuation of $0.8 million to a high of $3.4 million for pre-revenue companies.
We also have data points for VC investments in seed/startup companies (but not necessarily pre-revenue companies). The following chart from Dow Jones VentureSource shows very little variation in pre-money valuation of VC seed stage deals over the past decade. Average annual pre-money valuations have been just over $2 million during this period.
For purposes of this study, we will assume that the pre-money valuation of pre-revenue companies varies in the range of $1.5-2.5 million and that the average pre-money valuation for these firms is $2.0 million.
The next step in determining the pre-money valuation of pre-revenue companies using the Scorecard Method is to compare the target company to your perception of similar deals done in your region, considering the following factors:
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