A presentation on the angel investment process and how to value non-revenue start-ups.

1. Pre-revenue Business
Investment & Valuation
Julian Ranger
www.jranger.com
H2O Group

2. Basic truth
• To an investor a business consists of
• 50% team
• because they WILL have to tack & veer as business
progresses
• if team is weak, idea is irrelevant
• 25% idea
• idea is important, but it WILL change as market changes
and as gain experience in the market
• 25% revenue plan
• so often see proposals with a team and an idea, but
revenue plan is weak or non-existent
• hope is not a plan

3. Investment Steps - 1st
• Presenter only has one head ...
• Does idea resonate?
• Is it expressed clearly with a compelling need identified
• Investment need clearly explained with reasonable valuation
• All OK then move to pitch
• Why valuation at this stage?
• More of a negative than a positive
• If way out of line then lose confidence in decision making
of the team

4. Investment Steps - The Pitch
• Min items:
• Idea; wow me with idea; why great; why better than
competition; IPR & barriers to entry
• Team - enthuse me with what makes team special; done it
before?
• Re team past history helpful, but quality of pitch content
and presentation ability will form significant element
• Market - how market & sell; how become dominant:
revenue plan; believability - research
• Financials - state today; range of projections; clear punchline
- investment required and %age on offer (& other needs)

5. Investment Steps - Final
• Due diligence
• Does everything said stack up under investigation
• So put in best light when pitching, but don’t over-
embellish
• Legals, particularly, Shareholder’s Agreement
• Min. is Drag & Tag and approval of Director & Senior
Management service agreement
• Keep costs low by using standard templates
• Initial Investment - success!
• but ensure have element available for follow-on investment

6. Pre-Revenue Valuation
• A key part to the process • Formal methods?
• Public Company
• Easy to spot over- comparables
valuation • Discounted Cash Flow
• e.g. £50K of founder’s • Similar transactions
money, worked on • Balance sheet valuation
project for 3 months and • Berkus Business Stage
want £1.5M valuation • Rule of Thirds
• Put off till later
• Greed Ratio

7. Pre-Revenue Valuation
• A key part to the process • Formal methods?
• Public Company
• Easy to spot over- comparables
valuation • Discounted Cash Flow
• e.g. £50K of founder’s • Similar transactions
money, worked on • Balance sheet valuation
project for 3 months and • Berkus Business Stage
want £1.5M valuation • Rule of Thirds
• Put off till later
• Greed Ratio

8. Pre-Revenue Valuation
• A key part to the process • Formal methods?
• Public Company
• Easy to spot over- comparables
valuation • Discounted Cash Flow
• e.g. £50K of founder’s • Similar transactions
money, worked on • Balance sheet valuation
project for 3 months and • Berkus Business Stage
want £1.5M valuation • Rule of Thirds
• Put off till later
• Greed Ratio

9. Valuation - Return based
• First call is to work backwards from required return
• Aim is 10x
• But depends on risk ; low risk, then maybe 5x
• (Though what is truly low risk pre-revenue?)
• e.g.
• Business may be worth £3-5M in 3-4 years
• Put in £150K for 30%
• So on exit get £4M*0.3 = £1.2M
• 8x return

10. Valuation - variance
• Accept that there is a large variation in acceptable valuations
• Tightly tied to perceived risk in the investment
• 50% team; 25% idea; 25% revenue plan
• Tick all the boxes and perceived risk goes down
• Therefore return can go down and hence valuation
higher
• Weak on one element, valuation comes down as risk
higher
• Weak on 2 or more then valuation is ZERO
• or should be!

11. Valuation - Dislike factors
• Every investor has personal dislike factors that reduce
valuation, or puts to zero
• For me one is founder’s effort
• If founder has put money in and effectively free effort there
is a value to that
• BUT if founder wants investment for a comfortable salary
whilst building a business this is a strong warning sign
• i.e. if business fails, well founder got paid anyway
• & if it succeeds founder gets the bonus of an exit too
• Win/Win for founder, but not investor
• Investors want founder motivated and not overly
comfortable (but not in penury either)

12. Valuation - market price
• Its a market and have to price to the market
• If no interest then
• either team, product or plan is not right
• and/or valuation too high
• Iterate; ask advice; listen to feedback; iterate; etc
• However, I am constantly amazed how often the answer is
25%-35% whatever the level of investment is

13. Greed ratio
Investment Sum x Owners%
Owner’s Investment x Investors%
• Usual range is 5 to 8
• Over 10 is greedy
• Provides a good sanity check for small business valuation

14. Greed ratio - DAD calculation
£750K x 70%
= 3.5
£500K x 30%
• Usual range is 5 to 8
• For DAD below usual range = good value

15. Valuation - Conclusion
• An art form versus an exact science
• Looking for high IRR
• Only one part of the overall investment decision
• Perceived risk is a key factor
• Must ensure founders/management remain incentivised
• Advice for those seeking investment
• Kiss a lot of frogs to find your prince!

16. Entrepreneur’s Checklist

17. Exits - is it all worthwhile?
• Set up STASYS in 1986; sold in 2005 to Lockheed Martin
• Plan for the long term - not everything is 3-5 years
• Key factors
• Learning disposition
• Year 19 v different to Year 1!
• Innovation
• Honesty & Integrity
• The details matter too

18. Marketing

19. Marketing

20. Marketing
www.dadapp.com

21. Marketing
www.dadapp.com