Angel investors (like venture capital investors) want to make money, but they know that most companies they invest in will never pay them anything. They just know that. It’s in the statistics. And they know it from personal experience. After I invested in the first 10 companies a decade ago (before I figured out how to do it well) one of that first cohort has had a major liquidity event. I learned fast.
Even if angel investors believe your company will succeed, they know the returns will be years from now, maybe a decade from now. This is the main reason why it’s so hard to get a high startup valuation from angels. They want a low valuation so that they can get a larger share of your company. That way, the payoff for them will be large enough to cover all the investments which don’t succeed. They also want a low valuation so they can have a larger percentage, which means you’ll listen to them more. Investors like to be heard after they put their money in.
In this post, I’m using the term “investor valuation” loosely to apply to the valuation of any innovative new or growing privately-held company, not necessarily a newly born entity. So you may view your company as a “scale-up” venture, not a startup, or some other similar term, but for our purposes, the term “startup valuation” will apply to your company in this post.
Investor valuation is not as easy to determine as you think. It’s not an objective number. It depends on whether you’re the buyer or the seller (the investor or the founder of a business.) WTP vs WTA is the economic theory behind this. Of course, it’s obvious that the amount an investor is willing to pay for a share of your company (WTP=willing to pay) has to be more than you’re willing to accept (WTA=willing to accept) to give up that share. WTP >= WTA.
What’s not obvious is that the most common reason angels and VCs turn down deals when they reach the negotiation stage is that their WTP < WTA. In other words, the investor is not willing to pay what the business owner is willing to accept. Or to put it another way, the investor wants a larger share of the company for a certain dollar amount. Even if the investor says, if he says anything, that he thinks the business is a little too early in its niche (bad timing), or he’s worried about the qualifications of the executive team, he might accept the deal if the seller was to lower his/her WTA. So it still boils down to WTP must be >= WTA.
And the trouble is, economists know that WTP is lowered by various cognitive biases such as “normalcy bias” (what is normal is best) or the variant “social proof bias” – (“If this were so good, why doesn’t everyone agree and invest.”) or the variant (“I don’t want to be first.”) bias.
And for further trouble, the seller’s WTA is inflated by “endowment bias” (see article in Inc. magazine “Why Intelligent Minds LIke Steve Jobs and Elon Musk Embrace the WTP Rule to Make Better Decisions”. He/she values what they’ve created more than what they would pay for the same thing. So the problem in a valuation you’ll likely insist on a higher valuation for your company than most investors are willing to pay. This would be OK if you had endless time (your opportunity window was endlessly large) and there were an infinite number of investors you can reach. Neither is true. So maybe looking at your WTA (your perceived valuation) is a sensible idea. Forget about all the years and all the personal sacrifices you’ve made. Ask what is the objective value of your business? Really???
So the most common advice you’ll get is to lower your WTA limit, in other words, accept a lower valuation than you think your company is worthy Not here. No way.
THE ONE FACT YOU NEED: How to increase your much your investor’s WTP, in other words, how to increase your startup valuation in the eyes of the investor.
30 good ways to increase your investor valuation
NOTE: these tips apply to any young growing privately-held company, not just new startups. I’ll summarize them here, for detailing in subsequent blogs but in the meantime, this is the most comprehensive success checklist I know of:
- Increase confidence in your ability to execute
- Demonstrate that you really understand your customers
- Demonstrate that you understand the various market segments you could choose
- Demonstrate you understand the need for a beachhead market (i.e. focus)
- Decrease the main financial risk factors
- Demonstrate that your financial processes make it unlikely to run out of cash
- Value yourself by comparables in addition to discounted cash flow
- Increase trust in your personal motives and character
- Tell who your mentors are and which successful business leaders you emulate, and what you emulate in them
- Have an “Execution Master” on your team, with a significant equity share
- Show how you know your key team members are good matches for each other
- Increase trust in your team’s overall composition
- Team members should have worked together before but not be close relatives or romantic partners
- If you are teaming with a close relative or romantic partner, show how you’re compensating for the risks
- Get “Key Opinion Leaders” on your side
- Give investors an easy way to explain/sell your idea to others
- Demonstrate a compelling need that no one noticed (a gap in the market)
- Demonstrate that you’re not a company competing mainly on price (don’t claim to be better, faster, cheaper at the same time)
- Show that trends are converging to lift your company quickly
- Show real revenue
- Show increasing revenue
- Show revenues whose rate of increase are increasing
- Have a clear believable go-to-market plan
- Demonstrate that you understand the types of pivoting and the need to pivot
- Demonstrate you have the ability to pivot quickly when needed but not too quickly (a balance of the two)
- Demonstrate the positive impact of what your company does
- Demonstrate a clear path to liquidity (who would buy your company and why)
- Be clear that making a positive impact will not distract you from making money, so long as it’s honest money
- Demonstrate a clear “moat” that makes competition difficult or impossible (including but not limited to I.P.)
- Provide structural virality (use of your product automatically causes other people to notice it)
- Provide a network effect (the larger your user base, the greater the value to each new user)
- Provide a continuous stream of good news
- Never exaggerate or misrepresent the facts
- Lead your investors to “bet on the jockey” — putting more emphasis on you and your team than on your product
- Give your investors a powerful dose of “Fear of Missing Out”
QUESTIONS? Connect with me and we can discuss your situation