Bill Payne - Angel Meetup

1. US Seed Stage Valuation Trends
Dublin
April 18, 2012
BILL PAYNE

2. Bill Payne is an active angel investor, board member, and advisor to entrepreneurs.
He assisted in founding four angel groups: the Frontier Angel Fund (2005), Tech
Coast Angels (San Diego – 2000), Vegas Valley Angels (2003) and Aztec Venture
Network (1999).
For three decades, Bill Payne has successfully founded or invested in over 50 start-
up companies. He served as an Entrepreneur-in-Residence to the Kauffman
Foundation for twelve years. While there, he directed the development of the
Power of Angel Investing education series for entrepreneurs and angel investors.
He has served as lead instructor for over 100 seminars in seven countries.
In 2009, Bill was named the Hans Severiens Award winner as the “outstanding angel
investor in America.”

3. AGENDA
Impact of Valuation on Returns
Importance of comparables but scarcity of data
Data from VCs
Angel group surveys
Inferences from surveys
Methods for Valuation of Pre-revenue Startups
Copyright © BillPayne.com 2012

4. Stage of Development: Seed/Startup
• Valuation increases with maturity
• Valuation at the earliest stage is most difficult
• Focus of this work: Pre-revenue companies
• Product or prototype can be shown to customers
• Some customer validation is available
• Revenues zero or less than $0.5 million annually
• Earliest stage most angels would invest
• All data reported here is for pre-revenue ventures

5. Valuation Impacts Returns
Terminal Value Year n
ROI Year n
=
(Valuation at Exit)
(Cash-On-Cash) Post-Money Valuation
(Valuation at Investment)
Assume No Dilution

6. Pre-money Valuation of VC Deals
$89.6
$90
Median Premoney Valuation ($M)
$60
$36.5 $40.0
$34.0
$30
$19.7
$13.8
$6.7
$7.3
$2.6 $2.1
$0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1H09
Later Stage Second Round First Round Seed Round
Source: Dow Jones VentureSource

7. Angel Data on Valuation (before 2010)

8. Survey of Angel Groups (Summer 2010)
• Contacted leaders of 15 angel groups
• Asked for average pre-money valuation of recent
pre-revenue deals
• Asked for recent trends in valuation
• Collected and reported data (13 of 15 reporting)

9. 2010 Angel Valuation Survey
(Pre-money Valuation of Pre-revenue Companies)
Pre-money
ANGEL GROUP
Valuation*
Tech Coast Angels Southern California $1.25
Phenomenelle Angels Madison, WI $1.30
New York Angels New York City $1.30
Frontier Angel Fund Northwest Montana $1.40
DC Dinner Clubs Washington DC Metro $1.50
Vancouver Angels Vancouver, BC $1.50
Midwest Groups (Okabe) Chicago region $1.50
RAIN Funds Midwest region $1.65
Ohio TechAngels Columbus, OH $1.75
Band of Angels Silicon Valley $1.75
Life Science Angels Silicon Valley $2.00
Alliance of Angels Seattle $2.10
CommonAngels Boston $2.70
MEAN $1.67
MEDIAN $1.50
* in Millions of Dollars
From: Bill Payne, August 2010

10. Alert
• This data is statistically insignificant
• All conclusions are solely those of the author

11. Valuation Trends in 2010
• Market at the earliest stage was soft
• Many groups doing some deals at <$1 million
• (Having been an angel since 1980 my first
sub $1 million deal was in 2009)
• Valuations of pre-revenue companies were down in
most regions, flat in others
• Boston and Silicon Valley were seeing some
competition for deals (higher valuations than
elsewhere in North America)

12. Reaction in the Angel Community
• Rather universal
• Good stuff
• Show at ACA Summit
• Use in workshops and seminars
• We need more data
• No good deed goes unpunished

13. Survey of Angel Groups (Summer 2011)
• Contact Leaders of 46 angel groups
• 26 states (plus DC) and 2 provinces
• Ask for average pre-money valuation of
recent pre-revenue deals
• Ask for recent trends in valuation
• 91% response rate
• 35 groups from 20 states (plus DC) and 2 provinces
• 7 additional groups had insufficient data

14. 2011 Angel Group Valuation Survey
Pre-money Valuation of Pre-revenue Companies
Current Average
Organization Location Valuation Trend
(in millions)
Boise Angel Alliance Boise $0.8 up slightly
Fargo/Morehead Angels Fargo, ND $0.8 flat
Maple Leaf Angels Toronto, ON $1.0 flat
New Mexico Angels Albuquerque $1.3 up pressure
Desert Angels Tucson $1.5 flat
Hawaii Angels Honolulu $1.5 flat
RAIN Funds St. Paul, MN $1.5 sl lower
Tech Coast Angels San Diego $1.5 flat to down
Valley Angels Grand Forks, ND $1.5 flat
Vancouver Angels Vancouver, BC $1.5 decreasing
Angel Forum Vancouver, BC $1.6 decreasing
Atlanta Tech Angels Atlanta $1.6 sl down
Ohio TechAngels Columbus $1.8 flat
Queen City Angels Cincinnati $1.8 flat
SeedStep Angels Oklahoma City $1.9 flat to up
Mid-Atlantic Angel Group Philadelphia $2.0 unchanged
Pasadena Angels Pasadena $2.0 increasing
DC Dinner Clubs DC/Virginia $2.0 up slightly
Sierra Angels Incline Village, NV $2.0 flat
St. Louis Arch Angels St. Louis $2.0 unchanged
Wilmington Investor Network Wilmington, NC $2.0 down 10%
Launchpad Angels Boston $2.1 unchanged
Golden Angels Milwaukee $2.3 up slightly
Alliance of Angels Seattle $2.5 flat
Hub Angels Boston $2.5 up pressure
Sand Hill Angels Silicon Valley $2.5 up ~ 20%/yr
Virginia Active Angels Charlottesville, VA $2.5 declining
Golden Seeds NYC $2.9 down 10%
Central Texas Angel Network Austin $3.0 up
CommonAngels Boston $3.0 unchanged
NY Angels NYC $3.0 rising
S. Valley Angel Fund ND $3.1 flat
Life Science Angels Silicon Valley $3.3 flat
Blue Tree Angels Pittsburgh $3.3 increasing
Band of Angels Silicon Valley $3.4 up
MEAN $2.1
Bill Payne
October 2011
MEDIAN $2.0

15. Alert
• This data is probably statistically insignificant
• All conclusions are solely those of the author

16. Valuation Trends in 2011
• Median valuation = $2.0 million (mean = $2.1)
• Two-thirds of groups between $1.5 and $2.0
• Four groups below this range
• Eight groups above this range
• Reported trends
• 14 groups reported valuations as flat
• 12 groups reported valuation as higher
• 9 groups reported lower valuations
• Perceptions may differ from reality
• Groups reporting in both years: 8 up, 1 flat, 1 down

17. Comparison of Data: 2010 versus 2011
• Great response rate – groups hungry for data
• Median valuation increased from $1.5 to $2.0
• Range much broader for larger group
• Especially at the upper end of the range
• Most groups participating in both years
reported higher valuation, significantly higher
in some regions

18. Why the Huge Range in Valuation?
• Some verticals command higher valuation (and
some groups focus on those verticals)
• Capital intensive sectors, such as biotech and clean
tech tend to see high valuations than software and IT
• Some regions syndicate very large seed/startup
rounds ($2 million), which drives up valuation
(keeping ownership below 40%)
• Most press reports on valuation come from
Silicon Valley – a region of high competition
• Competition

19. Competition for Seed/Startup Deals
• Regions with substantial competition report
higher valuations
• Boston (3 groups) - $2.5 million
• New York (2 groups) - $2.9 million (up 2.5x in 1 year)
• Silicon Valley (3 groups) - $3.1 million (up 2X in 1 year)
• More investors are back into early stage investing
• Super Angels (and their new seed funds)
• Driven to invest in a large number of deals
• Some are not negotiating valuation
• Only looking for huge home runs

20. Summary
• Reporting on two statistically insignificant surveys
of angel groups on pre-revenue valuation of pre-
revenue companies
• Median valuation in 2011 is $2.0 million, up from
$1.5 million over 2010
• Competition increased over 2010, back to normal??
• Many groups still doing seed/startup deals at $1.5
million or less
• For angels, it is nice not to be in NYC, Boston or
Silicon Valley

21. Next Steps - 2012
• Ask for median pre-money valuation of pre-revenue
companies, not average.
• Ask for data by business vertical (providing a small
selection of options)
• Life Science/Biotech
• Energy
• Medical device
• Software/IT/Internet
• Other or ???
• Look for a bit more geographic diversity
• Expand the number of groups somewhat (60-70)
• Consider including seed stage VCs from around the North America