A Practical Guide to Angel Investing (2nd Edition)

If the company needs $2 million to hit the milestones required to achieve this exit, then the investor will require 1/3 of the company ($2/$6 million). Modified Berkus method – Coined by the well-known West Coast Angel Dave Berkus, this method has been modified or used as the basis for many Angel valuation systems. His factors and amounts have varied over the years, but the most current version on his website shows that each of the following factors increases the pre-money valuation by US$500,000:

Factors That Can Contribute to Company Value 1. Sound idea (basic value, product risk) 2. Prototype (reducing technology risk) 3. Quality management team (reducing execution risk) 4. Strategic relationships (reducing market or competition risk) 5. Product rollout or sales (reducing financial or production risk)

So, the maximum pre-revenue valuation for a company that had all these factors would be US$2.5 million, according to Berkus. Various other authors provide for a range of $2.5–6 million, and include other factors, such as value of IP, quality board members and previous investors. This valuation method may not apply to companies with large amounts of prior funding or IP, such as a spin-off from a research laboratory. Scorecard and risk factor summation methods – These methods start with the standard/market value and adjust this standard value up or down based on a list of factors. As with the Berkus method, different authors and Angel groups use different factors and weightings. Cayenne Calculator – The High Tech Startup Valuation Estimator (the Cayenne Calculator) from Cayenne Consulting asks 25 questions and provides an instant valuation online. The valuations range from $500,000 up to $40 million. Users are invited to experiment with the tool to see which factors are primarily driving their valuation assumptions. As such, it is as much an educational tool as it is a calculator. (Find it at https://www.caycon.com/valuation.php)

Median and Mean Valuation

Median $3.8M

Mean $6M

As shown in NACO’s 2016 report on investing activity, Canadian Angels ended up with a wide range of valuations. As the median is so much less than the mean, there were a larger number of small deals.

< $2M $2–4M $4–6M $6–8M $8–10M > $10M

How to Achieve Good Returns

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