Start-up Valuation & Investment Glossary 101

Just a link today; to an excellent brief on valuations and basic investing glossary for the uninitiated:

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How Do I Know If An Investor Has Money To Invest?

So I’ll be honest– I was reading my fellow entrepenuer Doug Richard’s blog and posted a reply (which in my typical verbose fashion turned out almost being an entire post in itself). Being a frugal chap, I thought I’d update my neglected blog AND point you back in the direction of Dougs blog and his School for Startups (not to be confused with Startup School in the U.S, run by Paul & his wife who also founded Y-Combinator)

This is an important question for entreprenuers raising their first round of Angel or VC funding:

Does the white-winged messenger from the gods you’re courting for investment with your fabulous new Google-killing start-up, actually have any money to invest?

Fallen Angel, in a cemetary somewhere in Rome

“Fallen Angel” (Photo Credit: Raquel Giffard)

After reading Dougs post, I felt one thing had been overlooked: Ask the Angel.

I’d recommend the entrepreneur look the angel in the eye, preferably during the first 10 minutes of a meeting and simply as the question “Do you have the money available to invest at the moment?” Any entrepreneur who is going to last the distance in business is going to need to be able to follow their gut as to when someone is telling the truth or telling porky pies.

I’ve found it is surprising how few people ask direct questions, out right, in person, to their face. It often reveals either a more candid answer that you might expect, or atleast you garner the answer indirectly from their reaction.

Few angels like to be seen as “not investing”. They want to keep their finger on the pulse- and there is often that sense of not ‘wanting to miss the next big thing’. Many I know will justify this by arguing that they could always make another asset liquid if they really had to, to take advantage of an opportunity (i.e. for those newbie’s reading- by selling a house, land, stock from another company to have cash available to invest) but I’d argue that this rarely happens in order to invest in a start-up.

So called “Angel Networks” are notorious for being full of timewasters, who use them as much as a club and enjoy the notion of being an investor, while rarely investing or indeed not having the capital to do so. That is not to say ALL Angel Networks are bad; some are OK but approach with serious caution. Personally, I’d also avoid any which charge upfront fees.

In summary, IMHO it is best to ask direct question up front, at the start. It is not rude. It’s demonstrating practical business sense – and an ability to be candid and pull no punches.

Lastly, all this applies in spades and more to VCs. For the uninitiated, make sure you ask them a boat load of questions. What is their fund size? When did it close? How much do they have left? What was the last investment they did? What size was it? When was the last time they did an investment the size of yours and in a comparable sector? So, Angels are not the only investors who like to appear to have money to invest, when they dont…

Quickfire overview:

  • Whether VC or Angel, ask out right if they are investing
  • Ask about specific last investment – inc. size and type of deal
  • Have conversations face to face and follow your gut instinct as to whether they are wasting your time
  • Ask to speak to the last entreprenuer they invested in
  • Don’t be afraid to ask other VCs or investors – the Angel or VC may found out, but it just means you’re doing your due diligence
  • Check for feedback about VCs. Some of it is just bitter talk from rejected applications- but mostly its good stuff.
  • Don’t take any money at any cost – the devil is usually in the detail

Lastly, re-read Dougs post as everything he says is bang on: there is nothing better than to get free advice from a seasoned Angel investor, but be clear about your own goals and beliefs- no one wants to invest their money in a CEO who is a push over. Equally, not a CEO who won’t listen or cant change position given good reason. Make sure you’ve got that balance right.

Termsheet Shenanigans for Beginners

Rummble is once again engaged in discussions with new investors; the meetings can be fun, interesting, engaging … or they can be stressful, frustrating and painful.

A simple rule can be applied here- If it’s the latter, walk away. That is not to say that meetings with your potential new bed partners will always be easy or not challenging. The best thing to be gained from any investment meeting is the potential to improve your business – regardless of whether that investor invests, or not.

Most angel investors and certainly VCs, see hundreds if not thousands of companies and startups. They have a unique insight and view on your business which should not be ignored.

Some VCs I have met with in the past have demonstrated a surprising lack of understanding of the world (in my case, internet and mobile). It is important that your investors have a clear vision of the future of their own. How else can they fairly judge your take on the world? Moreover, you end up pitching an entire industry sector, rather than your product and your team. Even if they do invest but they dont have a beleif set aligned to your own, it will cause major problems further down the line. You are choosing them too; consider your contact essentially joining your team – if you wouldn’t want to work with them in your team, why are you going to attempt to work with them on your board? Don’t.

In general you need to feel the meetings are “right”, that you see eye to eye at least on the basic: your product and the future of the market.

Ultimately, they are of course, looking to maximize their profits and that of their fund; so sometimes taking a dogmatic position for something you believe is right (be it price, your people or your product) is required – or at worst, some serious brinkmanship.

With haggling and termsheets in mind, the often excellent blog at Found and Read has a great Termsheet glossary outlining the most common terms. Also, check out which now has termsheet details uploaded too; its an excellent resource about VCs.

Don’t feel bad now about not knowing these terms as well as the VC – they do it every day, you dont – but do feel bad if you dont make some effort to gen up before discussions begin.

If you don’t know, just say so – you’ll look more foolish pretending to know but not, than simply saying “Liquidation multiple, remind me which one that is?”. After all, if you’re not a seasoned deal-sheet negotiator, they’re going to know that already.

So, it has been said 100 times before, but follow your gut. If you’re going to be a succesful entrepreneur, your gut is probably right.

(update: Found and Read has recently joined forces with Gigaom)