Superbowl 2020 brought us Kansas City Chiefs vs. San Francisco 49ers, Hummer EV vs. Genesis SUV, Jennifer Lopez with Shakira, and Tom Brady vs. potential retirement. It also brought us some interesting facts for angel investors and valuing angel investment opportunities.
Angel Investors, Valuing Angel Investment Opportunities, and the San Francisco 49ers
The York family bought the San Francisco 49ers in 1977 for $17 million. Forbes estimates the 49ers’ value at $3.5 billion, making it one of the 10 most valuable sports teams in the world. The San Francisco 49ers have not won a Super Bowl since 1995.
Why is this business so valuable?
The NFL has 32 teams. Every team gets an equal cut of the national revenue that includes money from TV rights, sponsorship, licensing, and merchandise sales. It doesn’t matter how many games each team wins or loses. National revenue is estimated to be more than $8 billion, with each team receiving more than $250 million. This is on top of local revenues, including ticket sales.
These teams obviously have expenses. Player salaries are probably the biggest expense. For the 2019 season, there was a salary cap of $188 million per team, and owners have to spend at least $167.5 million.
How do we get to a $3.5 billion value?
Calculating a reasonable price, or valuation, for a business can be a challenge for angel investors. Notice I stated that the angel investor should be determining the price. This is the opposite of how most angel investment transactions are taking place. Early-stage businesses typically establish the value and sales price. Some avoid the valuation discussion by delaying the conversation until later using a SAFE note.
However, angel investors are the ones in control. I estimated there are approximately 30 million angel investment opportunities, but less than 1 million active angel investors. The 21st Century version of the Golden Rule applies here… He (or she) who has the gold, rules….
There is no “one size fits all” approach to determining the value of a startup. However, there is a wealth of ideas on how to accomplish this, thanks to a wide array of methodologies created by experienced entrepreneurs and angel investors. It makes sense to consider the most credible methods and define your own approach to valuation. Here are the methods I consider.
Scorecard Valuation Method
The Scorecard Valuation method, created by Bill Payne, is one of the most popular methodologies used by angels. This method compares the startup seeking funding to other funded startups by creating an average valuation based on factors that include region, market, and stage.
The purpose of Scorecard Valuation is to compare the startup to the perception of other startups within the same region. Payne recommends using these factors:
Strength of the Founder(s) (0–30%)
Size of the Opportunity (0–25%)
Product/Technology (0–15%)
Competitive Environment (0–10%)
Marketing/Sales Channels/Partnerships (0–10%)
Need for Additional Investment (0–5%)
Other (0–5%)
Berkus Method
The Berkus Method was developed by super angel investor David Berkus. His approach assigns a number, a financial valuation, to each major element of risk faced by all young companies and credits the entrepreneur some basic value for the quality and potential of their business idea.
The Berkus Method uses five qualitative and quantitative factors to calculate valuation:
Sound Idea (basic value)
Prototype (reduces technology risk)
Quality Management Team (reduces execution risk)
Strategic Relationships (reduces market risk)
Product Rollout or Sales (reduces production risk)
The Berkus Method also assigns a monetary value to each factor. The maximum value that can be assigned to each factor is $500K, meaning that the pre-money valuation can total up to $2.5M. Berkus sets the “hurdle” number at $25M, achieved in the fifth year in business, to allow the investment to achieve a ten-times increase in value over its life.
Market Multiple
This approach is popular with venture capitalists because it gives them a good indication of what the market is willing to pay for a company. The market multiple approach values the company against recent acquisitions of similar companies in the market.
While most established corporations are valued based on earnings, the value of startups is commonly determined based on revenue multiples. Placing a value on young companies requires extensive forecasting to assess what the sales or earnings of the business will be once it reaches maturity.
The intent of the market multiple approach is to deliver value estimates that come close to what investors are willing to pay. The challenge is that comparable market transactions can be difficult to find, especially in the startup market. Companies that often represent the closest comparisons are early stage, unlisted companies.
Development Stage Valuation
The development stage valuation approach is often used by angel investors and venture capital firms to generate a rough range of company value. Investors set these values based on their experience and values vary depending on the company’s stage of development. The further the company has progressed along the development pathway, the lower the company's risk and the higher its value. Here’s an example of a valuation-by-stage model:
Estimated Company Value Stage of Development
$250,000 - $500,000 The business idea or business plan exists
$500,000 - $1 million The management team is in place to execute the plan
$1 million – $2 million A final product or technology prototype has been developed
$2 million – $5 million Strategic alliances, partners or customers are in place
$5 million and up Revenue growth and a pathway to profitability is imminent
Oftentimes, private equity firms will create milestones for providing additional funding. For example, the first round of financing may be dedicated to employee wages while a subsequent round of funding is designated to mass produce and market the product or service.
Conclusion
The startup valuation process is as much art as it is science. Determining the value of a young company is challenging because the factors contributing to success are uncertain. The good news is that the startup community offers many talented and well-established investors who have accumulated very valuable experience and are willing to share their knowledge. New angel investors will benefit from doing their research and listening to the more experienced investors they meet along the journey.
Contact Info@omegaaccelerator.com if you are interested in making angel investments.
Are you looking for investors for your business? Contact us at funding@omegaaccelerator.com.
Sources:
https://rencarlton.blogspot.com/2019/09/funding-session-with-ren-carlton.html
Disclaimer: This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service. We are not offering any legal, investment, or tax advice. All stories are based on true events, but are significantly altered to protect the identity of the individuals involved.
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