Valuation Returns-Formulas-Rules of Thumb

What the greatest technology investors say about Valuation Returns-Formulas-Rules of Thumb

VCs Want Big Outcomes & May Block a Sale

Mark Suster Partner Upfront Ventures and former entrepreneur

“VCs want big outcomes.  [VCs] will demand a veto right over [a company sale].  [A founder] might be very happy selling [his] business for $9 million and owning 50% of the company.  [A] VC is not necessarily going to be happy getting $3 million for his 33% stake for which he invested $1 million.

[While that’s] a 3x return [] it’s still just $3 million and if the VC has a $300 million [fund] it is just 1% of the money [needed] to reach his “hurdle rate” of when he’s entitled to earn carry (e.g. big bucks).  It’s just too much time to spend [] for such a small total return.  Many VC’s would still let [a founder] sell []” but some would block the sale.  Mark Suster  Do You Really Even Need VC? July 22, 2009; http://www.bothsidesofthetable.com/2009/07/22/do-you-really-even-need-vc/

 

When Can You Sell?

Basil Peters angel investor and Principal Strategic Exits Corporation

“When can [one] sell? [] [With] M&A [merger & acquisition] exits [] the real threshold is to ‘prove the business model’. [To prove the model] [] a recurring revenue business [] [should show] actual results for: revenue per customer, gross margin per customer, customer lifetime (or churn [i.e., how long one enjoys that customer]) [and] cost of customer acquisition.  In other words, how much is a customer worth and what do[es] [a customer] cost to acquire?

[With that proven model], [] credible projection[s] [can be built] that [show] if: new owners added $X millions of capital, the business would have Y customers and be worth $Z millions.

That’s when [one] can sell [although] there are often additional factors like competitors and market changes. [] As soon as [one] prove[s] the model is often the best time to sell.  [It’s] always best to sell on an upward trend. Sell[ing] on the promise, not the reality [is] often when [one] [gets] the best price.”   Basil Peters, Maximizing Exit Value Angel Capital Assn Annual Summit Workshop Apr. 15, 2009;  http://www.basilpeters.com/Presentations/Maximizing_Exit_Value_20090415_Part_2.pdf , pg 5-10

 

Angels Need a 20-25%/yr Return

Basil Peters angel investor and Principal Strategic Exits Corporation

“[] angels need to get 20% to 25% per year [] the same [return] as a venture fund.  So, if you do the math, [] angels need to make three to five times their money in three to five years.”    Basil Peters, Seed Capital From Angel Investors: Basil Peters, CEO and Fund Manager, Fundamental Technologies II (Part 5);  Jul 7, 2010;  http://www.sramanamitra.com/2010/07/07/seed-capital-from-angel-investors-basil-peters-ceo-and-fund-manager-fundamental-technologies-ii-part-5/

Why VC's Block an Exit

Basil Peters angel investor and Principal Strategic Exits Corporation

“Most entrepreneurs don’t even know that a VC is likely to block an exit when they accept the VC’s money. [] VCs design their investment agreements to give them the power to block exits.”

“[] VCs will almost always block a sale where they only make a 3-4X return on their investment.  This could have easily been a 10X return for the angels and a 100X return for the entrepreneurs.

[] The winners [must] produce at least 10-30X return for the [VC] fund to perform respectably.

[] This propensity to block exits is one of the reasons that every company needs a clear exit strategy before [it approaches its] first investor.”  Basil Peters, How VCs Block Exits, August 28, 2010, http://www.exits.com/blog/how-vcs-block-exits/; Why VCs Will Block Good Exits;  http://www.angelblog.net/Why_VCs_Block_Good_Exits.html

High Valuations Can Limit Exit Opportunities

Josh Kopelman Partner First Round Capital and former entrepreneur

Kopelman advises that entrepreneurs who “[] try to maximize valuation [] in many cases [] might be shortsighted” because high valuations can limit exit opportunities.  “[] too many founders are not aware that they are shutting off the majority of exits -- and therefore increasing risks -- when they accept a high valuation.”  “[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Thus, a VC could block an exit that could have been a fabulous payout for entrepreneurs and angels.   Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html;  When the music stops... March 10, 2006;  http://redeye.firstround.com/2006/03/as_a_little_kid.html

The Unwritten Term on the Term Sheet

Josh Kopelman Partner First Round Capital and former entrepreneur

 “When a company gets a term sheet with a high valuation, [the entrepreneur] need[s] to pay attention to the unwritten term on the term sheet.”  The entrepreneur should be ok “with [an] exit multiple that would generate [] returns [] to satisfy [] VC[‘s]. While every situation is unique, here's a simple rule of thumb:

Series A – 10X
Series B – 4-7X
Series C – 2-4X ”

“[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html; file Josh Kopelman Unintent Moonst Unwrt;      http://redeye.firstround.com/2006/03/as_a_little_kid.html