P.s.- This system works mostly for seed stage, from A rounds onwards, there is more information about the startup's performance and metrics to be able to predict future cash flows, and comparable multiples can also come into play. But in general, the exercise of starting the valuation by looking at the actual financial needs first should never be neglected.

Business angel reflections on valuation

There are many theories on the subject of startup valuation, but regardless of all of them, valuation doesn't really matter much, because, after all, what difference does it make to enter at 1 million than at 1.3 million? If you are going to put in, for example, 10 percent as a business angel, your investment will be between 100,000 and 130,000. That range is not what is going to define profitability. What really matters to an investor is to see that in that project he can multiply by a factor of ten or more. On the other hand, entrepreneurs do attach a lot of importance, too much importance, to the valuation of their start-up, because they consider it to be a kind of mark they have given it in the exam that they can boast about in bars and blogs. Finally someone has endorsed that their idea is valuable and they can finally tell others about it.

It is as if success has already been achieved. The entrepreneur thinks so, and quite possibly his brother-in-law and in-laws as well, and this, when you have been selling smoke for a long time, matters a lot, even if it is only to recover your self-esteem.  But for an investor, valuation is almost irrelevant. At least it is not the determining factor when it comes to whether or not to enter into an investment. A business angel usually invests between 100,000 and 200,000 euros, which represents a 10 to 20 percent stake, so, relatively speaking, whether the valuation goes up or down a little is almost irrelevant to the final amount invested and, above all, to what an investor is really interested in, which is the final return on his investment. 

If a company is sold for 80 million, like Trovit; What difference does it make whether you got in at one million or two million? Your 10 per cent is now worth eight million. Who can remember whether it cost you 100 or 130? The real objective of a valuation, in the eyes of the investor, is therefore to visualise in some way what the company is expected to look like in five years' time, the usual horizon for a business angel investment. What turnover can we be talking about in five years' time? This does make it possible to estimate what kind of profitability and what kind of exit transaction to expect. In practice, this The valuation process is usually done in reverse. The investor usually asks the entrepreneur: to achieve that target of, say, 20 million in five years, what investment do you need now? Let's say the entrepreneur says 300,000 euros. Well, as the investor needs to be able to multiply by ten what he is going to give now, he will want to receive at the time of the exit, in five years, about 3 million, and as it is assumed that the company will then be worth 20, in order to get the three he is aiming for, he must have 6 percent of the company. So the valuation is there. The investor will give 300,000 in exchange for 15 percent of the company. 

This simple calculation becomes more complicated if between now and the time of departure new capital increases (+) and there will be dilutions (+), but the concept is always the same: 

1. What company will we have in five years' time?
2. How much money do you need from the investor for this?
3. What returns do investors demand for their money? 

All in all, you get a percentage share in the company, which you will have to give him now. And that is the valuation. This is the essence of what investors call the venture capital method, a method of valuing companies that is mostly used by business angels and venture capitalists. But let's take the drama out of it, if in this calculation of the valuation y, therefore, in this discussion of investor participation, no agreement is reached with the entrepreneurs, nothing really happens for the investor. 

"It is better to have a friend who is not a partner than a partner who is not a friend. 

Moreover, this is going to be a long-term relationship and it should be one of total mutual agreement, with each party looking after its own interests. 

HOW MUCH INVOLVEMENT DOES A BUSINESS ANGEL WANT? 

Business angels, whatever the amount to be contributed, always take minority stakes. It is a big mistake for investors who want to run the company, who want to be entrepreneurs and control the investee companies. It is better for the founding team to keep control of more or less 60 percent of the shares and the other 40 percent to be divided equally between two investors, because the real business angel does not like to invest alone, mainly to avoid that uncomfortable situation in which entrepreneurs seem to be on one side, on one side, and on the other, opposite, on the opposing side, the investor.

As we all know, tables are much more stable with three legs than with two.

Many investors move around a 10 to 20 per cent stake for an investment of between 100,000 and 200,000 euros which, together with an identical investment from the co-investor, totals the 300,000 to 400,000 euros which, on average, I believe is enough today to start up a digital business. So I tend to keep no less than a 10 per cent stake, to get them to listen to me on the boards, but never more than 20 per cent, so that if things don't go well, it's the entrepreneur who doesn't sleep. The problem is theirs and the company is theirs. I think it's a fair deal. 

"In my own business plan, I set myself the objective that in each year of the four years into which I divide the life span of each fund, I should make ten investments of 200,000 euros, i.e. 40 investments. Of these, I know that 80 percent will disappear or I will forget about them, and that the remaining 20 percent - that is, eight companies - I will invest an average of another million euros. That is my investment strategy. Clear and simple, with few exceptions...".

It is also common to do follow-up rounds in companies that work very well; I invest approximately up to two or three million euros. In terms of investment and my criteria as a business angel. 

SOME TIPS FOR VALUING START-UPS:

It is important to give you some thoughts on the subject of valuation, because we often not only make the wrong judgement, but do so for the wrong reasons.

• Separate valuation from your ego: Unfortunately, more often than we dare to say, we take the term valuation as a measure of our success. As a question of size... when it is an instrument of our company, nothing more and nothing less. And so we spend months looking for a valuation that we think reflects us and not our company (which is different). So remember that your job is not to find investors, but clients.
• Round sizes: at the beginning it is a bad idea to do huge pharaonic rounds that require many months to close, why not split the round into "phases"? Although it depends a lot on the sector, in my opinion you should look for enough money to last 6-8 months and make the jump to the next level... and with those metrics look for the next round and my advice is to always ask for something more than you think you will need, given that normally the expenses are always higher than expected, and the income lower. How much? Well, maybe 20-30% more, but that's more of a personal assessment based on my experience than a scientifically derived figure.
• The investor profile also determines valuation - and value: usually, the more experienced the investor you are going to talk to, the more the valuation will be adjusted... which means you will be more diluted. This is a negative, no doubt, but it has to be weighed against another factor: the value that an experienced investor can give you is several orders of magnitude greater than that provided by a financial partner alone. So weigh both approaches with all the facts in hand.
• The more tangible the better: My advice is to try to delay that first round as much as possible to give yourself space to generate enough traction to support your valuation, and to provide the necessary confidence to investors. Nobody invests in powerpoints anymore, but in the right metrics, and in this order: revenue -> users -> social (contests, media...).
• Courage and valuation, first cousins: the key is to understand that the valuation of your startup has to be "matched" to the value that is created in the project... and between rounds, clear and quantitative leaps in value must be justified. Look at it from the investor's point of view: if he invests in your startup it is because he expects to multiply his investment (among other things)... and the first requirement for this is that you are able to multiply the value of the company. If there is no major qualitative leap between rounds, new investors are likely to doubt your ability to create that value.
• The impact of a high valuation: a high valuation can compromise the future of your project, even if you are now very happy because you have managed to convince 10 investors to contribute 200K at a valuation of 2M being in seed stage, most likely, you have just put the first nail in your coffin, as discussed in the previous point, you will have to make a major qualitative leap to get the next round ... and do you really think you will be able to justify that your company is worth 4 or 5M in 6 months a year? The road is littered with startups that have died because of this. How many rounds? It is often said that the ideal number of rounds is equal to or less than zero... because joining is a way to gradually lose control of your company, and to have to deal with more people, which increases the complexity of management. But it is also true that having experienced people on board in your company is absolutely key to go faster and better. Also, if you are exit-oriented, having experienced investors is usually the difference between "almost" and making it (but of course, it depends a lot on what success is for you).

AND REMEMBER, IT IS KEY TO UNDERSTAND THAT:

"In the early stages, valuation is not a function of the actual value of the company but of its potential and, above all, of the percentage that is given to investors".