From an outsider’s perspective, I have always found the process of valuing to be fascinating. I have always enjoyed watching shows like Shark Tank where you have investors running through various calculations to create an offer, and you have entrepreneurs showcasing and defending the value of their company in hopes of finding a partnership at a fair price.

 

I recently went through a valuation process myself as I have been trying to determine whether or not to buy in to a local gym and become part owner. While I won’t share the details of this deal for confidentiality reasons, I still wanted to share my experience compared to some of the strategies brought up in the book Winning Angels by Davis Amis and Howard Stevenson. Luckily, I have made some connections and have had some qualified and experienced people advising me along this process. They helped me to understand what questions I needed to be asking and what information I needed to be looking at. Most of which consisted looking at various financial statements as well as determining exactly how the current owners viewed the future direction of the business. Ultimately, after going through some negotiations, I made the gut decision not to invest in ownership of this business at this time. Given the industry, it seems to make more sense for me to save that capital and invest in my own business and make it exactly what I want.

 

The chapter on valuing in Winning Angels provides various methods for calculating valuations and determining whether the numbers support a good deal or a bad one. Most of the methods seem to support early stage valuations in the $2-10 million range for a typical angel investment opportunity. While numbers are obviously very important in deciding to invest or not, the authors of the book also point out that the numbers aren’t always the deciding factor. I really liked their splurge on “the feel good factor.” Just because numbers seem to make sense, doesn’t mean that an investor feels great about the entrepreneur or the industry in which the business exists. On the flip side, some investors will make what some would consider bad/higher risk deals just because they believe in the entrepreneur and they want to be in good standing with the entrepreneur for future opportunities as well. What I really like about this topic though is that it tells you to trust your gut. Human instincts are an incredible thing, and I feel as though I have trusted my gut through my recent experience leading me to make the right decision.

6 thoughts on “Angel Investing: Valuing

  1. Joseph Rudy says:

    Zach,
    Thank you for sharing your recent experience with us. It is not always easy to lay your personal life out for strangers to learn about.
    Trusting your gut was most likely a good decision. I know the fitness industry can get pretty rough, and making it your own will go a long way. I have learned the hard way that chasing money never works out well. Always go for what you love doing, and the money will take care of itself.
    When valuing an investment opportunity, there are many factors to consider. It boils down to what the angel wants to achieve through that particular deal. As you mentioned, it could be for a blockbuster hit or to simply build bridges for future opportunities.

    Joe Rudy

  2. Zach,
    I like that you pointed out what the book said about guy feelings. “The authors of the book also point out that the numbers aren’t always the deciding factor.” and that ” Just because numbers seem to make sense, doesn’t mean that an investor feels great about the entrepreneur or the industry in which the business exists.” I have the same reaction when I am interviewing candidates for positions. Just because they look good on paper and have all the right credentials, I may hire someone else based solely on personal presence and gut feeling.
    -Bri

  3. Katherine Pearson says:

    Zach,
    Finding the value in a company is so important and I feel of course it is monetary, but also is this going to add value to your life. I think it is great that you have had this experience and saw that this is not the right fit for you right now. I know when we have goals and owning your own gym being yours, it can be so easy and exciting to want to jump on board and get the ball rolling. Good for you for really researching and saying, this isn’t exactly what I had in mind and say not right now. Holding out for what is right for you is key. Great review and thank you for sharing with us your experience.

  4. Victoria Price says:

    Zach,

    I think having guidance when deciding whether or not to be an investor is a great idea and opportunity. Just like with anything in life there is a learning curve and it is usually better to go into something with guidance or someone to help you along rather than blindly. A lot of emphasis is always put on the money factor, especially because that is what an investor will be supplying and it is indeed important to consider, but I really like how you included discussion on the feel good factor because that is important to take into account. Sometimes your gut can tell you something that you may not be able to fully understand, but if you recognize the feeling then it can be a lifesaver if something you might not be able to pinpoint doesn’t feel right.

    Great read,
    Victoria

  5. Hey Zach,

    After some qualified research, it is pretty impressive what our intuition will do for ourselves; though it might not always be right, a lot of times, your “gut” feel or instinct is correct. Humans are emotional creatures where when the right amount of emotion and logic meet at the right time, we buy or invest. However, if there is too much logic or too much emotion, humans will walk away from buying something or investing. This is a fascinating section of the book for me because everything it is talking about my company is going through right now; about 3 to 4 years ago, an equity firm invested in our company, and our goal this year is to become a $50 million annual recurring revenue company and to be acquired, so when looking at all of the different valuing methods, especially the venture capital methods, I am learning a lot on whats going on at higher levels with my company, pretty fascinating.

    Best,

    Stokes Warren

  6. Zach:

    Thank you for sharing your experience of valuing a company that interested you. It was also surprising to read that you allowed your gut to inform your decision. I would have made the same decision if it meant using money to create what I envisioned for a business vs. having to compromise in working with a business partner. I think compromising might dilute your passion for the project and potentially the amount of drive you have to make it successful. I agree that the quickest method is to use the $2-10M range regarding the valuation process. The experts interviewed in the book seem to have a lot of success with this method.

    Adam

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>