As part of Global Entrepreneurship Week, the DomPost published an interview with me headlined “Passion a crucial ingredient for success” on the relationship between angel investors and wannabe entrepreneurs, which is available online.

They haven’t published my take on factors that affect valuation online, so I’ll take the liberty of reproducing them here.

Valuations are very subjective, and it takes someone with significant domain expertise to even hazard a guess. That’s one of the reasons that angels like to syndicate deals – nobody is an expert in every domain.

Factors that effect valuation include:

• Team: Track record (both success and failure), commitment, passion, ethics
• Financials: Realistic cash flow forecasts, ability to do things on the cheap, and future capital requirements
• Product: Uniqueness, simplicity, how much pain it will alleviate
• Sexiness: How “hot” is the product and the space?
• Market: Size, addressability, familiarity
• Sales strategy: Customer acquisition cost/effort, ability to execute
• Business model: Rapid scalability, flexibility, operational complexity, robustness of assumptions
• Intellectual Property: Patents and other barriers to entry for potential competitors
• Competition: Can someone else easily squash your startup?
• Hygiene: Governance, tidy accounts, good legal agreements, no outstanding law suits or significant legal risks etc

One thing’s for sure: your company becomes a lot more valuable the day you sign on your first batch of significant customers, and is worth more again the day you become cash-flow positive.

It’s a surprise to many entrepreneurs that cash-in (ie, how much as been previously invested into the company) has little impact on an objective valuation – it’s a highly emotional issue that is often a real roadblock to doing a deal.

For a bit of fun, see Cayenne Consulting’s High Tech Valuation Estimator.

If you’re more serious about it, local companies like Valuecruncher provide reasonably priced objective valuations. The Angel Association / NZTE’s Escalator Service also does a great job of helping companies become investment ready, part of which is arriving at a valuation you’re comfortable with.

It’s a truism to say that your idea or company is only worth what someone is willing to pay for it.  Don’t fall down the hole of holding out for an impossibly high valuation, as the real value in a high-growth company is its ability to outstrip that initial valuation quickly.  Most investors will completely shut off when you give them a number that’s an order of magnitude out from what they think your company is really worth, and you may not get a second chance.

So instead of insisting that your company or idea is worth a lot more than your potential investor thinks it might be worth, ask what your investor can do to ensure that your company will have the resources and expertise it needs to realise its full potential.

This week’s launch of AngelLink could mark a pivotal moment in the development of New Zealand’s innovation space.

Conceived and managed by WaikatoLink, AngelLink is a new national angel investment network specifically designed to commercialise intellectual property from universities and CRI’s, and is backed by the country’s most experienced and well-resourced hi-tech and biotech investors.

It brings New Zealand angel investment to the next level.

This is exciting news for a number of reasons:

• Movac, K1W1, Sparkbox, Neville Jordan, Waikato University, AUT, and SCIF are coming together to actively collaborate. While these players have co-invested with each other on a tactical basis before, this is the first time they’ve all agreed to work together in a more formal, strategic framework.
• Research institutions generate considerable intellectual property that until now has never seen the light of day, due to limited resources and commercialisation experience in the niche investment spaces and geographic locations that they occupy. A national network will increase the likelihood of successful commercialisation of some of New Zealand’s best IP.
• Conversely, angel investors nationwide have had limited access to university-sourced IP. AngelLink will give access to opportunities to a wider group of experienced investors.

The common theme is that all of the stakeholders – inventors, entrepreneurs, incubators, investors, and government – all understand that there are huge gains to be realised by working together, and have the appetite to make it happen. People realise that the pie can be made disproportionately bigger by relinquishing some ownership and control.

There’s a word for that – maturity.

And the experience and professionalism is evident from the start. AngelLink achieved SCIF accreditation prior to launch. Although based in the Waikato, they chose to launch at NZX in Wellington to underscore the national nature of the network. AngelLink is not a small club of wealthy dentists and farmers. At the launch, Chris de Boer, AngelLink’s chairman, said that he’d never seen such a broad spectrum of New Zealand investors in one room, ever. The gathering included people like Wayne Mapp (Minister of Science Research and Technology), Mark Weldon (CEO NZX), Franceska Banga (CEO NZVIF), Sir John Anderson (Chancellor Waikato University), Jim Bolger (Chairman NZ Post), Neville Jordan (Endeavour Capital), Mark Stuart (CEO WaikatoLink), Greg Sitters (Sparkbox), Phil McCaw and David Beard (Movac), Suse Reynolds (Angel HQ), John Errington (CEO VicLink), as well as a number of familiar faces from the local Wellington angel scene. Exposure to the entire investment food chain is compelling.

Chris said that they already have pipeline with four deals ready to go on day one.

There is some potential risk in setting up a new national angel network that has some overlap with the existing regional clubs. Some of New Zealand’s fledgling angel clubs are struggling to achieve and maintain critical mass, both in terms of investment capacity and ability to attract quality opportunities. But that shouldn’t be a problem so long as AngelLink sticks to institutional IP, and doesn’t compete with clubs for deals coming from local incubators and garage entrepreneurs. Syndication is all about sharing expertise, resources, risk and reward in such a way that everyone benefits.

And if AngelLink continues in the same manner as it has started, everyone will benefit from commercialising previously hidden IP.

New Zealand will be the winner.