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.

The NZ Angel Association held its annual conference in Queenstown last week.  It was a great chance to meet up with old friends, get the good goss on what’s going locally in other regions, and trade war stories hopefully learning to avoid painful mistakes others have made.

There were a few recurring themes from many of the talks:

• It’s all about people.  When you invest in a company, you’re investing in a combination of ideas, resources, capacity to execute, and people.  Of these, by far the most important is the people.
• Failure is a great teacher. We tend to underrate previous failure as an experience. No one starts a company with the intention of failing, but we should appreciate and seize the learning opportunities presenting by failure.
• The Kiwi Diaspora is ready and willing to help. Kiwis are everywhere, and most of the overseas speakers with Kiwi connections laboured the point that the Kiwi Expat Association (KEA), NZTE and others are generous with their connections and networks.  You’re silly not to use them.

Stephen Tindall was presented with an Archangel Award, recognising his contributions to the angel space.

It was announced that Colin McKinnon has taken on the position of Executive Director of the Angel Association.  Given that he spends the rest of his time as the Executive Director of the NZ Venture Capital and Private Equity association, hopefully he’ll be able to encourage follow-on investment for successful early stage companies.

Some choice quotes from the summit:

Alan McConnon (Upstart Angels)

The rule of Five: It always takes five times longer, five times as much money, and yields one-fifth of the expected rewards.

The five P’s of due diligence: People, Punters, Portion, Profitability, and Plan.

A good idea is only 20-30% of the value of a company.

Sir Eion Edgar (Sinclair Investments Limited)

Never do anything you wouldn’t want to see on the front page of the papers.

My aim in life: To be sure that everyone owes me a favour

Jim Connor (Sand Hill Angels)

If you want a higher valuation, go get some customers

We love cheap penny-pinching entrepreneurs!

Don’t invest in R&D, only invest in execution.

Bridget Liddell (Fahrenheit Ventures)

NZ companies generally have surprisingly weak digital and internet marketing strategies

Large US companies have become incapable of growing, except by acquisition

All up, the summit was useful, although the ratio of angel investors to others was disappointingly low (my guess would be around the 50% mark); it would also be great to have more time to mingle in structured and unstructured settings.  I might respectfully suggest that (for some people, anyway) lunchtime wine tastings are not the best way to get people to focus on key issues.  That said, I’m glad I went and will be looking forward to next year’s summit.