Valuation of Pre-revenue Angel Deals

I spent my summer developing a new half-day workshop on the valuation of pre-revenue start-up companies for angel investors and entrepreneurs. It is now complete and will be delivered in Tucson, Ariz., Grand Forks, ND, and Philadelphia in the next six weeks. This was a volunteer project I completed for the Angel Capital Education Foundation.

While venture capitalists don’t make many investments in seed/start-up stage, pre-revenue companies, we do have some data from the National Venture Capital Association demonstrating that such deals are usually valued at about $2 million (pre-money valuation). Since angels tend to invest at an earlier stage than do VCs, we would expect valuations for angel deals to be the same or somewhat lower than for VCs. Unfortunately, we have virtually no data on the pre-money valuation of pre-revenue companies funded by angel investors. So, I decided to survey a cross-section of angel groups in North America.

I asked the leaders of 15 angel groups from the East, Midwest, West Coast and Canada to provide me with the average pre-money valuation of recent investments in pre-revenue start-up companies. I was pleased to receive data from 14 – a great response. For this informal, statistically insignificant survey, the average pre-money valuation for recent pre-revenue angel deals by these groups was $1.7 million with survey results ranging from a low of $1.25 million to a high of $2.7 million. The mode (middle) response of these 14 groups was $1.5 million. In general, the response of these leaders was that pre-money valuations have decreased during the current financial recession.

I also noted an interesting trend among the responses: Valuations in Silicon Valley and Boston appear to be a somewhat higher than elsewhere in the country. Three of the highest four average valuations were from the groups in these two regions. One might conclude that because the competition for deals is higher in Boston and Silicon Valley, valuations would tend to be higher. A leader from one of the Silicon Valley groups confirmed that valuations in that region have increased recently due to competition with Super Angels.

For purposes of the workshop, I concluded that most pre-revenue angel deals are done at pre-money valuations of $1 million to $2 million and that the average deals were priced at $1.5 to $1.7 million.