When you find a startup you really like, it’s hard to fight the urge to move too quickly.
This is partly due to the general culture of entrepreneurship and angel investing. There’s always this sense of urgency – everybody is afraid they’ll miss their opportunity to get in on a deal. Make no mistake… startup founders are well aware of that fear, and tend to use it to their advantage.
Too often, this eagerness leads to hastily-written deals based upon a hurried valuation process. And deciding what a startup is worth is tricky business (more on that here).
So how should you balance the urgency of getting in early and the importance of moving with caution?
When you’re first starting off as an angel investor, my advice is to avoid pricing the company altogether.
At least for your first several deals, you should follow the lead of an experienced investor, or lead angel, who knows how to negotiate valuations with a higher degree of safety and ease.
There are so many factors to consider when pricing a funding round, it could make your head spin. These factors include:
- The company’s total revenue
- The total addressable market (TAM)
- The quality and completeness of the founding team
- The company’s rate of growth
- The cost to acquire a customer vs. that customer’s lifetime value
…And dozens more considerations, all of which become considerably tougher to iron out when a startup exists in a brand-new industry with nothing to compare it to.
So don’t get bogged down in the process of pricing a round right away. Instead, take advantage of my favorite angel investing strategy and let somebody else do the hard work.
Until next time,