Silicon Valley North #43                                       May, 2002


The Way I See It… by Michael C. Volker


Angel Angles and Angel Arithmetic


A business angel is a technology entrepreneur’s best friend. The definition I like is the one that identifies an angel investor as a successful entrepreneur investing her own time and money in a new startup. This is a sharp contrast to most venture capital investors who have never been in the driver’s seat and are betting other people’s money.


Let’s take a look at what angels want – both in terms of the type of company as well as the numbers that will attract them. Often, a committed angel will bring in a few co-investors to raise the ante. Many of the deals I see comprise a few investors putting up $500K or so to get a venture launched.


With respect to what they want, it’s got to be an opportunity that gets their attention. Since angels have varying interests, ambitions and styles, this part of the process boils down to talking to finding one that can identify with the specific opportunity being presented. That’s the easy part as it depends mainly on entrepreneur’s finesse and tenacity in identifying a potential fit. The tough part comes when they assess you, the entrepreneur, to determine if you and your team are worth the risk.


Angel investors will tell you that the three bases that need to be covered by entrepreneurs are: their knowledge, their goals and their capability. Of these, the “knowledge” component is the most important. A thorough knowledge of the industry, customers and the competition is paramount. Then, knowing what needs to be done is the first step towards success.


Goals are a matter of choice. Is the entrepreneur sufficiently ambitious to be of interest and does he have a chance at achieving these goals? Are the goals – personal and corporate – even articulated? This is a matter of both credibility and confidence.


As for capability, this can be acquired over time and by recruiting the right talent. One has to allow for the fact that first-timers may not have proven abilities. But, getting back to point number one, a good entrepreneur is one that knows what his shortcomings are.


Given that these bases are covered, let’s now take a look at the numbers and the valuation approaches that make angel investing work. Forget about doing anything overly sophisticated like a discounted cash flow analysis. A startup’s value is based on future events and without angel support, these events may never happen. If a group of angels puts $500K into a deal, what piece of the pie will they get?


There are two ways to arrive at an appropriate number. First, what might be the maximum upside value of this company in five years? If it hits its projections, could it be worth $50 or $100 million? That sounds pretty good, but if the angel valuation is $5 million, that means an upside of “only” ten or twenty-fold. Angels are looking at multiples of at least that and more often closer to 100X. Since targets are rarely hit without glitches, perhaps a going-in value of $2 million is more likely to produce a 10X return. We’ve all heard VC’s say that they look at hundreds of deals for every one they invest in and of those that they do invest in, only one or two in ten will be shooting stars.


Second, who is committing what to the startup? What’s an appropriate equity allocation for the sweat equity already and yet-to-be contributed? What’s the technology worth relative to the cash needed to commercialize it? If this deal is going to be a big win, there’s little point in being too inflexible. Entrepreneurs sometimes forget that an additional five percent dilution suffered by offering fifteen, instead of ten, percent to an angel makes a fifty 50 percent difference to the angel!


The way I see it, getting an angel investor on board is a critical first step for technology entrepreneurs. This entails finding someone who is empathetic with their cause and then striking a deal that takes into account both the up-front contributions as well as the future upside.


Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is Chairman of the BC Advanced Systems Institute and past- chair of the Vancouver Enterprise Forum. He may be reached at