Andreas Antonopoulos is the Rector of The University of New York in Prague and an angel investor with over 25 years of experience. He also has an academic, entrepreneurial, investment, and corporate background and is currently a Partner at Venture Growth Partner.

Andreas started the discussion by doing a round-up of the main forms of financing at different stages of development of a company:

• Self-financing & FFF;
• Incubators & Accelerators;
• Angel investors;
• Crowdfunding/Crowdinvesting;
• Seed stage venture capital;
• Venture capital (Series A, Series B, Series C);
• Bank loans, credit lines, corporate bonds;
• Private Equity.

The valuation process is more of an art than a science.

Valuation in the startup world will look differently depending on the person looking at it and how you assess it. Every investor will reach another type of valuation even if they use the same data points and information. The reason behind the process is not to find the correct volume but to define the factors that determine the value.

Valuations in the US and Europe are different

The valuations in the US look very different compared to valuations in other parts of the world. The process of determining the right value of a company in the US is not relevant for investors in Europe or any part of the world, except if you are present or have operations in the US.

Expected returns after the valuation process

Investors look for a solid proposal from a tech startup that is highly scalable and convincing to be worth the money invested. Investing in a startup with good high growth potential is tempting. However, it’s crucial to understand if that potential is high enough to justify the investment amount.

Angel investors expect between 10x-100x, while a venture capital investor looks for 5x-10x in the upcoming 5-7 years after the investment has been raised.

Remember to always look at the pre-money and post-money valuation.

Company valuation methods

There are five company valuation methods, according to Andreas, who breaks it down into Bottom-up with Premiums, Market and Transaction Comparables, Future or Current Multiples (EBIT or Revenue), DCF, and Unpriced Rounds (SAFE). The most relevant ones for early-stage startups who are at the pre-profit or revenue generation phase are the bottom-up with premiums, and future multiples, our main focus for today.

The bottom-up with premiums

This method is used for early-stage startups at pre-revenue. The value is determined based on assets such as time, idea, talent, etc.

The bottom-up with premiums is a method relevant for companies to the scale when they have at least a $300.000 valuation. Investors will pay a premium for a hot sector that goes up and down, as we see the energy sector right now, for example. Additionally, they consider a premium when the team is very good, teamed up with a few good serial entrepreneurs, and when the product is hot or showing good signs of traction.

Future or Current Multiples (EBIT or Revenue)

The principle of future multiples is used when you are already discussing with a company that has already convinced you the investment plan is realistic, and you are able to see the results in the upcoming future. You also need to consider future multiples for potential follow-on rounds.

In this case, you might or not have data on which to base your analysis. For early-stage startups, you start looking at the business plan and what’s credible in it. This plan has to make sense for both sides, and it should convey clarity and trust.

If you are looking at revenues here in the CEE region, you’ll find:

• 4x-8x revenue range depending on sector and growth speed
• MRR and AR multiple (Run rate)
• GMV basis (1x-1.5x)

How to minimize the probability of failure?

Nothing will help you guarantee, but there are a few clues you can look at to spot a potential success story.

TAM — Total Addressable Market

As a potential investor, you must understand the total addressable market and its reality. When founders pitch you different businesses, they’ll always present them in a way that will appear bigger than it actually is.

Every time you analyze a potential deal, try to kill it in different ways, viability, naming, legal, growth, positioning, anything possible. It might be worth your investment if it survives your trial process.

The stickiness of the product

Is this product something people need, or is it just a nice-to-have idea that they might be curious to test out? It might be just the hype of the moment, but not something they need in the long term.

Prepare to review the viability of the product over and over again. The product has to relieve the strong pain of the customers and become an essential part of their life. If you spot any red flag during the valuation, pick it up and raise it even in front of the founders. Investors are in this unique position where you can use their knowledge and experience to see how much potential an idea has and how you validate it.

A product scalability issue, especially for B2B companies, can be the need for constant customization. If you go from one customer to another and spend a lot of time understanding and customizing the technology to fit a particular customer, you have a scalability problem.

Other key elements to consider when building the valuation of the startup are: unit economics, gross margin, Cost of Acquisition (CoA), Lifetime-value (LTV), Cash flow problems, OOC/Runaway, timing, and as always, your gut feeling about the team or anything related to it.

Valuation trends

We’ve seen a spike in valuations in the past few years, making them reach new untouchable peaks. Today, we see a new reality taking shape for much healthier and reality-anchored valuations.

As investors, we rediscover the importance of profitability of capital in the future not so distant from us. This is the basis for future evaluations.

CFIMITYM — Cashflow is more important than your mother. Let’s not forget that!

Today, angel investors have a more powerful position from the point of view of liquidity. For example, UiPath has produced a whole mafia that is ready to invest its wealth in other potential opportunities.

Don’t forget to stay tuned for updates about the upcoming masterclasses of the Tech Investors Academy! We’ll be learning soon about

• Predicting and understanding growth with Sergiu Negut on 01/11/2022.
• Building a healthy and high-performing investment portfolio with Florin Ilie on 16/11/2022.
• Live debate on a case study and enjoy a networking event on 07/12/2022.