How is it possible to get a 10 Million valuation with almost no customers?


June 16th, 2016

Hi have been talking with some guys and they told me "we have already have had set of 3 Angels value us at 10 Million and invested for procuring 5% last month", they just have a prototype to take on commuter/passenger industry with some traction and bunch of good ideas.

Now my question is how can they do that? 10 Million "valuation"? can someone explain what is going on?

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

June 16th, 2016

5% of $10M is $500K. One third of $500K is $166,667. So each angel is willing to bet $166,667 for a lottery ticket. But every Angel investment is pretty much a lottery - the odds are against any one I let winning, but ultimately some ticket will win.

Probably the valuation is based on the P/S ratio of comparable companies and the forecasted sales of the new company in the future. For instance a company with projected $2m in sales in an industry with 5x p/s might get a 10m valuation.

Chicke Fitzgerald

June 17th, 2016

From the beginning of time, people have been investing in potential.   

All it takes is someone with a checkbook to believe in someone with an idea, a team, a cause, a prototype, an MVP, clients, etc. etc. (or anything along the way).  

That is why we do what we do.  We hope that we are the exception, the one that wins against all odds.  So we zig, where others zag.  And we believe.  

That is what we do.

Dimitry Rotstein Founder at Miranor

June 17th, 2016

I know nothing about this particular case, but in general there are many possibilities to get a big investment very early, including, but not limited to:

1. Having "shark founders", who had made a big exit before, so chances are they can do it again (plus, they probably know the investors personally). A friend of mine had made a $200m exit and a couple of years later started another project and got to $150m valuation based on investments long before launching even so much as a prototype.

2. Solving a problem that is close to investor's heart, so it's not only about the money. This often happens when the investors are from the same industry (or the industry itself). In fact, the largest seed investment I know of (Iridium, $4 billion!) was made by the industry. Also, another friend of mine raised $5m from the industry to develop a very interesting piece of hardware, that the industry apparently wanted very much.

3. It is also possible that their actual situation is much more impressive than what you've described, the fact that got lost in retelling (or perhaps they just don't tell everything about it to non-investors).

4. Conversely, it is possible that that's not what really happened, that there is no actual investment. Yet another friend of mine have been telling me that he's got like a dozen investors lining up to invest in him under $5m valuation, and he's in "very advanced stages" with most of them. In reality he met with each of those investors exactly once, they invariably faked interest, promised to call and never have. But he still believes that he's like one technicality away from the money.

5. It is also possible that the investors are idiots. A friend of a friend had managed to get $1m in cash, while having no product, no team, and no idea whatsoever! He just said: "Give me a million, I will hire the best team, we'll come up with a great idea, and just do it". After a year of searching he found some moron in South America who fell for it (or perhaps was too rich to care).

Martin Omansky Independent Venture Capital & Private Equity Professional

June 16th, 2016

We have been doing valuations for a very long time. I would start off by saying that valuations in start-ups are essentially arbitrary. And there is a lot of craziness in this field. I would be wary of an unjustified high valuation, especially because the investors might tforesee a need for more cash needs in the future and plan to buy additional stock later in "down rounds"; I.e., at a much better price. Sneaky but not illegal. I would also be careful of a high valuation deal because an investment that buys preferred stock comes with a preferred stock agreement, which can be lengthy, restrictive, and containing confiscatory elements if certain benchmarks are not achieved. There are some legitimate reasons for abnormally high valuations, however. People who normally invest in publicly-traded stocks might tolerate high valuations because (a) they are used to owning small percentages of an enterprise, and (b) they are concerned about the stock price and/or the yield, rather than the percentage of ownership. On this last point, I think that such behavior is not rational in private (not publicly-traded) companies, but some people in the investor space don't act rationally. If your friends can accept a high valuation deal without strings attached, by all means, encourage them to take the money and run. On the other hand, if the deal looks and smalls fishy, encourage them to get a neutral party (investment banker or experienced lawyer) to review the details. Sent from my iPhone