By guest authors Irina Patterson and Candice Arnold
Irina: What’s the average dollar amount you invest?
Alan: Normally, the average is about $500,000 that we’ll invest initially in every company. It may be a little less, maybe a little above. The largest initial investment we ever made was about $750,000. But it normally hovers around $500,000. When you factor in follow-on capital that may be needed, we may be into companies for over $1 million. Generally, the initial investment will be around $500,000.
Irina: How long does it take for a company to receive funding?
Alan: Normally about three months, maybe four. Companies tend to believe that the process moves faster than it does. It does not. It’s a protracted process. It’s a protracted process in the venture world. It just takes a lot of time and when we’re all done, we’ve got the investment terms nailed down, we’ve got the approvals, we’ve got the money sitting the bank, we still have a couple weeks to get the lawyers. When you add syndication on top of that, that can extend it even further.
Irina: What is the typical valuation of a company you invest in?
Alan: That’s very difficult to nail down. Companies always seem to want to know, for instance, what valuation do you like and what percentage ownership, fully diluted, do you want in the company? The way that we value companies is such that that question kind of misses the point.
Normally, what we’re looking for is companies that are generally in the $1 million to $3 million range, pre-money. Does that mean that we won’t look at a company that’s $15 million? No, we’ll look at a company that’s $15 million. It just depends on where the stage of the company’s development is. If we’ve got a company that’s coming in that’s very close to cash flow and it’s cranking in $2 million top line, yes, we’re probably pretty flexible on valuation.
The first investment that we made in this fund, in Springboard Two, the investment round was actually $6 million because we syndicated with VCs, and it was an $8 million pre-money valuation. But most angel groups would tell you, oh, that’s way out of their range. It depends upon the deal. The trite answer is, yeah, probably $1 million to $3 million.
Irina: How much equity do you usually seek?
Alan: That depends on valuation. It’s just a map on the valuation. If it’s an $8 million pre-money valuation, and we’re coming in at $500,000, we’re not going to get a very big bite. But that’s OK. We certainly will not consider getting anywhere near 50%. There are a number of deals that the real valuation on the company is something like $700,000 and they need $3 million. You can’t get that from here. We’d be owning the company. We’re not a private equity fund.
We look at what we think is a realistic valuation for the company and then if we like it, and we think it’s a realistic valuation, we’ll invest. If that gets us 2% of the company or if that gives us 20% of the company, we don’t really care.