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Seed Capital From Angel Investors: Larry Chaityn, Keiretsu Forum, New York Tri-State Chapters President (Part 4)

Posted on Monday, Sep 6th 2010

By guest authors Irina Patterson and Candice Arnold

Irina: When you think about valuation, do you have any specific number in mind?

Larry: It really depends, because we also have a life science forum and in life science the valuations tend to be a little bigger . But I would say our valuations are probably between $2 million and $5 million.

Irina: When you’re planning an investment, do you think in terms of equity?

Larry: Well, it’s all tied together. Your investment and the valuation really determine your equity. So, if you are putting in, let’s say, $1 million and the pre-money valuation is $3 million, your post-money valuation is $4 million. So, you own 25% equity, $1 million over $4 million. The valuation is a major factor in the amount of equity the investors receive.

Irina: And do you think in terms of the period that you would like to receive a certain return?

Larry: Yes. It’s usually five to seven years and five times to ten times return

Irina: Does the company have to have revenue before you invest?

Larry: Yes, we like to see market acceptance, and market acceptance is dictated by the company producing revenue. It doesn’t have to be in the millions, but we really want to see positive traction and some upward trajectory of the company.

Irina: In other words, you do not invest in an idea.

Larry: Correct, we do not invest in an idea. The idea has to be proven. It’s got to be at least in the market. They have to have some customers. We invest after friends and family and at the A round.

Irina: What about total addressable market?

Larry: I think for an angel investor, for it to really make sense, at minimum it’s got to be a potential $50 million market – minimum – and above.

Irina: Good. So, $50 million is OK. You are not looking for $500 million?

Larry: That would be great. But, yeah, we’ve got to be realistic because there are very few IPOs these days, and what’s happening is most companies are being acquired. We’re not seeing $500 million acquisitions. We’re seeing them at $50 million, a $100 million.

Irina: How about $20 million?

Larry: You know, it would depend on how quick. So, if you put $1 million in and the following year you’re offered $20 million, that’s a pretty good return. But if it’s years from now, that’s a little less desirable.

Irina: You already told me how important people are.  What about their previous business experience? Do you require any?

Larry: A serial entrepreneur is really the best. Someone who has either started, grown, and sold a company or has been on at an executive level in a company that was started, grown, and then was sold. We really need to see proof of an understanding of how to grow a start up or how to grow an early-stage company.

Irina: What if they are straight out of school?

Larry: Well, if it’s straight out of school, they need to have a solid advisory team. So, advisors who have grown businesses in the same market are preferable.

We’re really looking for is someone who can help to accelerate the entrepreneur, whether it’s investors or someone on on their advisory board. What have the advisors done in the past where that experience can help greatly accelerate the entrepreneur?

Irina: What if they come with incomplete business teams? What would you suggest?

Larry: Funding really goes from milestone to milestone. So, if you had an incomplete team that’s okay as long as the current team can get you to that next milestone where you’re going for that additional round of funding. You have to prove to the investors that with the amount of money that you’re asking for, you’re able to achieve those goals to get you to the next milestone whether, it’s . . . typically it’s revenue, market acceptance, where you can then expand the team.

This segment is part 4 in the series : Seed Capital From Angel Investors: Larry Chaityn, Keiretsu Forum, New York Tri-State Chapters President
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