Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels (Part 6)

By guest authors Irina Patterson and Candice Arnold

Irina: What is the typical valuation of the companies you invest in?

Bob: Okay. This is my soapbox, and this is what I tell entrepreneurs. This is what I told the guys last night. Valuation is a surrogate for return. If you can empathize with an angel and put yourself in their shoes and understand what I’m looking for is a five times to ten times return in three to five years, and you can tell me a plausible story that gets me to that kind of return, then I really don’t care what the valuation is or what the percentage of the company I own is. It’s all a function of the return. So, if you tell me that you’re gonna sell the company for $25 million in five years, and then you need $2.5 million up front, I’m gonna tell you I need 10% of your company. I’m gonna tell you the pre-money valuation is $7.5 million. If you tell me you can sell your company for $100 million and I’m giving you $1 million, now I only need 10% of your company, right? So, the valuation and the percentage ownership are all tied to that return.

Irina: Right, but give me some range where you will not go.

Bob: We’ve invested in companies that have a $7 million pre-money; we’ve invested in companies that have a sub $1 million pre. Again, it’s back to the story. But if you really want a range . . . If a company’s in a pre-money valuation between $1.5 million and a $3 million, that’s probably where most of our companies lie.

Irina: And some range for your typical return?

Bob: I think almost all the investors are looking something that’s gonna give them that three times, maybe five times, hopefully, a ten times return. And again, understand that return is a function of time. If you give me a ten times return in 100 years, I’m not gonna be very happy. Right? If you give me a three times return in a month and a half, I’m going to be delighted.

Irina: The maximum time you’re looking for?

Bob: What’s happened, with all the calamity that we’ve had over the past couple years, it’s reset – for most investors, the guys I talk to around the table – our time horizons. We would like to be able to say our investments are three to five years, but effectively they’ve been pushed to five to seven years because of this. Everything’s, in essence, reset over the past two years. So, anything I invested in in, say, June 2009, I put it back to baseline as that’s a brand-new investment starting in 2010. So, I kind of have to wipe those away. I think that’s an aberration. I don’t think that’s going to carry on cause most people are looking at three to five years but effectively with the current environment, anything that was made over the past couple years may be twice that.

Irina: What do you invest in? Do you need validated customers? Do you need revenues?

Bob: What’s happened is, early on the Pasadena Angels were much more early stage. We would invest in a company with just an idea and maybe a prototype, but as the credit dried up over the past couple years, everybody’s gone downstream. So, VCs are now investing later stage, private equities are later stage, which has allowed us to go down stage. But typically, we’re looking for something that’s more than an idea. We’d certainly like to have customers . . . paying customers would be delightful, but somebody who’s validating a product, I think, is our sweet spot. We like to put our capital in to prove out technologies and start with the scaling issues, so it has to be a little bit more than an idea.

This segment is part 6 in the series : Seed Capital From Angel Investors: Bob Aholt, Pasadena Angels
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