Assigning value to a seed-stage or early-stage company is a little more complicated than just writing a check. Early-stage companies don’t have a track record yet, and that alone makes figuring out their value a tricky prospect for angel investors.
Fear not, early-stage companies hopeful to get some cash. There actually are things you can do to make your new venture more appealing to the people with the money.
Mario Casabona, an angel investor, longtime tech professional, and founder of TechLaunch, a Clifton-based accelerator, will present “What’s the Value of Your Early-Stage Company?” at the New Jersey Entrepreneurial Network on Wednesday, November 18, at noon at the Princeton Marriott. Cost: $55. Visit www.NJEN.com.
If there is a theme to what Casabona and his fellow tech investors look for at the seed stage, it’s the team itself. Without a real product to show, of course, early-stage companies have a tough time convincing money people that the company is worth the investment. Sure it’s riskier than investing in more established companies, but Casabona was born to a pair of risk-takers who immigrated from Italy when he was 5 years old and settled in New Jersey.
Casabona’s parents, a barber and a seamstress, lived what Casabona calls a typical immigrant life of hard work and big dreams. Actually, their dream for their only child was for him to become a doctor. He instead chose to be an engineer. Casabona earned his bachelor’s in electromagnetic fields and waves from Fairleigh Dickinson and started his professional life as a design engineer at ITT Avionics in 1972.
As an engineer, Casabona says, he thought the whole world was about engineering. Then he became a department manager at Raytheon in 1978 and found that, suddenly, the world involved people beyond just the engineers. In 1982 he started his own business, Electro-Radiation Inc., a developer of radar, navigation, and communications technology and equipment for the defense industry, and realized the world was even bigger still. Now he had employees to manage, a company to build from the ground, and all the responsibilities of business ownership at his fingertips.
Casabona bootstrapped his company, building it to the point that Honeywell Aviation bought it in 2004. The merger process taught him a lot, and he stayed on with Honeywell for three years, learning more about investing in companies, and making some classic mistakes, like trying to go it alone. But then he had to figure out what to do with the rest of his life.
Casabona figured he didn’t want to start another tech company. Those can take three, five, eight years to really get running, and he did not want to invest his time like that in one focused area. He did, however, want to invest in emerging tech companies, helping them get off the ground and providing him with some variety in his professional life. He started Casabona Ventures (still active) in 2007 as a strategic planning and consulting company for early-stage tech concerns. In 2011 he started TechLaunch, an accelerator aimed at commercializing innovative technologies.
Land of enchantment. Even in tech, where science is supposed to rule the day, emotions run high when starting a new business. Ideas blossom, hopes bloom, and expectations soar. And it’s not just the startups that get lost in the clouds.
“When I started, I would invest individually in a company,” Casabona says. “I was primarily enchanted by the tech, but maybe I was enchanted by the founders. Or maybe by the industry. Or the business model.”
The point is, Casabona felt it in his gut, rather than calculating it in his head, and it was often a mistake. Still, he says, you can’t take emotion out of it. People founding businesses on exciting inventions can be a heady brew, and he still finds himself enchanted by the right combination of founder passion, tech, and potential.
The difference these days is that he has a team working with him on all potential investments. “I co-invest with other, smarter angel investors,” he says. “They may see it differently than I do.”
For example, Casabona might be really jazzed about a particular app and want to invest in it. On his own, he would have done so, but as part of a team, he is more likely to have someone point out that a similar technology is being built or is already in the market and is expected to make a lot of money. That kind of insight has saved TechLaunch some real headaches, he says.
Getting investment money early on. Casabona and his team don’t necessarily need a product before they invest, but they do need to believe in the team. Have team members worked together before? Is the main founder or CEO someone with a track record in the industry? Is there some revenue coming into the business already?
If yes, then TechLaunch is willing to consider investing. Another key ingredient is whether the tech team understands the market. In other words, the team can’t just rely on pipe dreams and enchantment with their own potential. They have to know how to run a business, and they have to have an exit strategy.
“It can’t be a lifestyle business,” Casabona says. What he means by this is a business that does well, but not well enough to reward angels for their investments. A business that makes its own steady revenue is good for the business itself, but when there’s not enough left to pay back investors what they want and expect, that’s a bad sign.
Casabona looks for companies projected to be worth at least $250 million in what’s called the total addressable market, and ideally he wants to see a 10-fold return on initial investment. “That doesn’t happen often, but it’s always the goal. Something angels call ‘the unicorn,’” he says.
One gauge of how well-suited a company is for investing, he says, is how much of the industry the founders can actually capture. A big mistake companies make is looking at the industry and thinking it’s all theirs. Someone will point out that “this is a $15 billion industry,” but not the critical “and this is how much of that $15 billion we stand to get” part. Just because global cloud marketing is worth $121 billion, for example, doesn’t means your app will make a dime, unless you have a viable product and a good strategy.
TechLaunch helps companies commercialize, of course, but the point is that these same companies need to be aware that angels are not investing because they just want to spend money. They want to make it in return, and they want to make enough to make their faith worthwhile.
The big question from Casabona’s side is how to determine that eventual value. “How do you minimize the gut feel?” he says. “You’ll never get rid of it totally, but rational decision is needed.”