How to secure angel investment: Valuing your start-up for angel investors

If you're an early-stage start-up looking to increase its growth trajectory without taking on traditional debt, securing angel investment can be a highly important step.

One issue, however, that you might face is how to value your company fairly for both you and any investors.

There's a lot to understanding how to secure angel investment. You must know how to put together a strong pitch. You definitely need a great product.

But the process is also about striking that elusive balance, where investors see the possibility of high returns and you hold on to enough equity to remain motivated and committed to your business.

In this blog, we explain what would be considered a "good deal", look at useful ways to figure out what your start-up's worth and provide tips for securing angel investment that go beyond just the numbers.

Recognising the investor's point of view

To secure angel investment, first consider the opportunity from your potential investors' perspective.

Angel investors (also called business angels) are typically successful entrepreneurs and/or high-net-worth individuals. These private investors tend to seek out businesses that can give them a seven to 10 times' return on investment over five to eight years.

But what makes a start-up a good bet for them? It boils down to a few essential aspects:

• A genuine solution to a real problem

• Entry into a market that's large or expanding

• Great potential for growth and a credible path towards it

• Most importantly, a highly capable management team

As many angel investors say, they back the jockey, not just the horse. Your vision, credibility and dedication are equally as important as your product.

This is the point at which many start-ups fail. Not because the product is unpromising, but because the valuation doesn't fit the investor's expectations of risk and reward.

The drawbacks of traditional methods of valuation

When valuing angel investments, conventional techniques like discounted cash flow, net asset valuation or EBITDA multiples often can't be used.

For these strategies to work, there needs to be predictable figures and physical assets, which most new businesses simply don't have in their early phases.

• The discounted cash flow (DCF) approach, for example, is based around reliable predictions of future income. But early-stage businesses frequently lack the historical data needed to support these forecasts.

• A net asset basis is equally flawed, as start-ups often don't own many physical or intangible assets that can be valued objectively.

• Even a valuation based on comparable multiples can be misleading when you're pre-revenue or just starting to see early sales.

  While it may be effective for more established businesses, it often results in deflated valuations for new ventures. This can frustrate founders who know their product's potential.

Instead, what's required is a more nuanced and adaptable way to value angel investments. One that considers your stage of development, the market opportunity and the strategic value you bring as a founder. 

Other valuation methods for start-ups

Valuing angel investments in the start-up world is more of an art than a science.

Nonetheless, founders can employ a number of methods to generate a realistic valuation that appeals to financial backers while preserving the potential for long-term equity.

Industry rules of thumb

These are valuations often shared informally between angel syndicates or angel networks (groups of individual investors). In the software industry, for example, a company at idea stage might be provisionally valued at £250,000.

That range can increase to between £750,000 and £1 million once you add a working minimum viable product (MVP) and a few pilot clients.

If you're generating revenue, valuations might climb further, sometimes surpassing £1.5 million if you've managed to gain some traction.

Researching comparable deals

Platforms such as Republic Europe (formerly Seedrs) and Crowdcube keep records of successfully funded campaigns, often including criteria such as deal size, valuation and industry vertical. Beauhurst is another good data resource for UK companies.

Finding five or six similar companies and removing any outliers will help you arrive at a reasonable range – particularly useful when discussing valuations with potential angel investors.

Working backwards from a future exit

Start by laying out a five- to eight-year plan that details how you'll scale your company to the point that it can be sold or go to initial public offering (IPO).

Estimate a future valuation based on revenue or EBITDA multiples typical in your sector, and then discount that figure using an ROI multiple (often seven to 10 times for early-stage investors) to arrive at today's value.

While based on projections, this method can work very well if it's supported by clear, achievable assumptions.

Matching the valuation with your start-up's goals

The main goal of the valuation process is to make sure your business remains viable, fundable and founder-driven in the long run. Meeting investors' expectations comes second.

Giving up too much equity early on because you've valued the company too low may dilute your ownership stake and make it harder to attract future funding rounds.

On the other hand, overvaluing your start-up can drive away investors or result in you raising less than you need.

Begin by determining your boundaries, both on a personal and business level.

• How much equity are you willing to offer?

• What amount of angel funding do you need to reach the next set of significant milestones?

Your valuation should let you raise that amount while holding back enough equity to keep you motivated – and to offer future investors room for returns.

A common mistake is fixating on a high valuation rather than thinking about whether the assumptions behind it make sense. Instead, aim for a number you can defend confidently, that's based on realistic projections, comparable deals and a strategic plan for the future.

VIDEO: How to find, meet and pitch to angel investors

Learn how to put together a target list of active angel investors, make a compelling pitch deck and create momentum so you can close your seed round:

Tips for securing angel investment

It takes more than naming a valuation figure to get angel investors to back your business.

Here are some crucial tactics that boost your chances of closing a successful round:

Gather feedback early and often

Send your pitch deck to mentors, other founders and even friendly investors. Ask them what they think of your product, but specifically how they see your valuation.

You'll learn whether your expectations match the market – and possibly attract interest in the process.

Present your raise as an investment opportunity, not a plea

Emphasise traction, timing and team. Investors want to feel that they're embarking on a journey with a high chance of making money, not saving a failing project.

Refine your pitch after each discussion

Incorporate the feedback you receive and be ready to adapt your approach for future pitch meetings based on who you're talking to.

Some angels will show more of an interest in your market, while others will dig in to your experience. Know how to shift emphasis without changing your core story.

Recognise your audience

Understand what criteria the angel or syndicate to whom you're pitching typically use to decide whether to invest.

Tailor your valuation and pitch to match. If you're approaching someone who usually backs B2B SaaS businesses, make sure you're fluent in the metrics they care about.

Ultimately, securing angel investment requires trust as well as numbers. A well-structured pitch backed by a logical, transparent valuation helps build that trust.

Final thoughts

There's an old saying in fundraising: "Ask for investment and you'll get advice; ask for advice and you'll get investment."

While it isn't always that simple, there's truth in the idea that smart founders treat the valuation process as a dialogue, not a declaration.

By applying clear logic to your valuation, showing flexibility and inviting feedback, you not only arrive at a number that makes sense – you also show potential investors that you're thoughtful, coachable and focused on building something that lasts.

In the end, the question of how to secure angel investment is answered by preparation and communication, as well as figures on a spreadsheet.

Master both and you'll dramatically increase your chances of raising the funds you need – on terms that work for everyone.

Relevant resources

• Understanding start-up business options: Angel investors, VCs and crowdfunding

• How to raise money for your start-up

• Small business funding: How to choose the right type for you

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