The Valuation Game: The triple play strategy to land Triple N angels

Valuations are a tricky game for founders, and I’ve found they wildly over optimize for them in the early days and frequently waste time and miss great investors.

An early stage startup by a new or unquantified founder here in the Bay Area, where things are frothy, should do what I call the “triple play” strategy.

This strategy will a) get your rounds done QUICKLY, b) let you fund the company over time to minimize dilution and c) reward early supporters by a factor of 2-6x the later ones (which builds long-term loyalty).

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STAGE ONE: $1M (REAL) FRIENDS & FAMILY

If you need $25-100k to get your startup going (i.e., quit your job, hire a designer, and build a prototype) this is a great way to reward your friends and family with a super juicy bite of the apple. Give them 5% of your company for $50,000.

Product Progress: You have no product, just an idea or wireframes.

Important Note: I do 10-20% of my deals at this level. I love giving to founders who I have invested with before (and who do things like give monthly updates), have friendships with, or who have had a successful exit. I write checks like this often. For example, Josh Williams, Kevin Rose, and Jeff Dachis have all gotten checks from me in the past year because I know them and want to support them blindly. If we don’t know each other, it’s hard for me to write this check -- that’s why your mom should!

STAGE TWO: $2M INFLUENCER ROUND

You’ll probably need another $200,000 to finish your product and do an alpha or beta test. There are two dozen investors whose names, networks, and knowledge (the triple N!) can be transformative for a startup, and you want to get them in this round with a juicy valuation as an acknowledgement of this fact.

“Triple N Angels” include (self-servingly) myself, Chris Sacca, Kevin Rose, Cyan Banister, Esther Dyson, Dave Morin, Bill Lee, Gary Vaynerchuk and Gil Penchina (among others). I’ve invested with all those folks multiple times and I have seen them do amazing things for startups that go waaaaaaayyyyy beyond the 2x value they get by being in the “Influencer round.” I’ve seen them land the A round or a key developer, and even give a key insight to a founder about the product that is game changing.

Product Progress: You have a prototype or raw MVP.

Important Note: I do about 1/3rd of my deals at this level. It’s more risk, it’s more work, but it’s more fun to be involved early. When I own 10% of a business for $200-300k I’m REALLY excited about spending time with that startup (if only I did that with Uber and Thumbtack!).

STAGE THREE: $4-6M ANGEL ROUND

Now that you have your product finished, at least in MPV form, you’re ready to do a wider angel round with folks who -- frankly -- don’t want to take a ton of risk in the first two influencer or F&F rounds. This will be your $1-2m angel round (which used to be called the A round).

Participants are typically the micro VCs who write $500k-1m checks, or select VCs who like to dip down into angel from time to time (Fred Wilson is writing angel checks again -- there’s a signal!). They’re happy to pay $500k to get 10% of the business, knowing that you have some amount of product & market fit -- or at least a product that is slick and they can play with.

Product Progress: Your product MVP is done and you’ve done some consumer testing.

Important Note: I do 1/3rd of my deals at this level. If I get in at this level I work just as hard as the other levels.

Some other important notes about this strategy:

1. YCombinator, Techstars & the LAUNCH Incubator are typically taking over the role of F&F in this model. The valuations tend to be in the $500k-1m range with incubators if you look at them *only* as cash.
2. It’s unfair to consider only the cash of an incubator/accelerator since they are running a 12-week program, hosting a demo day, etc., and your mom isn’t (“say hi to your mother for me, ok?” -- Mark Wahlberg voice).
3. YCombinator companies come out of their 12 weeks in Stage 3+ typically, with valuations that are literally 2-4x their peers. This is a critical mistake IMO because you’re seeing a ton of the YC companies not get the high-quality investors in favor of investors without the name/network/knowledge thing. I’ve had countless discussions with influencer angels and micro VCs and they are skipping YC demo day and basically getting “two for one” with startups outside of the YC system.
4. I liked 2-3 from the last YC class, but I passed since all of them were 2-4x the valuations I normally see for companies that were further along. In fact, most YC companies had valuations that were larger than the valuations I invested in Uber and Thumbtack at -- COMBINED!!!
5. If you do a Kickstarter or you get an actual customer to buy your product in advance, you can skip steps one and two above -- and that’s AWESOME for founders. If you do $250,000 in a Kickstarter or get GE to buy your product for $5,000 per month -- four months in advance -- you’re your own F&F! Brilliant!
6. When you get influencers in early, as I have multiple times personally in my companies, they become very loyal in my experience. They wind up doing the later rounds, so the juicy bite of the apple they got early isn’t a major issue! Remember: if you get someone in at the $2m round they will probably keep investing at the $6m and $16m rounds!
7. If you’re outside of the Valley you can take 10-30% off these valuations.
8. If you’re in the Valley and have had a successful startup you should fund the first one or two steps yourself!
9. By making the first two stages microrounds of $50k and $250k they close almost instantly -- with one or two investors!

In summary: Get the best valuation you can while still getting the best investors you can -- and not spending a lot of time fundraising (which is death).

all the best, @jason