During an economic downturn, investors with money in financial vehicles such as mutual funds and ETFs may have a portfolio that has substantially declined in value. So since they have less money overall, their motivation to invest in risky assets takes a hit.
From an investor’s perspective, valuations are most reasonable when it’s harder for startups to raise money. For example, a company I knew in the beverage space had a valuation of $45 million when valuations were sky high. A year later, when the economy was quieter, its valuation was at $10 million.
Another company I spoke with in the diagnostics space de-risked their offerings by demonstrating great progress and more favorable data. But because the economy had softened, their valuation still fell from $35 million to $20 million.
Angel investors will often assess valuations both by themselves and as part of an angel investment group. This results in a collective due diligence process that aims to arrive at fair valuations via both group management and angels with diverse backgrounds. The benefit to founders is that if one angel refers you to their group, other angels in the group will often invest as well.
Understand the market
When you look for investments, ensure your valuation is realistic for the type of innovation and market segment, and is aligned with the state of the economy.
While assessing prospective investments, I ensure it’s a product or service that I care deeply about and educate myself about the company’s market. I want to see a fair valuation of the business and a well-defined market worth at least $100 million. I also assess whether the product or service has a significant advantage versus the competition.
To determine your valuation, you need to understand your market.
If your company has a minimum market threshold of $100 million in a large total addressable market (TAM), clearly explain how your company’s innovation solves a huge problem in a space that has no solutions or is substantially better than existing products and whether it can scale rapidly.
Determine your company’s valuation
When I’m considering an investment, “What’s your valuation?” is one of the first questions I ask.
Valuation has two primary concepts: pre-money and post-money.
Pre-money valuation is the value of the company prior to an investment, and post-money valuation denotes what it’s worth after investment.