Making the decision to invest in an early stage company can be difficult – but it’s an important and sometimes an avoidable one. Returns and risks in early stage investments come in a wide spectrum ranging from high – low on each axis. This clearly affects how successful the investment can be in a portfolio. Investors use different valuation methods that rely on qualitative or quantitative data.
Before we get to different methods, we set aside traditional discounted cash flow or other m ..
Before we get to different methods, we set aside traditional discounted cash flow or other methods that rely on current financial metrics. Because many companies will be pre-revenue and these methods offer a conservative valuation without considering the potential for high growth.
Such events or trends, their early identification requires significant investment of time and effort to deeply understand a domain and translate them into investment theses. Even then portfolio returns from such insights is not guaranteed.
First method is common among early stage accelerators that take fixed ownership for a fixed investment amount. For example YCombinator in the US commits $125K for 7% + $375K as uncapped.
Investors may be fixated on ownership percentages for the amounts they commit. This method obviously does not work across all sectors and enforces some self-selection in the type of startups that target these programs/investors.