Can MSPs Attract Angel Investment Money?: Part II

Written by Joe Panettieri 1
February 5, 2014

Let's assume you're building a start-up MSP or cloud services business. You want some angel dollar investments. How do you set valuation? Here's the first step.

I spent portions of last week at an angel investor conference — exploring how high net worth individuals and angel networks potentially invest in early stage technology companies. My first reaction was to educate MSPs about the overall angel investor industry. But now, it’s time to dig a little deeper. Let’s pretend you’re just starting an MSP or cloud business. How much is it worth and how can you attract angel dollars?

First, a refresher course. Angels are high net worth individuals who are willing to pump $25,000 or more into a company in return for some equity, perhaps a board seat — or more. Also, angel networks pool their money to buy a bigger “group” stake in an early stage company. The angels typically don’t exit until a company is acquired, IPOs or dissolves.

Chasing the Dollars — and Estimating Your Valuation

Let’s assume you’re just starting an MSP or a cloud-oriented company. You’ve got zero revenues but you have a big idea — and you want some funding. How do you set valuation?

According to the so-called Berkus method, your startup — with zero revenues — can potentailly be worth from $0 to $2.5 million. To estimate a valuation, assign between $0 and $500,000 to each of these areas:

Will the business be built on a sound idea — that is, does it sound hot, interesting and sustainable?
Does the business already have a prototype product or service built (thereby reducing technology risk)?
Does the business have a quality management team (thereby reducing execution risk)?
Does the business have strategic relationships (thereby reducing market and competitive risk)?
Has the business actually rolled out a product and have sales/revenues kicked in?

Again, take each of those five areas and assign between $0 to $500,000 to each area. Then add up the five areas for your total pre-investment valuation. Of course, your views on value may greatly differ from that of an angel investor — but the exercise is a helpful one for those sitting on both sides of the table.

Next time around, I’ll describe how angel investor networks evaluate whether your business is worthy of investment money. The answer to that question involves seven steps: Screening, due diligence, structuring the deal, term sheet, closing, monitoring investment and exit.