Assume that Point A is the value at which we, as angel investors, originally invest in a company. Point B is the value at which we exit from the investment. In a perfect world, if we were to graph our investment over its lifetime, we would proceed along a straight line from our original investment value to the exit value.
If we make money, the line is sloping upward until we exit. See Diagram A below. If we lose money, it is sloping downward. Regardless of whether we make money or lose money, both are a straight line. In terms of our scorecard ratings, ratings for a winner would go from “C”, to “C+”, to “B-“ to “B” to “A-“ etc. Losers would go from “C” to “C-“ to “D+” to “D” to “D-“ etc.
But we do not live in a perfect world. Almost every investment that we make seems to have a series of significant events. Some of those events are positives and some are negatives. And the value of the company rises and falls with each of those events. A graph of the company value over a period of time resembles a roller coaster rather than a straight line and looks something like Diagram B.
To show how drastically circumstances can change over a short period of time, let’s examine Kredible and Predikto since the Spring. In late Spring of this year, Kredible was in due diligence to sell to a large public company for 2½ times our investment value one year earlier. It was one of our highest rated companies in the 1Q scorecard. The deal falls through, Kredible misses on two large contracts, and almost runs out of money in early 3Q. The ratings scorecard ratings take huge hit in 2Q. In the Spring, Predikto was a major disappointment. The company had failed to produce any significant level of revenue and the 1Q scorecard ratings reflected the disappointing performance. The company signs three huge contracts in July and the ratings skyrocket in 2Q.
MemberSuite, our largest investment, has probably had more swings in valuation that any other portfolio company. After we make our original investment, the company actually exceeds its revenue projections and the scorecard ratings go up for two or three quarters. Then sales dry up and ratings go down. The company raises more money to implement a new sales program. The program initially is a disappointment and ratings fall further. Then the program kicks in big time and revenues along with scorecard rating, increases. Then the company has a disappointing 2Q when it is raising its Series B round of funding in 3Q of this year. The Series B gets completed, but at a lower valuation than anticipation. Our scorecard rating goes down as a result of the dilution. The company is now taking the proceeds from Series B and pumping money into marketing. The sales pipeline is growing and the outlook for 4Q may be the best sales quarter ever. If that happens, scorecard ratings will enter their third period of time where significant increases were happening. But the company has already two periods of time when the ratings were going down. That is five major swings in valuation in less than four years.
So what is the conclusion of all this? Going from Point A to Point B is not a predictable constant straight line. It is more like a roller coaster with all sorts of ups and downs.