Angel investing is the practice of investing in startup companies, typically at the earliest stage of their development – where there is too much risk even for the appetite of venture capital firms. To learn more about the difference between angel investment and venture capital, check out this article.

Monitoring your portfolio valuation and ROI as an angel investor helps you to understand the impact of your investments on your overall financial goals and risk profile. By regularly reviewing your portfolio and its performance, you can make more informed and strategic decisions about your angel investing activities.

In this article, we’ll help you to understand the logic behind portfolio valuation in more detail, provide a practical exercise for you to try, and share the portfolio valuation workshop we hosted with our partner Dealum, a platform for Angel group management.

Is it worth calculating valuation for pre-seed startups?

A common and valid question. Startups at this stage have a huge amount of uncertainty in their future, so the effort required to calculate a valuation can seem futile – particularly when asked to consider things like revenue projections and market size.

Here’s the thing: some calculation is always done. Whether that’s just deciding to accept the given price, or putting together an exhaustive DCF model. The question is how far does it make sense to go?

The process of valuing a startup will help you to discover and understand the detail of an opportunity, as well as the broad context and market considerations. Exactly how much effort you put into that process is always on a spectrum, where you trade the potential for greater alpha against the ability to evaluate a greater volume of opportunities.

Valuation for specific deals

A question we get asked often is “what is the best valuation for a startup?”

The answer we usually give is fairly simple; it is the valuation that makes the startup as successful as possible, which by default also makes the investment as successful as possible. It must align the incentives of current and future investors, to encourage future investment in the company, and provide the right motivation to founders.

Valuation for portfolios

Valuation becomes even more important when building a portfolio.

Valuation of a startup can tell you when you might have made a mistake. Portfolio valuation can tell you when there may be a more fundamental issue with your thought process. The errors or biases in how you evaluate opportunities, which might have taken a long time to discover otherwise.

Portfolio valuation can also help us get a better read on the market. Do we know, more or less, if we are deploying the right capital at the right time? Should we back off from the market because valuations might be inflated, or is now the time to increase exposure to startups?

How to calculate portfolio ROI?

Simply put, portfolio valuation is the start of period value / end of period value.

If we invest $1M, and now that portfolio is worth $3M, that is clearly a 3x return, 200% ROI.

The problem is that for any kind of portfolio the scenario will be more complicated than this. There will be capital invested throughout the year, portfolios need to be balanced and adjusted. Capital injections and withdrawals need to be taken into account when calculating ROI.

We have put together a simple spreadsheet which offers you three different ways of looking at portfolio ROI:

  • For the easy method, we look at the value of the fund at the beginning and at the end of the period, assuming no injections or withdrawals of capital.
  • For the medium method, we do a Modified Dietz calculation, or mIRR (modified Internal Rate of Return). This basically calculates a weighted average capital for the start value, and then uses that start value to calculate the portfolio return
  • For the hard method, we assume we are going to value our portfolio companies periodically (yearly, quarterly…). Then we do what we did for the medium difficulty method, but for each period. The final return is then the sum of the returns. (Careful to have periods of the same length)
Angel Portfolio ROI Calculator
Open in Google Sheets

Watch our workshop with Dealum, where we go into all of the above in much more depth, including a look at the various methodologies to use when valuing early stage startups: