Angel Investors vs Venture Capitalists

Angel Investors vs Venture Capitalists – Part-2 – What Is Intrinsic Value

Angel Investors vs Venture Capitalists Part 2

 

What is a Good Investment?

Angel investors vs venture capitalists (post1) One of the main differences between investment from an angel versus a venture capitalist is their level of involvement.

Angels usually take a hands-on approach, working closely with the company to guide them to success. Venture Capitalists on the other hand will only invest in great companies.

Venture Capitalists

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This is a general definition and not specific to either sector.

Venture Capitalists might be investing in a particular company and might also be providing strategic advice as to where to invest, but in all cases, it is not something that their clients see.

Angel Investors vs Venture Capitalists, Angel investors in contrast will typically seek out companies that are struggling to raise funds. Also, see Angel Investing For Beginners With No Skills.

Raise Capital

Companies that may be struggling with debts and with a difficult company board. In these situations, the investors will look for great companies that are currently breaking even and are seeking a way to raise capital.

Road To Recovery

These are companies that may be going through a difficult period but are clearly on the road to recovery. The investors will also seek out companies that are currently trading below their book value.

As a result of this focus on current companies, venture capitalists will have a much more hands-off approach.

Angel Investors vs Venture Capitalists

Venture Capitalists will typically only be looking for companies that are facing a crisis situation that is directly related to the company’s future.

CEO That Wants Out

These crises may be related to a product that hasn’t found its market, a supplier failing to deliver, a board member taking a leave of absence or even a CEO that wants out.

Angel Investors vs Venture Capitalists, The Venture Capitalists won’t be looking for companies that are currently breaking even but instead are looking for companies that are facing immediate crises that will have a positive impact on the company in the future.

Facing Immediate Crises

I’ll go into more details on what I mean with these two categories in another post. For now, the important thing is that Venture Capitalists will seek out companies that are facing immediate crises.

Next, the investors will look at company data to see how well the company is doing. In order to do this, the company will need to have a balance sheet, earnings, cash flow, market capitalization, income statements, and statements of operations.

The Market Value

Now, one important thing to note about all of these data points is that the market value will only really mean how much someone is paying for the company at this moment in time.

This is true even if the data is updated periodically and the company is using that data to value itself at a higher price.

Meaning, at some point in the future, this stock will become less valuable.

Meaning, if you buy now, you could sell for less than you paid. While that may seem bleak, remember that this is the nature of a speculative stock.

Great Investment Opportunities

This is a key point in being able to spot great investment opportunities. Remember, these data points are important to investors but are not necessarily important to a management team.

This is important because management teams tend to obsess over the future stock price, which is a much broader concept.

Intrinsic Value And Market Value

Now, to understand this last point, one must understand the difference between intrinsic value and market value.

Intrinsic value is simply the stock price at which the company was trading before there was any news about the business.

Meaning, if the company was trading at $15 and nothing was happening, the stock would be trading at $15 even though the company may be technically not making any money.

Market Value

This value is hard to come by as it is influenced greatly by outside news and events. Market value on the other hand, is the current share price at which the company is trading.

Meaning, if the company is making money, the market value is higher meaning it is more valuable.

This is a crucial point because a high share price does not mean a great company; it simply means the market believes in the company more. Meaning, investors believe in the company more and the company believes in itself more.

More Money Into Companies

Now, to go into why this happens, it is important to understand that investors tend to put more money into companies that have a high share price.

This is because it simply reflects the confidence the public has in the future growth of the company. Meaning, if the public believes in the future, it is more likely they will put money into the company.

Intrinsic value is the exact opposite.

This value is always the exact current share price of the company so, if the company’s share price is trading at $20, the intrinsic value would be $20.

The company is more likely to fall in value if it trades at less than $20 because it is more likely the public will sell the company believing it is a bad investment. In most cases, this happens when the company is failing or is close to failing.

Intrinsic value is important to look at as this is the value of the company in the eyes of the public. Meaning, if the company was trading at $30 and the public is buying it, it is a great buy.

What Is A Good Investment?

This is something that is always debated. Firstly there is a great club that does all the work for members that I recommend you join to start getting shares in fantastic companies today. Some investors believe it is any share that is trading above $10 and is at least $5, in other words, a “good” investment is any share that is at least $5.

However, I believe there is another metric that is more important than the price that is also below $10.

This is a “good” investment in any share that is at least $5 and just a bit above $10. Meaning, if the company is at least $5 in price, but just a bit above $10, then the company is more likely to be a good investment.

High-Risk Investor

Angel Investors vs Venture Capitalists, If you are a high-risk investor, you should look at the Intrinsic value since it is slightly above the share price to give it more weight in the calculation.

I believe this is more important than price since you are comparing a share against a stock index (for example, NASDAQ) instead of against an individual company.

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Angel Investors vs Venture Capitalists - Part-2 - What Is Intrinsic Value

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