NEW YORK (
TheStreet) -- Wouldn't
Apollo Global Management's
(APO) legendary CEO Leon Black like to get a hold of one of the most rigorous, Web-based valuation systems for entrepreneurs and angel investors? You bet he would, and so would the CEO of
(IEP), none other than Carl Icahn, who made a lot of headlines lately with some controversial suggestions for
As you might suspect, the big players in the field of investment management are always looking for great companies to invest in. Whether it's a publicly traded company they've scoped out or a smaller, privately held one, the game is to find ones that are undervalued, fairly valued and adequately capitalized.
Then they do the careful number-crunching to determine a fair-market valuation. How accurately they do that kind of due diligence translates to whether the investment in the company they've targeted will bring the return-on-investment (ROI) all smart investors seek. The same could be said for venture capitalists and angel investors. They want to know what they are buying and what the market value is based on a reliable valuation system.
This process starts in the early stages of the investor's analysis and often with companies in the early stages of attracting investment capital. That's why an announcement by a company aptly called Worthworm is both significant and promising, especially for companies that want to be purchased and for angel investors who need to determine what that company is really worth.
At last there's a software program that's Web-based, user-friendly and can do the job described above. Designed to answer the demand for an easy-to-use, Web-based system that will generate a realistic, defensible and credible pre-money valuation (PMV) for early-stage ventures seeking investment from angel investors, Worthworm is the only tool of its kind to facilitate negotiations between entrepreneurs and investors based upon the pre-money valuation in which both parties can have a high degree of confidence.
PMV is the equivalent to intrinsic value before investors start placing their capital into the coffers of the company that wants to be capitalized or acquired. That would be right up the alley even for the big investment management firms like APO, IEP and The Blackstone Group (BX). But to begin with, Worthworm has targeted those investors who want to invest in start-ups and existing companies that want to grow to the next level.
Worthworm adds to an investor's data a blend of the valuation methodologies widely accepted by seasoned angel investors, third-party valuation comparables and proprietary real-options technologies to go beyond providing just a reliable PMV. Instead, armed with data from the system, Worthworm users will also gain a deeper understanding of what risks can be mitigated and what opportunities can be exploited to rapidly increase a venture's value for the benefit of its owners.
Sounds like a win-win for entrepreneurs and for investors who want to participate in the ongoing or future success of a business enterprise. In order to help entrepreneurs create the most comprehensive valuation and for angel investors to standardize a portion of their due diligence process either in the screening phase or later, the Worthworm system includes guided questionnaires, PMV reports and some nifty, interactive risk tools.
You can probably already see why this system can increase the chances of focusing in on the right metrics to help both the sellers and the company's potential investors know what they are dealing with and what price makes sense. After calculating a PMV, Worthworm users also have access to a suite of additional tools that help entrepreneurs and angel investors maximize the venture's PMV.
These include the risk tools I referenced earlier. As investors, we all want a risk/reward ratio that makes sense and is grounded in reality. The Risks Tool in the system identifies areas of uncertainty within the venture that could be mitigated to increase the company's PMV. Then there's the Risks and Opportunities Tool which highlights areas of opportunity in which the venture could invest to increase its PMV and compares these available increases to those to be gained by reducing as many uncertainties as possible.
When I interviewed the co-founder of Worthworm, Alan Lobock, I was impressed to learn that the system even has "The Next Steps Tool" that analyzes the key valuation drivers in a way that allows the user to develop strategies and tactics to maximize the venture's PMV.
Lobock explained the advantages and usefulness of Worthworm:
"The reality is that there has not been a reliable, simple, or cost-effective way to calculate an early stage company's valuation, which is why so many entrepreneurs and angel investors get it wrong. The alternatives to Worthworm are spending hours upon hours customizing a spreadsheet that a seasoned investor is unlikely to accept as credible if for no other reason than the valuation method applied, or spending thousands of dollars with a valuation firm. When you are clocking 80-hour weeks building your start-up from the ground-up on limited funds, neither of those options are attractive. Worthworm is designed to fill the market void, providing users with an affordable, rigorous, Web-based valuation system that derives a reasonable and defensible pre-money valuation from which entrepreneurs and angel investors can begin negotiating."
Although the big investment players like Black, Icahn or even Warren Buffett would find it useful, Worthworm was primarily designed with angel investors in mind. Given the recent lift of the General Solicitation ban, the number of U.S. investors considering early-stage venture funding is expected to rise. Lobock and his team have hit a home run by zeroing in on what all savvy investors want more of, and that's an effective way to evaluate the worth of a company.
Worthworm, he said, is one of the strongest tools in an investor's arsenal, providing them with a consistent framework with which to standardize the screening process or later due diligence. "If you are an angel investor and a venture is seeking capital from you, insist on getting its Worthworm report," Lobock said. "If you make an investment, insist that the venture update its Worthworm report throughout the year so you can track its performance with respect to key valuation drivers and evaluate its strategies based upon the venture's changing risk and opportunity profile."
There may be only one thing better than investing in an accurately valued, competitively priced company. That would be to invest in the investment management firms that may eventually use an upscale version of Worthworm to plan their next purchasing campaign. But with APO, IEP and BX trading near 52-week highs, now may not be the most opportunistic time. My internal Worthworm is signaling that companies like these are due for a pullback before too long.
Let a system like Worthworm inspire investors in publicly traded companies to find their own reliable set of criteria to determine if a company's stock is fairly priced. Those should include such important standards as net free cash flow, profit margin, the condition of its balance sheet, rising earnings per share and a return on equity (ROE) that stands atop its peer group.
To learn more about Worthworm, I encourage you to peruse its user-friendly Web site. Educate yourself on the importance of both pre-money valuation and keep reading the abundant articles and services here at TheStreet to get a better picture of the "post-money valuation" of publicly traded companies like the ones mentioned in this article. PMV can stand for both valuations, and the more we know about both the better investors we shall be.
At the time of publication the author had no position in any of the stocks mentioned.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV