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Valuation for Startups - Art or Science?
 

Valuation for Startups - Art or Science?

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Valuation of Startups: An Art or is it Science? This presentation explains how price differs from value, and how your feelings and emotions can influence your valuation negotiations and perception. ...

Valuation of Startups: An Art or is it Science? This presentation explains how price differs from value, and how your feelings and emotions can influence your valuation negotiations and perception. Valuation of startups is sort of an art, there is no trackrecord yet. However, there are methods you can use to support your arguments: Comparable Analysis and Venture Capital Valuation Method.

Author: Eva Hukshorn

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Valuation for Startups - Art or Science? Valuation for Startups - Art or Science? Presentation Transcript

  • Valua%on  for  Startups  Art  or  Science?  Author:  Eva  Hukshorn     1  
  •      1.  EFactor  is  a  Smart  Network  that  matches  entrepreneurs  with  the  very  people  who  can  help   them  grow  2.  Finding  Business  Partners:  from  partners  to  investors,  from  coaches  to  customers  3.  Largest  Entrepreneurial  Network  in  the  World  with  1mio  members  in  185  countries  4.  An  online  community  Offering  you  a  network,  knowledge,  events,  and  every  business   resources  you  need  to  succeed  @  discount!  5.  GO  Online,  fix  your  personal  profile  &  company  profile  and  get  MATCHED!   It’s  not  about  connec%ons  -­‐  it’s  about  the  right  ones…   2  
  • Eva  Hukshorn:  An  introducHon  •  Work  Experience   -  Current:    Partner  EFactor        Board  of  Advisory:  TreFoil  Energy  /  CleanDrinks  /          Global  Thinkers  /  ShowLinq            Coach  Startup:  Bootcamp  Amsterdam  /  New  Venture  McKinsey   -  2009  –  2010:  Dutch  BouHque  –  Marktlink  Mergers  &  AcquisiHons,  Amsterdam   -  2007  –  2009:    Royal  Bank  of  Scotland  –  Corporate  Finance,  Amsterdam   -  2004  –  2009:    ABN  AMRO  –  Corporate  Finance  New  York,  Amsterdam   -  2003  –  2004:    Accenture  –  ConsulHng  London,  Amsterdam  •  Educa%on   -  1997  –  2002:  MSc  Economics,  Finance  –  University  of  Groningen,  the  Netherlands   -  2003:      InternaHonal  &  Asian  Studies  –  NaHonal  Sun  Yat-­‐Sen  University,  Taiwan   -  2009  –  2011:    CerHfied  Management  AccounHng  (CMA)  –  InsHtute  of  Management  Accountants            (IMA),  United  States   -  2009  –  2011:    Colloquium  General  &  Modern  Art  –  Academy  for  History  of  Art,  the  Netherlands   -  2012:    InternaHonal  Financial  Report  Standards  (DipIFR)  –  AssociaHon  of  Chartered  CerHfied          Accountants  (ACCA),  United  Kingdom   3      
  • FUNDING  TUESDAY,  EVERY  TUESDAY  So  what  can  you  expect  from  us  each  Funding  Tuesday?  1.  Webinars  on  EFactor  on  Finance  &  Funding  related  topics  in  the  EVENT   SecHon  2.  Blogs  &  interviews  with  informal  investors  and  funded  entrepreneurs   with  Hps  &  tricks  in  the  BLOGS  secHon  under  NOW  3.  Finance  &  Funding  related  arHcles  on  NOW  feed  4.  In  the  Finance  &  Funding  GROUP  on  our  website  you  will  find  Q&As  of  the  webinars  under     NETWORK  5.  In  the  KNOWLEDGE  base  you  will  find  more  and  more  presentaHons  on  Finance  &  Funding   related  topics,  including  the  webinar  presentaHons  6.  And  if  you  become  a  VIP  MEMBER  you  will  personally  be  supported  on  your  Finance  &  Funding   related  quesHons   4  
  • Webinar  Program  Overview  2012  June  19:    Business  Plan  WriHng  -­‐  A  Roadmap  to  Success  July  3:      Pitching  &  PresentaHon  -­‐  3  Minutes,  1  Impression  July  17:    Strategy  -­‐  A  Vision  for  the  Future,  A  Strategy  for  Geing  There  July  31:    BudgeHng  &  ForecasHng  -­‐  PredicHng  the  Outcome  Aug  14:    Working  Capital  -­‐  An  Unknown  Key  to  Success  Aug.  28:    Capital  Management  -­‐  Playing  with  Risk  Sept  11.:    Funding  &  Investments  -­‐  Some  Sources  are  More  Equal  then  Others  Sept.  25:    Valua%on  -­‐  Art  or  Science  Oct  9:      Exit  Strategy  -­‐  Nice  to  Have  or  Need  to  Have?  Oct.  23:    Bootstrapping  -­‐  An  AlternaHve  Answer  to  Funding  Nov  6:    Crowdfunding  -­‐  The  Power  of  Friends,  Family  and  Fools  Nov.  20:    Networking  -­‐  Nice  You  have  3000  Friends,  I  have  30  Relevant  ConnecHons  Dec.  4:      MarkeHng  &  (Social)  Media  -­‐  Noise  or  Value?  Dec.  11:    No  Sales,  No  Glory  Dec.  18:    Most  Common  Mistakes  of  Entrepreneurs   5    
  • What  is  value?  Market  value:               Historical  value:      US$  5.5mio   US$  2.0mio  Replacement  value:   Economic  value:  USUS$  3.5mio   $  1.8mio   Although  ra%onal  reasoning  can  influence  the  outcome,  the  value  of  a   company  is  never  a  truth  but  always  some  one’s  perspec%ve   6  
  • Price  does  not  equal  Value   PRICE   VALUE   -  Supply   -  Growth  &  prospects   -  Demand   -  Profitability   -  Capital  intensity   -  Risk   -  Leverage   -  Tax     -  Synergies   -  EsHmaHons   -  Time  spend     WILLINGENESS     SUBJECTIVE   7  
  • Control  your  emoHons,  or  you  will  lose  the  poker  game!   8  
  • Life  cycle  of  a  startup  in  the  early  days   IDEA:   STARTUP:   GROWTH:   PRE-­‐  SEED   SEED   EARLY  /  LATER  STAGE   REVENUES   PROFIT   No  revenues   Small  revenue   Growing  revenues   OperaHng  losses   Increasing  losses   1st  signs  of  profit   9  
  • ValuaHon  of  Startups:  Art  or  Science?   1   No  product  validaHon   2   No  financial  evidence   3   No  historical  track  record   4     self  financing  through  own  revenues  &  profit   No         long  term  guarantee   5   No   6   No  solid  underlying  assumpHons  yet  to  use  intrinsic  valuaHon  techniques     Too  much  guessing,  too  less  knowing   •  10    
  • Comparable  Analysis:  a  relaHve  valuaHon  method  Comparing  your  company  with  other  companies,  transac%ons  or  relevant  items  based  on  comparable  rates  to  determine  your  (implicit)  value    EXAMPLES  OF  MULTIPES:  •  EBIT  mul%ple  =  Company  Value*    DIVIDED  BY    EBIT   –  how  much  Company  Value  is  US$  1  of  EBIT  worth  •  Equity  value  per  member  =  Total  Equity  Value    DIVIDED  BY    Total  members   –  How  much  Equity  Value  is  1  member  worth  •  Equity  value  per  Eye  Ball  =  Total  Equity  Value    DIVIDED  BY    Total  website  visitors   –  How  much  Equity  Value  is  1  visitor  worth  Note:  Company  Value  =  Equity  Value  +  Long  Term  Liabili@es  -­‐  Cash   11  
  • Comparable  Analysis:  example  Startup    Earnings(before(Interest(&(Taxes $10Total(Members 10,000Visitors(Website(p/m 30,000Industry,Average,MultiplesEBIT(Mutiple((Company(Value(/(EBIT) 5.3xEquity(Value(/(Member 98.0xEquity(Value(/(Eye(Ball 54.0x Ø  Note:  much  more  different  kinds  of   mul@ples  exist:  P/E,  EBIT/Sales,            Implied,Value,Startup Equity  Value/Sales  etc.  Company(Value $53Equity(Value $980,000Equity(Value $1,620,000 12  
  • Comparable  Analysis:  problems  for  startups  Startup •  What  do  you  scale  value  to?  Earnings(before(Interest(&(Taxes $10 •  Who  are  your  comparable  companies?    Total(Members 10,000Visitors(Website(p/m 30,000 •  How  do  you  take  survival  or  other  risks   into  account?    Industry,Average,MultiplesEBIT(Mutiple((Company(Value(/(EBIT) 5.3xEquity(Value(/(Member 98.0x Ø  20%  small  company  discount  Equity(Value(/(Eye(Ball 54.0xImplied,Value,StartupCompany(Value $53Equity(Value $980,000Equity(Value $1,620,000 13  
  • Venture  Capital  Approach:  Formula  &  AssumpHons      Post-­‐Money  Valua%on  =  Terminal  Value  or  ValuaHon  at  Exit                          DIVIDED  BY                            Return  on  Investment  (ROI)      Post-­‐Money  Valua%on  =  Money  or  Investment    PLUS    Pre-­‐Money  ValuaHon      SIMPLE  VERSION  -­‐  ASSUMPTIONS:  •  No  share  issuance  aoer  first  round  •  %  of  ownership  remains  constant  unHl  exit       14  
  • Venture  Capital  Approach:  Terminology      Post-­‐Money  Valua%on  =  Terminal  Value  or  ValuaHon  at  Exit                          DIVIDED  BY                            Return  on  Investment  (ROI)      Post-­‐Money  Valua%on  =  Money  needed  PLUS    Pre-­‐Money  ValuaHon      TERMINOLOGY  •  Pre-­‐Money  ValuaHon  •  Terminal  Value  •  Return  on  Investment  (ROI)       15  
  • Venture  Capital  Approach:  Key  drivers    Post-­‐Money  Valua%on  =  Terminal  Value  or  ValuaHon  at  Exit                          DIVIDED  BY                            Return  on  Investment  (ROI)      Post-­‐Money  Valua%on  =  Money  needed  PLUS    Pre-­‐Money  ValuaHon      UNDERLYING  DRIVERS  TO  ESTIMATE  •  Net  Profit  •  P/E  RaHo  •  Return  on  Investment  (ROI)       16  
  • Venture  Capital  Approach:  Terminal  Value  Determina%on  Terminal  Value:  1.  Revenue  in  exit  year  2.  Industry  standard  profit  as  %  of  revenue  3.  Expected  Net  Profit  4.  Comparable  Price  per  Share  /  Profit  =  P/E  raHo  StartupEXAMPLE:  Revenue&at&Exit   $&45mio  Industry&profit&margin 20%  Industry&Equity&Value&/&Profit&(=P/E&ratio) 8xExpected&profit&at&Exit $&9.0mioTERMINAL/VALUE $/72mio 17  
  • Venture  Capital  Approach:  Return  on  Investment  (ROI)     Cash(Invested( ROI Multiple Pre5Seed(Capital 75%+ 20x Seed(Capital 60% 10x Early(Stage(Capital 50% 8x 2nd(Stage(Capital 40% 6x 3rd(Stage 30% 4x Bridge 20% 2x 18  
  • Venture  Capital  Approach:  Pre-­‐Money  ValuaHon  for  Seed  Capital  Startup    Post-­‐Money  Valua%on  =  Terminal  Value  or  ValuaHon  at  Exit                          DIVIDED  BY                            Return  on  Investment  (ROI)    Post-­‐Money  Valua%on  =  US$  72mio  /  10x  =  US$  7.2mio        ASSUMPTION:  US$  4mio  capital  needed    Pre-­‐Money  Valua%on  =  Post-­‐Money  ValuaHon  MINUS  Money  needed    Pre-­‐Money  Valua%on  =  US$  7.2mio  MINUS  US$  4mio  =  US$  3.2mio       19      
  • 3  things  to  watch  with  Venture  Capital  Approach   1   Valua%on  Trend  Trap   2   Share  Price  Trap   3   Value  equals  Cash  Trap       20  
  • Trap  1:  ValuaHon  Trends  x"ths"US$ Start Round*1 Round*2 Round*3 Round*4Ordinary(Shares(with(Founders 500,000Number(of(Ordinary(Shares(Sold 100,000 100,000 50,000 100,000Sum*of*Total*Ordinary*Shares*Outstanding 600,000 700,000 750,000 850,000%"of"total"Ordinary"Shares"in"this"Round 16.7% 14.3% 6.7% 11.8%Total(US$(value(raised(this(round 250 250 100 360PostCMoney(Valuation 1,500 1,750 1,500 3,060PreCMoney(Valuation 1,250 1,500 1,400 2,700 Focus  on  Post-­‐Money  Valua%on  of  Round  (n)  with  Pre-­‐Money  Valua%on   of  Round  (n+1)  to  create  a  steady  overall  valua%on  increase   21  
  • Trap  2:  The  Share  Price   Ordinary( Preference( Shares Prices Value Shares Prices Value TOTALFounders 34,000 0.20 6,800 0 0.00 0 6,800Round(1 25,000 2.00 50,000 2,900 500.00 1,450,000 1,500,000Round(2 10,000 3.00 30,000 1,140 500.00 570,000 600,000Round(3 50,000 4.00 200,000 4,400 500.00 2,200,000 2,400,000 22  
  • Trap  2:  The  Share  Price  –  Cont’d   Ordinary( Preference( Shares Prices Value Shares Prices Value TOTALFounders 34,000 0.20 6,800 0 0.00 0 6,800Round(1 25,000 2.00 50,000 2,900 500.00 1,450,000 1,500,000Round(2 10,000 3.00 30,000 1,140 500.00 570,000 600,000Round(3 50,000 4.00 200,000 4,400 500.00 2,200,000 2,400,000x"ths"US$ Start Round*1 Round*2 Round*3Ordinary(Shares(with(Founders 34,000Number(of(Ordinary(Shares(Sold 25,000 10,000 50,000Sum*of*Total*Ordinary*Shares*Outstanding 59,000 69,000 119,000%"of"total"Ordinary"Shares"in"this"Round 42.4% 14.5% 42.0%Total(US$(value(raised(this(round 1,500,000 600,000 2,400,000Ordinary(Share(Price 2.00 3.00 4.00PostFMoney(Valuation 3,540,000 4,140,000 5,712,000PreFMoney(Valuation 2,040,000 3,540,000 3,312,000 23  
  • Trap  3:  Value  equals  Cash  Valua%on  related  to  momentum   –  No  cash  before  exit   –  Early  exit  of  founders  is  restricted  in  contracts   –  Value  based  on  guesHmated  future   expectaHons  of  exit  value     I  ain’t  over  un%l  the  cash  is  in!”   24  
  • Source:  Lorenzo  T  Geraci       L@TECorpora@on.com  CharacterisHcs  of  a  Tech  Company   CORE  TECHNOLOGY   INFRASTRUCTURE   APP’S  &  BOXES   SERVICES   O/S,  Chip  Design,   Databases,  routers,   Sooware  packages,   ConsulHng,  payroll,  EXAMPLES   Barcode   telecom  networks   PDA’s,  PC’s   outsourcers  INTELLECTUAL   Huge   High   Medium   Low  PROPERTY  TIME  TO  MARKET   Long   Less  long   12  to  24  months   Rapid  EARLY  CAPITAL   Low   Moderate  to  High   Moderate   Depends  REQ’D   Sow,  then  hockey  REVENUE  GROWTH   Hockey  SHck   Hockey  SHck   Linear   sHck  LONG  TERM  VALUE   Extremely  high   Very  High   High/Moderate   High-­‐moderate  IMPORTANT   ConHnued  customer   Becoming  standard;   First  mover;  Market  CRITERIA  TO   Market  Share   saHsfacHon;  Market   Closing  partners   Share  SUCCESS   share   Decreasing  Risk  and  Reward  
  • Source:  Lorenzo  T  Geraci       L@TECorpora@on.com  Phase  of  Startup  development   NEEDS   FTE   MANAGEMENT   MILESTONES   -­‐   Tight  linkage  between  EARLY  DEVELOPMENT   devel.  &  biz  goals   Working  prototype,  TO  PROTO/BETA  (12   1  to  10   CTO  and  GM   -­‐   Focus   beta  installaHons  MONTHS)   -­‐   Excellent  people   -­‐   100%  dedicaHon  to   CTO,  VP  Eng,  Dir’s  of  EARLY  CUSTOMER   customer  saHsfacHon   Sales,  Finance,   Customer  approval,  DEPLOYMENTS  (24   5  to  20   MarkeHng   -­‐   Cheerleading  and   some  revenue  MONTHS)   endurance   GM  à  CEO   Clear  target  market,  MODERATE   CTO,  VP’s  Sales,   Repeatability  of  PENETRATION  (36   Savvy  Management   20  to  50+   MarkeHng,  Finance,   business,  real  MONTHS)   Engineering,  CEO   product,  real   customers   1/3  to  ½  of  all  new  RAPID  PENETRATION   All  VP’s,  CFO,  COO  if   Excellent  Management   Growth  to  100’s   sales  in  target  (60  MONTHS)   necessary   markets   DomesHc  and  DOMINANCE   Greed  and  ego   Big   Clear  #1  player   Worldwide  
  • Source:  Lorenzo  T  Geraci       L@TECorpora@on.com  QuesHons,  Capital,  ValuaHons   Pre-­‐ QUESTION  TO  ANSWER  WITH  CAPITAL   CAPITAL  NEEDED   SOURCES   Money  SEED   Technology:  does  it  work  at  all?   <  $1M   -­‐   FFF  Early   $100K  to   Market:  in  there  a  market?   usually   -­‐   Angels  Development   $1M   Timing:  if  a  market,  when  does  it  start?   <500K   -­‐   Seed  Funds  Proto/Beta  1st  Round   Technology:  does  it  work  in  pracHce?   -­‐ Angels   $2M  to  Early  Customer   Target  market:  is  this  the  right  first  place?   $1M  to  $4M   -­‐ Seed  Funds   $5M  Deployment   Timing:  if  a  market,  when  does  it  start?   -­‐   Early  Stage  Funds   Market  %ming:  is  the  market  happening  fast   -­‐ Early  Stage  Funds  2nd  and  3rd  Rounds   enough  (or  too  fast)?   -­‐ Later  Stage  Funds   $10M  to  Moderate   $5M  to  $15M   Execu%on:  can  we  grow,  develop,  sell,  manage,   -­‐   Corporate  Investors   $50M  Penetra%on   etc.?   -­‐   Venture  Leasing   -­‐ Corporate  Investors  Mezzanine  and   Execu%on:  can  you  grow  fast  enough  without   -­‐   Mezzanine  Funds   $40M  to  IPO   $0  to  $100M   loosing  control?   -­‐   iBanks   $100M+  Rapid  Penetra%on   -­‐   Leasing   -­‐   iBanks   Complacency:  with  so  much  success  can  you   Public  Dominance   Corp.  finance   -­‐   Commercial  Banks   conHnue  being  paranoid?   Market   -­‐   Et  al.  
  • Source:  Lorenzo  T  Geraci       L@TECorpora@on.com  Risks  and  ExpectaHons   BUSINESS  RISKS   INVESTMENT  RISKS   Expected  Returns   -­‐   No  “dry  power”  for  more  SEED   Technology:  does  it  work  at  all?   investment   20%  to  50%  more  Early  Development   Market:  in  there  a  market?   -­‐   Risk  that  there  is  NO  market,  bad   than  Series  A  Proto/Beta   Timing:  if  a  market,  when  does  it  start?   technology  and  NO  value   -­‐   High  risk  of  total  loss   -­‐   Risk  that  there  is  NO  value   Technology:  does  it  work  in  pracHce?   6  to  10x  total  1st  Round   -­‐   High  risk  of  total  loss   Target  market:  is  this  the  right  first  place?   investment  over  5  to  “Series  A”   -­‐   Huge  opportunity  cost  id  enterprise   7  years   Timing:  if  a  market,  when  does  it  start?   develops  slowly   Market  %ming:  is  the  market  happening  fast   -­‐   Big  opportunity  cost  if  enterprise  2nd  and  3rd  Rounds   4  to  6x  total   enough  (or  too  fast)?   develops  slowly  “Series  B,  C,  D,   investment  over  2  to   Execu%on:  can  we  grow,  develop,  sell,  manage,   -­‐   Investment  in  markeHng  and  sales   5  years  etc..”   etc.?   yields  no  assets  if  done  poorly   -­‐   Opportunity  cost  if  enterprise  Mezzanine,  Bridge   Execu%on:  can  you  grow  fast  enough  without   develops  slowly   2x  within  12  to  24  and  IPO   loosing  control?   -­‐   Risk  of  public  markets  closing  or   months  Series  D,  E,  etc..”   changing  rules   -­‐   Market  percepHons  impact  stock   Complacency:  with  so  much  success  can  you   price  IPO   15%  per  year?   conHnue  being  paranoid?   -­‐   Fat,  dumb  and  happy  management  
  • Conclusion  •  The  closer  it  is  to  an  idea,  the  less  it  is  worth  •  You  are  the  biggest  investor  of  them  all  •  Manage  expectaHons  when  dealing  with  FFF  •  ValuaHon  isn’t  everything  •  Seed  capital:  High  Risk  =  High  Return  •  Don’t  worry  too  much  about  diluHon:  DIVIDED  BY  2  TIMES  3    •  No  exit,  is  no  liquidity,  is  no  value       Golden  Rule  in  Valua%on  –  “he  who  has  the  gold  makes  the  rules”  
  • Webinar  Program  Overview  2012  June  19:    Business  Plan  WriHng  -­‐  A  Roadmap  to  Success  July  3:      Pitching  &  PresentaHon  -­‐  3  Minutes,  1  Impression  July  17:    Strategy  -­‐  A  Vision  for  the  Future,  A  Strategy  for  Geing  There  July  31:    BudgeHng  &  ForecasHng  -­‐  PredicHng  the  Outcome  Aug  14:    Working  Capital  -­‐  An  Unknown  Key  to  Success  Aug.  28:    Capital  Management  -­‐  Playing  with  Risk  Sept  11.:    Funding  &  Investments  -­‐  Some  Sources  are  More  Equal  then  Others  Sept.  25:    ValuaHon  -­‐  Art  or  Science  Oct  9:      Exit  Strategy  -­‐  Nice  to  Have  or  Need  to  Have?  Oct.  23:    Bootstrapping  -­‐  An  AlternaHve  Answer  to  Funding  Nov  6:    Crowdfunding  -­‐  The  Power  of  Friends,  Family  and  Fools  Nov.  20:    Networking  -­‐  Nice  You  have  3000  Friends,  I  have  30  Relevant  ConnecHons  Dec.  4:      MarkeHng  &  (Social)  Media  -­‐  Noise  or  Value?  Dec.  11:    No  Sales,  No  Glory  Dec.  18:    Most  Common  Mistakes  of  Entrepreneurs   30    
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  • Thank  you!    This  document  was  prepared  by  Eva  Hukshorn.  Several  people  and  organiza%ons  have  inspired  her  to  write  this  presenta%on,  amongst  which  are,  but  not  limited  to  the  Founders  of  EFactor,   ABN  AMRO/RBS,  University  of  Groningen,  Ins%tute  for  Management  Accountants