Startup Valuation

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How to calculate a good business deal?
Entrepreneurs vs Investor

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Startup Valuation

  1. 1. How to calculate a good business deal Entrepreneur vs Investors
  2. 2. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money Valuation post-money $200 M Founders Inv. seed Inv. Series A Inv. Series B x1,5 9m + 3m x2,5 21m + 3m x2 24m 1. As a founders, we calculate the cash needed for the 5 next years before to be acquired $2M + $7M + $50M = $159M 2. Today on TechCrunch, a similar company is acquired by a big corporation for $200M 3. Times: From Seed to Series A: 9months + 3months (finalizing next deal) From Series A to Series B: 21months + 3months (finalizing next deal) From Series B to M&A: 24months 4. IRR “Internal Rate of Returns” for the investors will be: 1. Investor 1 x1,5 in 1year ≈ 80%* 2. Investor 2 x2,5 in 2years ≈ 60%* 3. Investor 3 x2 in 2years ≈ 41%* *Look at the RRC table
  3. 3. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money Valuation post-money $100M $200 M Founders Inv. seed Inv. Series A Inv. Series B PREM&A = $200M $200M / 2 = $100M x1,5 9m + 3m x2,5 21m + 3m X2 24m
  4. 4. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $50M Valuation post-money $20M $100M $200 M Founders Inv. seed Inv. Series A Inv. Series B PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M x1,5 9m + 3m x2,5 21m + 3m X2 24m
  5. 5. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders Inv. seed Inv. Series A Inv. Series B PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M PRESEED= $8,6M - $2M = $6,6M x1,5 9m + 3m x2,5 21m + 3m X2 24m
  6. 6. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders 76,8% Inv. seed 23,2% Inv. Series A Inv. Series B PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M PRESEED= $8,6M - $2M = $6,6M Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8% x1,5 9m + 3m x2,5 21m + 3m X2 24m
  7. 7. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders 76,8% 49,92% Inv. seed 23,2% 15,8% Inv. Series A 35% Inv. Series B PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M PRESEED= $8,6M - $2M = $6,6M Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8% Series A %A = $7M / $20M = 35% - 100% = %F+S = 65% %F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8% x1,5 9m + 3m x2,5 21m + 3m X2 24m
  8. 8. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders 76,8% 49,92% 24,96% Inv. seed 23,2% 15,8% 7,9% Inv. Series A 35% 17,5% Inv. Series B 50% PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M PRESEED= $8,6M - $2M = $6,6M Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8% Series A %A = $7M / $20M = 35% - 100% = %F+S = 65% Series B %B = $50M / $100M = 50% - 100% = %F+S=A = 50% %F= 50% * 59,92% = 24,96%; %S = 50% * 15,8% = 7,9% %A= 50% * 35% = 17,5% x1,5 9m + 3m x2,5 21m + 3m X2 24m %F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8%
  9. 9. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders 76,8% 49,92% 24,96% $49,9M Inv. seed 23,2% 15,8% 7,9% $15,8M 7,9x 52% Inv. Series A 35% 17,5% $35M 5x 50% Inv. Series B 50% $100M 2x 41% PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M PRESEED= $8,6M - $2M = $6,6M Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8% Series A %A = $7M / $20M = 35% - 100% = %F+S = 65% Series B %B = $50M / $100M = 50% - 100% = %F+S=A = 50% x1,5 9m + 3m x2,5 21m + 3m X2 24m %F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8% %F= 50% * 59,92% = 24,96%; %S = 50% * 15,8% = 7,9% %A= 50% * 35% = 17,5%
  10. 10. Seed Series A Series B M&A Cash out Value X RRC Cash needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders 76,8% 49,92% 24,96% $49,9M Inv. seed 23,2% 15,8% 7,9% $15,8M 7,9x 52% Inv. Series A 35% 17,5% $35M 5x 50% Inv. Series B 50% $100M 2x 41%PREM&A = $200M $200M / 2 = $100M PREB = $100M - $50M = $50M $50M / 2,5 = $20M PREA = $20M - $7M = $13M $13M / 1,5 = $8,6M PRESEED= $8,6M - $2M = $6,6M Seed %F= $2M / $8,6M = 23,2% - 100% = %S = 76,8% Series A %A = $7M / $20M = 35% - 100% = %F+S = 65% Series B %B = $50M / $100M = 50% - 100% = %F+S=A = 50% x1,5 9m + 3m x2,5 21m + 3m x2 24m Conclusion: This is a great deal! The proposal for the investors is: Seed Investor: for $2M you’ll return $15,8M in 5 years = IRR 52% 7,9x SeriesA Investor: for $7M you’ll return $35M in 4 years = IRR 50% 5x SeriesB Investor: for $50M you’ll return $100M in 2 years = IRR 41% 2x %F= 65% * 76,8% = 49,92%; %S = 65% * 23,2% = 15,8% %F= 50% * 59,92% = 24,96%; %S = 50% * 15,8% = 7,9% %A= 50% * 35% = 17,5%
  11. 11. Seed Series A Series B M&A Cash out Value X RRC Capital needed $2M $7M $50M Valuation pre-money $6,6M $13M $50M Valuation post-money $8,6M $20M $100M $200 M Founders 76,8% 49,92% 24,96% $49,9M Inv. seed 23,2% 15,8% 7,9% $15,8M 7,9x 52% Inv. Series A 35% 17,5% $35M 5x 50% Inv. Series B 50% $100M 2x 41% x1,5 9m + 3m x2,5 21m + 3m x2 24m • Now you are a Seed investor trying to figure out you shares % in each series: • You can invest $2M and expected return will be $12M in 5 years. • What’ll be your % share en each round? • M&A: $12M / $2M = x6 ≈ you will expect 43%* • The expected value at M&A will be $300M -> $12M / $300M = I need to have 4% at the M&A • I assume that my dilution at Series B will be 50%: Shares at the M&A 4% / .50 = I need to have 8% before the Series B • I assume that my dilution at Series A will be 35%: Shares at the M&A 8% / .35 = I need to have 23% before the Series A Conclusion: If you have 23% at the initial round for $2M you’ll receive $12M in 5 years. Deal!!
  12. 12. Hope you enjoy it! @BerkeleyExecEd If you have any question do not hesitate to contact me: @RicardGarriga

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