Start-up valuation: a quick and dirty approach

How to Value a Technology Start-up By: Lorenzo T Geraci [email_address]

Types/Characteristics of IT Start-ups Decreasing Risk and Reward Continued customer satisfaction; Market share First mover; Market Share Market Share Becoming standard; Closing partners IMPORTANT CRITERIA TO SUCCESS High-moderate High/Moderate Very High Extremely high LONG TERM VALUE Linear-ish Hockey Stick Hockey Stick Sow, then hockey stick REVENUE GROWTH Depends Moderate Moderate to High Low EARLY CAPITAL REQ’D Rapid 12 to 24 months Less long Long TIME TO MARKET Low Medium High Huge INTELLECTUAL PROPERTY Consulting, payroll, outsourcers Software packages, PDA’s, PC’s Databases, routers, telecom networks O/S, Chip Design, Barcode EXAMPLES SERVICES APP’S & BOXES INFRASTRUCTURE CORE TECHNOLOGY

The Phases Clear #1 player Domestic and Worldwide Big Greed and ego DOMINANCE 1/3 to ½ of all new sales in target markets All VP’s, CFO, COO if necessary Growth to 100’s Excellent Management RAPID PENETRATION (60 MONTHS) Clear target market, Repeatability of business, real product, real customers CTO, VP’s Sales, Marketing, Finance, Engineering, CEO 20 to 50+ Savvy Management MODERATE PENETRATION (36 MONTHS) Customer approval, some revenue CTO, VP Eng, Dir’s of Sales, Finance, Marketing GM  CEO 5 to 20 ,[object Object],[object Object],EARLY CUSTOMER DEPLOYMENTS (24 MONTHS) Working prototype, beta installations CTO and GM 1 to 10 ,[object Object],[object Object],[object Object],EARLY DEVELOPMENT TO PROTO/BETA (12 MONTHS) MILESTONES MANAGEMENT HEADCOUNT NEEDS

Questions, Capital, Valuations Public Market ,[object Object],[object Object],[object Object],Corp. finance Complacency : with so much success can you continue being paranoid? Dominance $40M to $100M+ ,[object Object],[object Object],[object Object],[object Object],$0 to $100M Execution : can you grow fast enough without loosing control? Mezzanine and IPO Rapid Penetration $10M to $50M ,[object Object],[object Object],[object Object],[object Object],$5M to $15M Market timing : is the market happening fast enough (or too fast)? Execution : can we grow, develop, sell, manage, etc.? 2 nd and 3 rd Rounds Moderate Penetration $2M to $5M ,[object Object],[object Object],[object Object],$1M to $4M Technology : does it work in practice? Target market : is this the right first place? Timing : if a market, when does it start? 1 st Round Early Customer Deployment $100K to $1M ,[object Object],[object Object],[object Object],< $1M usually <500K Technology : does it work at all? Market : in there a market? Timing : if a market, when does it start? SEED Early Development Proto/Beta Valuations (pre-money) SOURCES CAP REQ’D QUESTION TO ANSWER WITH CAPITAL

Risks and Expectations 15% per year? ,[object Object],[object Object],Complacency : with so much success can you continue being paranoid? IPO 2x within 12 to 24 months ,[object Object],[object Object],Execution : can you grow fast enough without loosing control? Mezzanine and IPO Series D, E, etc..” 5x to 10x total investment over 2 to 5 years ,[object Object],[object Object],Market timing : is the market happening fast enough (or too fast)? Execution : can we grow, develop, sell, manage, etc.? 2 nd and 3 rd Rounds “ Series B, C, D, etc..” 10x to 20x total investment over 5 to 7 years ,[object Object],[object Object],[object Object],Technology : does it work in practice? Target market : is this the right first place? Timing : if a market, when does it start? 1 st Round “ Series A” 20% to 50% more than Series A ,[object Object],[object Object],[object Object],Technology : does it work at all? Market : in there a market? Timing : if a market, when does it start? SEED Early Development Proto/Beta Expected Returns INVESTMENT RISKS BUSINESS RISKS

Valuations ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],By: Lorenzo T Geraci [email_address]

Start-up valuation: a quick and dirty approach

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