Start-up valuation: a quick and dirty approach
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Start-up valuation: a quick and dirty approach

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How much is your start-up worth? How much capital can you raise? How much equity will you have to give up? What will investor be looking at? What is too little? What is too much? ...

How much is your start-up worth? How much capital can you raise? How much equity will you have to give up? What will investor be looking at? What is too little? What is too much?
5 slides, quick and dirty job, far from perfect, but a good starting point.
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  • 1. How to Value a Technology Start-up By: Lorenzo T Geraci [email_address]
  • 2. 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
  • 3. 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
    • 100% dedication to customer satisfaction
    • Cheerleading and endurance
    EARLY CUSTOMER DEPLOYMENTS (24 MONTHS) Working prototype, beta installations CTO and GM 1 to 10
    • Tight linkage between devel. & biz goals;
    • Focus
    • Excellent people
    EARLY DEVELOPMENT TO PROTO/BETA (12 MONTHS) MILESTONES MANAGEMENT HEADCOUNT NEEDS
  • 4. Questions, Capital, Valuations Public Market
    • iBanks
    • Commercial Banks
    • Et al.
    Corp. finance Complacency : with so much success can you continue being paranoid? Dominance $40M to $100M+
    • Corporate Investors
    • Mezzanine Funds
    • iBanks
    • Leasing
    $0 to $100M Execution : can you grow fast enough without loosing control? Mezzanine and IPO Rapid Penetration $10M to $50M
    • Early Stage Funds
    • Later Stage Funds
    • Corporate Investors
    • Venture Leasing
    $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
    • Angels
    • Seed Funds
    • Early Stage Funds
    $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
    • FFF
    • Angels
    • Seed Funds
    < $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
  • 5. Risks and Expectations 15% per year?
    • Market perceptions impact stock price
    • Fat, dumb and happy management
    Complacency : with so much success can you continue being paranoid? IPO 2x within 12 to 24 months
    • Opportunity cost if enterprise develops slowly
    • Risk of public markets closing or changing rules
    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
    • Big opportunity cost if enterprise develops slowly
    • Investment in marketing and sales yields no assets if done poorly
    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
    • Risk that there is NO value
    • High risk of total loss
    • Huge opportunity cost id enterprise develops slowly
    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
    • No “dry power” for more investment
    • Risk that there is NO market, bad technology and NO value
    • High risk of total loss
    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
  • 6. Valuations
    • The earlier the money, the riskier it is
      • Be realistic – the less you have, the less it’s worth
      • Pretend it’s your money that’s being invested
      • Taking friends’ money is stressful – don’t promote to them (they’re betting on YOU)
      • Seed money should make a BIG return
    • Later Rounds
      • If you really thing it’s a big idea, don’t sweat the percentage points on dilution – worry that the value of your stock keeps increasing
    • Liquidity
      • Valuation means nothing if it’s illiquid – think about how investors get their return
    By: Lorenzo T Geraci [email_address]