3. 2
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The asset method values the assets of a business and does not assume a going
concern
Source: Eric Tachibana
VALUATION METHODS Theory
You are worth
what you own
You are worth what
you own in the future
You are worth what
the market says
you are worth
1 2 3
Valuation Approaches
4. 3
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Valuing a business based on actual assets is the simplest and most intuitive way;
however, it doesn’t work for start-ups and is generally used during liquidations
Assets Liabilities
Current Assets
Cash
Accounts Receivables
Inventory
Total Current Assets
Current Liabilities
Accounts Payable
Tax Liabilities
Provisions
Total Current Liabilities
Non-Current Assets
Equipment
Buildings
Intangible assets
Total Non-Current Assets
Non-Current Liabilities
Long-term loans
Long-term provisions
Total Non-Current Liabilities
Net Assets
Equity
ASSET APPROACH You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
5. 4
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Source: Eric Tachibana
VALUATION METHODS Theory
You are worth
what you own
You are worth what
you own in the future
You are worth what
the market says
you are worth
1 2 3
Valuation Approaches
DCF* models are premised on the fundamental tenet of corporate finance: the
value of a company today is equal to the present value of future (but uncertain)
cash flows
6. 5
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The discount rate reflects the level of risk and the opportunity cost
NET PRESENT VALUE METHOD
− 0 = Initial Investment
= Cash Flow
= Discount Rate
= Time
NPV Formulas
You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
So what’s the discount rate?
* DCF = Discounted Cash Flow
7. 6
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Investments in early stage businesses are high risk with more than 50% not
returning the capital initially invested
52%
33%
8%
3% 4%
0%
10%
20%
30%
40%
50%
60%
<1x 1x to 5x 5x to 10x 10x to 30x >30x
3.3 years
3 years
4.6 years
4.9 years 6 years
Distribution of Group-Affiliated Angel Returns
Source: Wiltbank, Returns to Angel Investors in Groups, 2007
INVESTOR RISK You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
8. 7
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A principal cause is the lack of information at the time of the investment
Seed
Funding
Angel
Funding
Series
A, B, C
Trade
Sale /
IPO
Available Information
Low High
LACK OF INFORMATION You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
Bridge
Funding
Source: Efrat Kasznik
9. 8
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The higher the risk the higher the discount rate
Source:
Efrat Kasznik,
Harvard Business Review; How Venture Capital Works
Harvard Business Review: A Method for Valuing High-Risk Long-Term Investments
80%+Seed
50-70%Angel
40-60%Series A
30-50%Series B
25-35%Bridge
15-25%Mezzanine
DISCOUNT RATE You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
Discount rate: risk and opportunity cost
10. 9
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-0.25
0
0.25
2.5
10.0
Year 1 Year 2 Year 3 Year 4 Year 5
The NPV* of an early stage venture forecasting a year 1 loss of $250 thousand
and a $10 million profit in year 5 is $624 thousand
EXAMPLE
NPV = Net Present Value
Source: www.biz.yahoo.com, extract only
Start-Up Profit Profile, NPV and IRR
- in million $ -
Seed investment
= 80%
)
You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
While VC firms regularly use DCF analysis it is best suited for projects
11. 10
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The price earnings analysis leverages the wisdom of crowds …
Source: Eric Tachibana
Theory
You are worth
what you own
You are worth what
you own in the future
You are worth what
the market says
you are worth
1 2 3
Valuation Approaches
VALUATION METHODS
12. 11
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… whereby the value of a business should be similar to the value of similar firms,
in similar industries
PRICE EARNINGS RATIO
-0.25
0 0.25
2.5
10
Year 1 Year 2 Year 3 Year 4 Year 5 EV at
Exit
15x
150
Sector P/E*
Application Software 45.5
Asset Management 15.7
Beverages-Brewers 31.5
Biotechnology 102.8
Food Products 15.9
Medical Equipment 44.9
Waste Management 35.5
IT Services 19.1
Source: www.biz.yahoo.com, extract only
P/E Ratios and EBIT Multiples
- in million $ -
You are worth
what you own
You are worth
what
you own in the
future
You are worth
what
the market
says
you are worth
1 2 3
Valuation
Approaches
Theory
Method is best suited for (more) mature, profitable businesses
14. 13
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Convertibles notes defer the cumbersome negotiation of EV to times when more
quantitative information is available
Angel Invest?
End
How?
No
Yes
Not Priced Priced
Convertible
Note
Ordinary
Shares
Source: Efrat Kasznik
ANGEL VALUATION APPROACHES Practice
Angel Investment & Valuation
15. 14
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Angel investors’ valuation of start-ups is driven by the desire to hold a sizeable
shareholding
Funds Raised ($)
Valuation ($) Ownership
10%-30%$1.5m*
$300k
* Pre money
Source: Efrat Kasznik
Practice
Angel Valuation Triangle
ANGEL VALUATION APPROACHES
16. 15
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DAVE MCCLURE’S VALUATION MODEL
Revealed by Dave McClure (500 Startups) at a TechCrunch Disrupt Event (2011)
Each point is worth $1 million (‘million dollar points’)
1. Market
2. Product
3. Team
4. Customers
5. Revenue
Question: is IP considered?
Dave McClure’s approach to valuing start-ups is based on 5 simple criteria each
worth a maximum of $1 million
Max valuation is $5 million
Practice
Source: Efrat Kasznik
17. 16
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In the US valuations of start-ups have risen from $2.5 million to $3 million in just
over 12 months
START-UP VALUATIONS-US
Source: HALO Report
Practice
Start Up Valuations in the US
USD 3.0m
Median
USD 1.5m
1st Quartile
USD 4.0m
3rd Quartile
USD 0.3m
USD 10mUSD 2.5m
Median
2013
2014
18. 17
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Industry
Software 141
Physical 33
Health 11
Other 7
Software (web & mobile)
dominates at 73%
Valuation Sought
< $1m 19
$1m - $2.5m 55
$2.5 - $5m 31
Other 88
A large number at 0 or outside
Sydney Angels Criteria
Capital Sought
< $300k 51
$300k - $500k 63
$500k - $1m 32
Other 46
3% chance of being
funded in 2014
START-UP VALUATIONS-SYDNEY ANGELS
At Sydney Angels a majority of entrepreneurs have realistic valuation
expectations of below $2.5 million; angels negotiate valuations down anyway
Practice
Source: Sydney Angels
19. 18
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Assumption
VC VALUATION APPROACH
The VC approach to valuation is exit driven and combines DCF analysis with the
P/E method
Practice
15x =
P/E Multiple
80% Discount
Rate = 20x ROI
50% future
dilution
$10 million
$150 million
~$8 million
~$4 million
Profit in year 5
EV in year 5
Value today
Fully diluted
value today
Shareholding: 33.3%
IRR: 194%
Return: 75x
Investment: $2m
21. 20
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MISTAKES TO AVOID Lessons
5 per cent of something is better than 100 per cent of nothing
Dos … Don’ts
Do your homework and be prepared to
justify your valuation
Don’t pull a number from thin air
Be realistic Don’t be greedy & alienate investors
Don’t be obsessed and procrastinate
Focus on what matters: raise capital
quickly & accelerate growth
No need to raise too much
Balance funding requirement, dilution &
time to raise capital
Don’t succumb to a common mistake by
thinking: the grass is greener in the US
Concentrate on the environment you are
most familiar with
22. 21
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Dependent on the level of traction a valuation of $1.5 to $2 million is likely to
avoid unpleasant discussions
Scientific approaches to valuing start-ups have limited validity;
Start up valuation of $1.5 to $2 million is a safe bet;
Expedite the capital raise process, minimise disruption and focus on what matters: growing the business.
SUMMARY Lessons
24. 23
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The comparison of enterprise values for start ups and mature businesses
often lead to counterintuitive results
The Valuation Paradox
Characteristics Electrical Services
Provider
Start-Up
Year of Establishment 1985 2014
Product/service Well defined Proof of concept
Business model Proven Unproven, big dream
Scalability Low Perhaps
Revenues $10 million None
Cash flow Positive, $1.5 million Burn rate $60 thousand p.m.
Profit $1 million None for the next 4 years
Enterprise Value $2 million $2.5 million
Source: Efrat Kasznik
VALUATION COMPARISON Valuation Methods
