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Startup Valuation: from early to mature stages

Methods and approached to startup and company valuations.
Please be free to send me any additions/correction proposals.

Prepared for Startup&co lecture in Freud cafe, Kyiv, April 30, 2014

Startup Valuation: from early to mature stages

  1. 1. Startup Valuation ликбез
  2. 2. Who am I? - Startup Weekend organizer - Lonely Walls founder & CEO, - Flowersense co-founder & CMO
  3. 3. Startup valuation is more an art than a science They all say that: but..
  4. 4. Valuation exercises are needed to get the rage for further negotiations with investors.
  5. 5. That is why... .. the more valuation methods you will use, the more accurate figures you will have:
  6. 6. The valuation of your startup is what the market is willing to pay But, at the end:
  7. 7. Some (must know) terms and definitions Pre-money valuation (PRM) Post-money valuation (POM) Option Pool Dilution Rounds: (fff, angel, seed, Series A, B, C) Return on Investment (ROI) Compound Annual Growth Rate (CAGR) Revenue Return Rate (RRR) EBITDA, EBITA, EBIAT,
  8. 8. A short recap on investment rounds
  9. 9. Purpose: hypothesis validation Amounts: Typically the range is $0-250k fff, Angel, pre-seed:
  10. 10. Seed Purpose: Figuring out the product and getting to user/product fit. Amounts: Typically the range for seed is $250 K-$2 million.
  11. 11. Series A Purpose: Scaling the product and getting to a business model (aka getting to true product/market fit) Amounts: Used to be $2m-$15million with a median of $3-$7 million. Series A amounts have gone up dramatically recently to more of a $7-15 million raise being typical.
  12. 12. Series B Purpose: The Series B is typically all about scaling. You have traction with users, and typically you also have a business model that has come together. Amounts: Anywhere from 7 million to tens of millions.
  13. 13. Series C Purpose: The Series C is often used by a company to accelerate what it is doing beyond the Series B. This may include going international, or costly acquisitions Amounts: This can range from tens to hundreds of millions. and IPO :)
  14. 14. First things first: What kind of company are you evaluating: - a traditional brick and mortar company? - a flying startup/IT?
  15. 15. It is all about risks! The higher risks, the lower chances of succeeding, the higher valuation multiples.
  16. 16. PRE money Notraction/ norevenue POST money Traction/ revenue :( :) Validate idea, work on traction! You got a great team, awesome idea and you are a lucky bastard! Bootstrapping or fundraising full speed! Seems. that things are good. Work on scaling!
  17. 17. Basic truth for fundraising on the early stage: To an angel investor business consists of: - 50% of the team if the team is weak, idea is irrelevant - 25% idea (understanding that the team will pivot) - 25% revenue plan hope is NOT a plan :)
  18. 18. Team - experience, working full/part time Market - how big is the market? Is it growing? If so by how much? Competitors - how big are the barriers to entry against competitors? Assets - what type of assets do you own? Customers - how many customers do you have at this very moment? Are these repeating or one off?
  19. 19. Method 1: The Dave Berkus Model for early stage companies
  20. 20. Method 2: Scorecard method for early stage 1. Start with the median value for the pre-revenue companies in the region 2. Determine valuation factors and weights 3. Determine performance level for each factor 4. Calculate the weighted total for factors 5. Multiply median value by weighted total Assumption: For the [area] based on [data] we assume that valuation ranges from $1.5M to $2.5M, with a $2.0M median
  21. 21. Method 2: Scorecard method
  22. 22. Method 2: example, company Z Z company has the following characteristics: 1. A strong team (125% of norm) 2. Average technology (100% of norm) 3. Large market opportunity (150% of norm) 4. Single angel round needed (100% of norm) 5. Competition is stronger (75% of norm) 6. More work needed on sales/partners (80% of norm) 7. Excellent initial customer feedback (100% - 1other)
  23. 23. Method 2: example 2 mil average valuation x 1.125 multiple = 2,25 mil
  24. 24. Method 3: Investments In At a minimum, your startup should be worth the amount of money+ man-hours* that have been invested in it by the founders during all the time of startup existence. *1 man-hour costs an average salary one would get working elsewhere
  25. 25. Method 4: Industry Comparables Compare your startup to one that has had an exit or is at the similar stage. Mind different geographical regions!
  26. 26. MoneyTree report: get more industry intelligence
  27. 27. Method 5: Industry Multiples What is your: - User engagement - # of installs - CAC (customer acquisition cost) - Customer LTV (lifetime value) - ARPU (average revenue per user) - Customer attrition (churn rate) - Conversion rate (funnel) Knowing the data above, estimate year RRR (revenue run rate = revenue projections)
  28. 28. RRR x industry multiple = valuation
  29. 29. Method 6: DCF Discounted Cash Flow utilizes cash flow projections for the business in future years, discounting them due to the inflations and risks. DCF is not appropriate for early stage companies with extreme lack of predictability of cash flows
  30. 30. DCF formula DCF= 1 (1+R) n R - interest rate, assuming 10%, influenced by the riskiness of the business, its liquidity other opportunities, etc N - ordinal number of year you are calculating it for Years: 1 2 3 4 Cash flows assumptions 90 m 100 m 110 m 100m ... Interest rate: 10% For ex, DCF for year #2: 1/(1+0.1) = 0.83 * 100 m = 83 m Company’s value = DCF year 1+ DCF year 2 + DCF year 3.. 2
  31. 31. Method 7: P/E Ratio Applicable for the mature companies. A valuation ratio of a company's current share price compared to its per-share earnings. P/E ratio = Market Value per Share Earnings per Share (EPS) For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). Company’s value = 1 years revenue * P/E ratio
  32. 32. Method 8: Ratios Company’s Valuation = Multiple * EBITDA/Sales Multiple = Market capitalization of the company (enterprise value)/EBITDA or Sales (if no revenue yet)
  33. 33. Method 8: example Enterprise Value = Share Price * # Shares + Preferred + Debt – Cash let’s say $ 300 MM Multiple = Enterprise Value / EBITDA for ex: $300 MM/ $50 MM = 6.0x Enterprise Value = Multiple * EBITDA Enterprise Value = 6.0x * $40 MM = $240 MM
  34. 34. Method 9: asset based approach A type of business valuation that focuses on a company's net asset value, or the fair-market value of its total assets minus its total liabilities (=debts). The asset-based approach basically asks what it would cost to recreate the business. The cost of assets (servers,buildings, machines, patents etc) is taken from the balance sheet.
  35. 35. Startup/company’s valuations online tools
  36. 36. Tetiana Siianko Thank you!