I assist companies Accelerate to the next level and empower entrepreneurs to succeed.
There is a lot written on the subject of valuation and there are a lot of opinions.
To quote a friend of mine “In God we Trust, everyone else brings data.”
Really the same as selling any asset including a house
Valuation is the current price you are willing to pay, not the value in the future.
Too many entrepreneurs are convinced that investors will invest in your company at some future valuation.
There are many ways to project the value of a company for purposes of pricing an investment but all rely upon the revenue and profit projections of the entrepreneur as a starting point
Not to be confused with valuation. This is an accounting or tax value. CRA may use this to determine the ACB or Adjusted Cost Base
How many Finance or Accounting majors are in the room.
The majority of these methods are that of a CBV – Chartered Business Valuator
Mark to Market Assets or Current Value Accounting was a highly popular discussion during inflationary periods
Book Value is Historical Asset Value
Total Enterprise Value is current value of adjusted assets
Market Value is Stock Market Value
For early and growth stage companies alternatives such as IPOs are increasing in occurrence
Tell Loblaws and Shoppers Story
There is a trend where we are saying Goodbye to Capital Efficiency: Tech start-ups are Raising more capital and Exiting for less
Today the median valuation for angel investment has only mover to $3 million in the USA. For VC’s it is higher
The range of valuation for an pre- commercialized company 1 to 13 mil
There is a universal truth – that fewer than one in a thousand start-ups meet or exceed their projected revenues in the period planned.
In an article published in Sept 2015 the manager of Harvard’s $37b endowment fund is warning about “potentially frothy markets” Stephen Blyth, CEO of Harvard Management Company noted that the fund was taking a more careful approach to investments that could prove illiquid in the future.
A convertible debenture is a way to take the valuation discussion off the table.
In 1975 cost $8.95 to buy in a store and the founder sold 1.5m for $4:00 each becoming a instant millionaire. The rocks often traded hands at multiple of that price based on the uniqueness of the story.
Let us start the bidding at $2.00.
In Bond Trading "A Dutch Auction" is often held where all bidders will pay the highest or conversely lowest price bid.
Deciding how much a start-up should be worth is like deciding how much a one of a kind painting is worth
Early Exits by Basil Peters
There are mixed views on who sets the valuation “Founder” or “Investor”
What's worse, you don't truly know if your estimate of valuation was good until long after you have made the investment
To quote Dave McClure “ I have never seen a company that could acquire profitable and scalable sales not get funded”
Blyth of HMC wrote “ the debate about highly valued assets continues to get louder: private equity valuations are now, on average, at higher levels than in 2007.
There are over eighty “Unicorns” (Venture Capital portfolio companies with valuations over 1 billion), as many as in the last three years combined.
Current conditions for M&A and financing are making it fel like 2007 all over again.
According to CB Insights this year alone there were 62 new unicorns, as companies in the $1 billion club have come to be known.
“It’s like déjà vu, all over again.” Yogi Berra, NY Yankees
Sorry to put some of your professors out of business; however, I was recently complemented that I was the first person see explain the venture capital method in one slide.
Weighting of scores can change for different businesses based on the priority of various attributes
+/- (2, 1,0)
1. Solve a Problem 2. Product 3. Business Model 4. Management Team
I found this article that I researched last evening to be a interesting assertion on how a Billion Dollar Company is built that was published on Forbes.com yesterday and written by Adeo Ressi of Founders Institute.
The most recent Unicorns are being developed in as little as 36 months with the combination of strong Founders, forward-thinking investors and aggressive teams using a cycle of three tactics: 1. the Push, 2. the Markup, and 3 the Backfill
This method of increasing valuation has all the Hallmarks of a Bubble.
I leave you with some final words on valuation. Don’t become overly concerned with valuation. Seed investors should not want to own more than 30% of the company for their initial stake. The investor has to have a strategic economic benefit in investing in your company and the investor has to leave enough equity for the founders to ensure they are motivated to grow the company. The only fatal mistake for the founder is to grow into bankruptcy and run out of cash.
Venture valuation a reality check
“ Venture Valuation: a Reality
Governance - Financial Management - Strategy
Experience and Expertise
S Founder & CEO of Jaguar Capital an Advisory Practice for
Growth Companies in Governance, Financial Management
S Past - Chairperson of Board of Directors, Maple Leaf Angels
Corporation & founder and Lead Director for Maple Leaf
Angels Capital Corporation, the General Partner of
MLA48LP1 a Pre-Seed Angel Fund.
S Certified Corporate Director of the Institute of Corporate
S Previously Entrepreneur in Residence with Incubes
S Past member of Small & Medium Enterprise Committee of
The Ontario Securities Commission
S Investment Committee of Mount Saint Vincent University,
S 32 yr. Career with Scotia Capital as a Financial Risk
Management Advisor to Fortune 200 Companies: Rogers,
Irving Group, Empire Co., Four Seasons, Bruce Power, OPG,
Province of Ontario, Ford etc.
S Fair Market Value
S Revenue Companies
S Business Valuations
S Investor Expectations
S Q & A
Valuation - Agreement of
Price to Buy and Sell
The Valuation of a company is the price to buy the entire company whether it is
public or private often quoted in the price of a share. For a private company
you need to know the total value usually stated as Pre- Money Valuation before
investment or Market Capitalization (post money valuation) after investment.
FMV - Fair Market Value
``The price, expressed in terms of cash equivalents, at which property
would change hands between a hypothetical willing and able buyer and a
hypothetical willing and able seller, acting at arms length in a open and
unrestricted market, when neither is under compulsion to buy or sell and
when both have reasonable knowledge of the relevant facts.``
1. Multiple of EBITDA 5. Book Value
2. Discounted Cash Flow 6. Market Value
3. Comparable transaction method 7. Liquidation Value: Forced or Orderly
4. Total Enterprise Value
S Every valuation and Pricing is unique
S In a M&A Transaction price or valuation
comes down to the strategic value the
acquirer brings to the transaction & the
portion paid to the target
S 43% of Canadian business owners who
are within 10 years of retirement and
have no transition plans
S 65% of business owners don’t know
what their company is worth
S 75% of their worth is tied up in their
S , as a M&A buyer paid < 20 mil with <20 people for 90 % of it`s
S An Angel Investor has traditionally expected a return of 10X on invested capital
S Valuations for tech start-ups have been increasing in recent years while the
stock market decreases in valuation
S According to CB Insights; between 2012 and 2014, the capital efficiency ratio
for 1b exits for VC backed US tech exits has been cut in half, dropping from
22x to 9x.
S The capital efficiency of exits in the $500m - $1b range fell by 46% to 7.5x
S Exits in the $100m to $500m range also saw a decrease, although the trend9
S Ready to make some money
S I will auction off $10 to the highest bidder
S Three rules:
S Bid increments must be in amounts of $1
S You must have cash in your pocket to bid
S While the highest bidder obtains the $10, the second highest bidder must pay a
penalty equal to his or her last bid. The penalty payment will go to Action 2015.
Valuations are as much an art as a
S At the end of the day valuations are subjective
S Many VC`s will not discuss investment until a price is set
S Many VC’s will try to neutralize valuation through terms and conditions such a
S A high valuation may create an orphaned financing or even worse a future down
S Businesses are sold not bought, a business should be preparing for an exit from
S Valuation is calculated on a Fully Diluted Basis – all options, warrants,
convertible debentures, vesting, etc. are converted for the purposes of
presenting the `Capitalization Table` referred to as `Cap Table`
S Valuation is caveat emptor – buyer beware. More investors have lost
more money because they overpaid for a stock than has been lost due
to fraud. (Warren Buffett and Benjamin Graham = Value Investing)
S Has the founder bootstrapped the company to a sustainable level
S Are you raising enough money to last you 18 to 24 months?
S “Valuation metrics in some sectors do
appear substantially stretched –
particularly those for small firms in the
social media and biotechnology
industries, despite a notable downturn
in equity prices for such firms early in
the year.” Janet Yellen, Federal
Reserve Board Chair in her report to
congress on the state of monetary
policy – July 2014
Are Current Valuations
S When you are offering equity to employees
S When you are trying to raise equity financing
S When you are trying to sell the business
When does a Pre-Revenue
Company Need a Valuation
1. Venture Capital Method (ARI)
2. Scorecard Method (Bill Payne)
3. Risk Factor Method (ARI)
4. The Shamrock Method (David Berkus Hybrid)
5. Strategic value based on assumptions of acquisition
6. Comparable companies with similar forecasted profit
Management - quality team in place, except sales
Opportunity - appears to be a huge opportunity
Product – disruptive technology, prototype done
Sales – team not in place , channels unclear
Competition – many small players, lack technology
Other Factors – foreign Market, partners
Risk Factor Method
S Stage of the business
S Legislation/Political risk
S Manufacturing risk
S Sales and marketing risk
S Funding/capital raising risk
S Competition risk
S Technology risk
S Litigation risk
S International risk
S Reputation risk
S Potential lucrative exit
“A David Berkus Hybrid”
S Credit for Actual Invested Capital (no sweat equity)
S Up to 450K for Disruptiveness of Technology & Patents
S Up to 450K for Proof of Concept or Product Validation
S Up to 450K for Business Model, pricing, etc.
S Up to 450k for go to market strategy, traction, growth…
S Up to 450K for Management Team
S Up to 450K for other including advisors, governance, financials, company
S Credit for 2 years of revenue run rate up to 3 years
s is what they base their Valuation on
How to Build a Billion Dollar Company:
The Method Behind Today’s Unicorn
Discussed in an article by Adeo Ressi
of Founder Institute and published on
S 237 Investments in 2014 totaling $90.5 m, an increase from 2013 of 199
investments and a increase in investment from 89.0 m
S Average investment is $1,229k up fr $945k 2013 from over 1700 investors
down from 2100 in 2013
S Investments in $ 89% - Ont & Que, 10% West, 1% Atlantic
S ICT (42%), Life Sciences (41%), Clean Tech (3%)
S Valuation – Median $4.0m, Mean 5.6m
S 61% of transactions involved a co-investor
S Of 2972 applications in Canada 7.9% get funded by networks
Canadian Angel Investment Group
Activity - 2014
S Median Angel Round Size $800K in ’14 up
from $600k in 2013. Mean Angel Round
Size $1.64m in 2014 up from $1m in 2013
S Pre-Money Valuations continue to climb at
$3M in 2014 up 20% from 2013; however,
top valuations increased from $9.3M to
S 72% of deals occur in angel groups’ home
S 73% of Angel Deals are Syndicated or Co-
S Median Round Size $2M in ‘14 from $1.8M
in 2013 when co-invested
S Share of Deals by Sector - Internet 34.6%(-
), Healthcare 18.3%(+), Mobile & Telecom
15.3%(-), Software (non-Internet/mobile)
Angel Resource Institute – Halo Report
s is what they base their Valuation on
S This is what investors base their valuation on:
S High anticipated growth rate
S Experienced management team
S Sustainable competitive advantage
S Barriers to entry
S Clear strategy for commercialization
S Proof of concept or enterprise level validation
S Business model anchored in Reality
S Traction (sales or user)
S Investor exit strategy
WHAT INVESTORS LOOK FOR
1. National Angel Capital Organization 2014 Report on Angel Investing Activity in Canada.
2. Angel Resource Institute – Halo Report – Angel Group Update: 2014
3. Valuing Pre-Revenue Companies by Andrew Maxwell RIC Centre c CIC- Canadian Innovation Centre 2011
4. How do Investors Value Pre-Revenue Companies? By Leo Polovets, Forbes Magazine – Dec 24, 2014
5. Entrepreneurs, here’s how to think about your valuation by Bernard Moon, Sparklabs Global Ventures – Venturebeat.com – Oct 5, 2014
6. The Berkus Method: Valuing an Early Stage Investment by David Berkus -The Berkonomics – Mar 27, 2012
7. Tech Start-ups: Take the Money and build by Howard Tullman – Money Magazine
8. 2012 Valuation Survey of Angel Groups by Bill Payne
9. Valuation of Early Stage Companies, Presented by: Angel Resource Institute, October 24, 2010
10. Goodbye Capital Efficiency: Tech Start-ups are raising more, and exiting for less. CB Insights Blog July 14, 2015
11. Why aspiring to achieve unicorn status could be dangerous for startups by Anwar Ali published in Financial Post November 17, 2015
12. How to Build a Billion Dollar Company: The Method behind Today’s Unicorn Madness by Adeo Ressi Published in Forbes.com Nov 20, 2015
“1/3 of all SME’s in Canada had
problems accessing additional
financing, let Jaguar Capital
help you attain the financing
– Gerard Buckley
Gerard Buckley, BBA, FICB, CMC, ICD.D, Acc. Dir.
Jaguar Capital Inc.
JAGUAR CAPITAL TEAM