Introduction: About the Class & Me, My Investment Theme, Startup Valuation Challenges & Solution Approaches, Key Considerations: Startup Idea, Physical Assets, Intellectual Property, The People, Customers & Contracts, Market, Size & Growth, Competitors & Barriers, Asset Replacement Cost, Earnings Multiple Valuation Methods: Berkus, Comparable/Precedent Transactions, Risk Factor Summation, Scorecard, Book Value, Liquidation Value, Discounted Cash Flow (DCF), First Chicago, Venture Capital

1. ©
What’s a Start-up worth?®
By
Tomi Davies

2. ©
Content
• Introduction
• About the Class & Me
• My Investment Theme
• Startup Valuation Challenges
& Solution Approaches
• Key Considerations
• Startup Idea
• Physical Assets
• Intellectual Property
• The People
• Customers & Contracts
• Market Size & Growth
• Competitors & Barriers
• Asset Replacement Cost
• Earnings Multiple
• Valuation Methods
• Berkus
• Comparable/Precedent
Transactions
• Risk Factor Summation
• Scorecard
• Book Value
• Liquidation Value
• Discounted Cash Flow (DCF)
• First Chicago
• Venture Capital

3. ©
About this Masterclass
• This Masterclass is aimed at current and potential
early stage investors who want to understand how,
as a an investor, you can value your entrepreneurs
venture prior to investing in their business.
• It will take you through the key considerations and
different valuation methods available to better help
understand how to determine a StartUp’s Pre-
Money Valuation.

4. ©
About Me: Harry ’Tomi Davies (TD)
• Blue chip Enterprise Technology
Management & Big 5 Consulting
background
• Strategic Advisor (Tech), Mentor,
Board Member, Public Speaker &
Author
• Co-Founder, Lagos Angel
Network, Lagos Nigeria
• President, African Business
Angels Network (ABAN)
• Board Member, World Business
Angels Forum (WBAF), Global
Business Angel Network (GBAN)
Business Angel Investor with growing
portfolio of Nigerian Tech Startups
Strika, Sproxil, Hutbay, TextNigeria, Big Cabal
Media, Café Neo, Versecom, Mines.io, Vconnect,
FlexiSAF

5. ©
My Investment Theme!
• TechnoVision Syndicate
• Lagos-based Startup:
• 2+ founding team members with relevant backgrounds
• Private legal entity in growth industry sector with governance
• Technology-enabled innovation or solution based market
proposition
• Potential social impact reach > 1M people/year
• 1+ round of Founder, Family & Friends (FFF) funding
• 2+ years of founding team time invested
• Post-revenue with less than 5 years of customer service operations
• Requires: $50-$100k for pre-scale growth
• Objective:
• Pre-Money Valuation Cap
• Post-Money Ownership Percentages

6. ©
Startup Ventures have Value but…
• Building a Startups is building a
money making machine.
• It takes a cash investment
multiplies it in return
• The machine has a value
because of the things in it. The
more things in the machine, the
more its value increases.
• + strong management team to
the machine, the value
increases.
• + patent to the machine, the
value increases
• Challenge to the entrepreneur Is
that building a StartUp can be
very expensive.
• So after they’ve tapped out their
personal savings come
investment by Friends and Family
• Then they need find people with
more money ( investors) to offer
them a deal:
• Give me X Million to build my
startup, and you get Y% of
everything that comes out of it
• Given X, how much should “Y”
be?
• It depends on the value of the
startup at the moment of
investment.
• But calculating this Pre-Money
Valuation is tricky.

7. ©
There are challenges and solutions…
• There are no precise valuations
• When confronted with the problem of evaluating an early stage company,
although you will find a number of valuation methods that provide solutions you
will discover there are no precise valuations for early stage companies and
there is no such thing as a one and only, true value for a startup company.
• There’s not much information available on startups
• The lack of comparable companies, historical data, complexity of estimating
volatility and large number of intangible assets, which unfortunately are key
drivers for value in tech related companies, make this discipline quite difficult.
• Best practice is average of multiple valuations
• Early Stage investors therefore use a number of valuation models and
scenarios and take a weighted average of them as a starting point for
negotiations. This set of valuations are paired with negotiated deal-terms to set
a specific price for a startup investment transaction.
• Market valuation is whatever comes out of a deal
• A deal will eventually happen at a certain price (market price) and the startup
will refer to this price as their “market-valuation”.

8. ©
Valuation approaches…
There are three standard
approaches to Enterprise Values
(EV) determination that are widely
used:
• Fair Market value – the value of a startup
enterprise determined by a willing buyer
and a willing seller – both conscious of all
relevant facts – to close a transaction.
• Strategic value – the value the startup
company has for a particular (strategic)
investor. The positive effects like synergy,
opportunistic costs and marketing-effects
are considered and calculated for this
valuation approach.
• Intrinsic value – the measure of the
startup business value that reflects the
entrepreneur’s in-depth understanding of
the company’s economic potential.
• Early stage investors should consider
professional advice and research to obtain
different and unbiased points of view that will
compare valuation concepts, weigh synergies
and consider premiums and discounts.

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Key Considerations
• Startup Idea
• Physical Assets
• Intellectual Property
• The People
• Customers & Contracts
• Market Size & Growth
• Competitors & Barriers
• Asset Replacement Cost
• Earnings Multiple

10. ©
Startup Idea
• What problem is the startup
solving?
• Is it popular? Growing?
Urgent? Expensive?
Mandatory? Frequent?
• What’s the Solution being
offered?
• Avoid SISP!
• Why will this solution
succeed?
• Founders? Market? Product?
Acquisition? Monopoly?

11. ©
Physical Assets
• What is the fair market
value for all the start-up's
physical assets?
• The asset approach is the
most concrete valuation
element.
• Although most startups
normally have fewer
physical assets it is still
worth counting everything
they have.

12. ©
Intellectual Property
• What is the real value that
can be assigned to the
startup’s intellectual
property?
• Trademarks, Patents and
Designs that gives the
startup market advantage
which can justify an
increase in valuation should
be registered.

13. ©
The People
• What is the value of all
the principals and
employees in the
startup?
• Value should be
assigned to all paid
professionals, as their
skills, training, and
knowledge of the
business operations
and technology are
valuable.

14. ©
Customers & Contracts
• What is the value of
each customer and
contract the startup has
going?
• Every customer
contract and
relationship even ones
still in negotiation
should be monetised.
• Recurring revenues like
subscriptions are
particularly valuable.

15. ©
Asset Replacement Cost
• What would it cost to
replace the startup’s key
assets?
• The cost approach can be
used to measure the net
value of the start-up today
by calculating how much it
could cost for a new owner
to replace all its key assets.

16. ©
Market Size & Growth
• What’s the size of the
start-up’s market, and
the growth projections
for its sector?
• The bigger the market
and the higher the
growth projections are
from analysts, the more
the startup is worth.

17. ©
Competitors & Barriers
• What are the SWOT of
each direct competitor to
the start-up and what
barriers to entry are there?
• Competitive market forces
such as “first mover”
advantage, premium
management team, few
competitors, high barriers to
entry, etc. can have a large
impact on what valuation
the start-up has.

18. ©
Earnings Multiple
• What are the multiples of
the start-up’s earnings
before interest, taxes,
depreciation and
amortization (EBITDA) (2x,
5x, 10x)
• A target multiple taken from
industry average or derived
from scoring key factors of
the business can be used.

19. ©
Valuation Methods
• Berkus
• Comparable/Precedent Transactions
• Risk Factor Summation
• Scorecard
• Book Value
• Liquidation Value
• Discounted Cash Flow (DCF)
• First Chicago
• Venture Capital

20. ©
The Berkus Method
• The Berkus Method is a simple and
convenient rule of thumb to estimate
the value of a startup that was
designed by Dave Berkus, a
renowned author and business angel
investor.
• The starting point is: do you believe
that the startup can reach $20M in
revenue by the fifth year of
business?
• If the answer is yes, then you can
assess your startup against the 5 key
criteria for building startups.
• This will give you a rough idea of how
much your startup is worth (AKA pre-
money valuation) and more
importantly, what you should improve.
If Exists Add to
Company
Value up to:
Sound Idea (basic value) $1/2 Million
Prototype (reducing
technology risk)
$1/2 Million
Quality Management Team
(reducing execution risk)
$1/2 Million
Strategic Relationships
(reducing market risk)
$1/2 Million
Product Rollout or Sales
(reducing production risk)
$1/2 Million
Note that according to Berkus, the pre-
money valuation should not be more than
$2M.

21. ©
The Berkus Method Example
For a startup expected to reach at least $20 Million revenue by year 5
The Berkus Method is meant for pre-revenue startups.
To read more about the Berkus Method, go to https://berkonomics.com/

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The Comparable/Precedent Transactions Method
• The Comparable Transactions Method
is like in real estate where a property is
valued for sale by comparing it to
similar properties recently sold in its
area.
• Depending on the type of startup you
are valuing, you want to find indicators
which will be good proxies for the value
of your startup.
• These indicators can be specific to the
startups industry e.g.:
• Monthly Recurring Revenue (Saas),
• HR headcount (Interim),
• Number of outlets (Retail),
• Patent filed (Medtech/Biotech),
• Weekly Active Users or WAU (Messengers).
• Most of the time, you can just take lines
from the P&L such as sales, gross
margin, EBITDA, etc.
1.Select the universe of comparable
acquisitions
1. Start by identifying investment transactions for
similar sectors in your area with the same size
as your startup!
2.Locate the necessary deal-related
financial information
1. If you have access, use Bloomberg, Reuters or
others, this step is easy. If not find annual
reports, make searches on google or read
specific company analyses and sector reports
to gather data on Sales Revenue, EBITDA,
forecasts and Deal Values.
3.Spread key statistics, ratios and
transaction multiples
1. Now analyse the startups peer group and
calculate key multiples. Commonly used
multiples are EV/EBITDA, EV/SALES, EBITDA
margins and growth rates.
4.Benchmark the comparable
companies
5.Determine valuation and output
1. Use the key financial numbers from the
company you wish to value.

23. ©
The Comparable/Precedent Transactions Example
Company EV/SALES
LTM
EV/EBITD
A LTM
EBITDA %
LTM
Company A 1.0x 6.5x 15.3%
Company B 0.2x 4.2x 5.8%
Company C 0.6x 5.5.x 10.8%
Company D 0.5x 4.5x 11.9%
Company E 0.9x -0.2%
Company F 0.4x 4.8x 7.8%
Company G 0.4x 12.4x 3.0%
Company H 0.6x 8.4x 7.1%
Company I 0.3x 4.6x 5.6%
Company J 0.7x 12.6x 5.6%
Company K 0.3x 6.3x 5.9%
Median 0.5x 5.4x 5.9%
Mean 0.5x 6.9x 7.2%
• If your startup had sales of 100 million in
the last twelve months (LTM), this would
imply an Enterprise Value of 50 million (0.5 x
100) in this example.
• If your startup made an EBITDA of 10 million
(LTM), this implies an Enterprise Value of 54
million (5.4 x 10).
The Comparables Transactions Method is
meant for pre- and post-revenue startups.
To read more about the Comparable
Transactions Method, go to
https://www.business-
valuation.net/methods/precedent-
transactions/

24. ©
Risk Factor Summation (RFS) Method
• The Risk Factor Summation Method,
by the Ohio TechAngels, considers a
much broader set of factors than the
Berkus Method in determining the
pre-money valuation of pre-revenue
companies.
• First, you determine an initial value
for your startup based on the
average value for one or more similar
startups in your area,
• You then adjust the average value
positively by $250,000 for every +1
(+$500K for a +2) and negatively by
$250,000 for every -1 (-$500K for a -
2).
• The most difficult part here, and in
most valuation methods, is actually
finding data about similar startups.
• The 12 Inherent Risk Factors in
building a StartUp:
• Management
• Stage of the business
• Legislation/Political risk
• Manufacturing risk
• Sales and marketing risk
• Funding/capital raising risk
• Competition risk
• Technology risk
• Litigation risk
• International risk
• Reputation risk
• Potential lucrative exit
Each risk is assessed, as:
+2 very positive for growing company and executing wonderful exit
+1 positive
0 neutral
-1 negative for growing company and executing wonderful exit
-2 very negative

25. ©
Risk Factor Summation Method Example
The Risk Factor Summation Method is meant for pre-revenue startups.
To read more about the Risk Factor Summation Method, go to http://blog.gust.com/valuations-
101-the-risk-factor-summation-method/

26. ©
Scorecard Valuation Method
• The Scorecard Valuation Method
(AKA Bill Payne Method) is a more
elaborate approach to the startup
valuation problem.
• It starts the same way as the RFS
method i.e. you determine a base
valuation for your startup, based on
the average valuation of recently
funded companies in the area
• Then you adjust the value using a
certain set of criteria that are
themselves weighed up based on
their impact on the overall success to
establish the pre-money valuation
• Key to the Scorecard Method is a
good understanding of the average
(and range) of pre-money valuation
of pre-revenue companies in the
area.
No Sample Criteria Weight
1 Strength of the
Management Team
0-30%
2 Size of the Opportunity 0-25%
3 Product/Technology 0-15%
4 Competitive Environment
5 Marketing/Sales
Channels/Partnerships
0-10%
6 Need for Additional
Investments
0-5%
7 Other 0-5%

27. ©
Scorecard Valuation Method (SVM) Example 1
• Assume a startup venture has:
• an average product and technology (100% of norm),
• a strong team (125% of norm) and
• a large market opportunity (150% of norm).
• The startup can get to positive cash flow with a single angel
round of investment (100% of norm).
• Looking at the strength of the competition in the market, the
startup is weaker (75% of norm)
• Early customer feedback on the product is excellent (Other
= 100%).
• The startup needs some additional work on building sales
channels and partnerships (80% of norm).
• Using this data, and a $1.5 Million average pre-money
valuation for similar startups in the area we can complete
the SVM valuation.

28. ©
Scorecard Valuation Method (SVM) Example 2
Comparison Factor Range
Max
Venture Factor
Strength of Entrepreneur and Team 30% 125% 0.3750
Size of the Opportunity 25% 150% 0.3750
Product/Technology 15% 100% 0.1500
Competitive Environment 10% 75% 0.0750
Marketing/Sales/Channels/Partnerships 10% 80% 0.0800
Need for Additional Investment 5% 100% 0.0500
Other Factors (great early customer feedback) 5% 100% 0.0500
Sum 1.0750
Multiplying the Sum of Factors (1.075) times the average pre-money valuation of $1.5 million; we
arrive at a pre-money valuation for the startup of about $1.6 million (rounding from the calculated
$1.61 million).
The Scorecard Valuation Method is meant for pre-revenue startups.
To read more about the Scorecard Valuation Method, go to http://billpayne.com/wp-
content/uploads/2011/01/Scorecard-Valuation-Methodology-Jan111.pdf

29. ©
The Book Value Method
• Book Value Method refers
to the net worth of the
company i.e. the tangible
assets of the box i.e. the
“hard parts” of the box.
• The Book Value Method is
focused on the “tangible”
value of the company, while
most startups focus on
intangible assets : R&D (for
a biotech), user base and
software development (for a
Web startup), etc.
The Book Value Method is not particularly useful
for startups.
To read more about the Book Value Method, go
to https://en.wikipedia.org/wiki/Book_value

30. ©
The Liquidation Value Method
• The Liquidation Value is the sum of
the scrap value of all the startups
tangible assets that you can find a
buyer for in less than two months
• The liquidation value is useful as a
parameter to evaluate the risk of the
investment:
• a higher potential liquidation value
means a lower risk.
• All other things equal, it is preferable to
invest in a company that owns its
equipment compared to one that
leases it.
• If everything goes wrong and you go
out of business, at least you can get
some money selling the equipment,
whereas nothing if you lease it.
• If a startup had to sell its assets in
the case of bankruptcy, the value it
would get would likely be below its
book value, so liquidation value <
book value
The Liquidation Value Method is not
particularly useful for startups.
To read more about the Liquidation Value
Method, go to
https://www.investopedia.com/terms/l/liqui
dation-value.asp

31. ©
The Discounted Cash Flow (DCF) Method
• The Discounted Cash Flow (DCF)
method is based on the principle
that any investment is an exchange
of present cash inflow for future
cash outflow.
• The time value of cash from the
start-up’s projected income can be
used for valuing the start-up.
• The discount rate will vary from
30% to 60% depending on
circumstances.
• DCF derives a startup’s value by
estimating future (yearly) operating
cash flow and its associated risk
• Once yearly cash flows have been
estimated, the exit value is added
to arrive at the valuation
• The expectation being that the
future cash you receive will be
more than the investment, and
compensate you for the risk of
separating from your initial cash.
• DCF = [CF1 / (1+r)1] + [CF2 / (1+r)2]
+ ... + [CFn / (1+r)n]
• CF = Cash Flow
• r= discount rate (WACC)
For more on Discounted Cash Flow (DCF) go to
https://www.investopedia.com/terms/d/dcf.asp#i
xzz5LXd3AW3n

32. ©
Discounted Cash Flow (DCF) Example-1
• We start by determining the company's trailing twelve month (TTM) free cash
flow (FCF) which is operating cash flow minus capital expenditures.
• So lets say that the startups TTM FCF is 50m and you estimate that Company
X's cash flow will grow by 10% in the first two years, then 5% in the following
three.
• After a few years, you may apply a long-term cash flow growth rate,
representing an assumption of annual growth from that point on.
• This value should probably not exceed the long-term growth prospects of the
overall economy by too much; we will say that Company X's is 3%. You will
then calculate a WACC; say it comes out to 8%.
• The terminal value, or the long-term valuation the company's growth
approaches, is calculated using the Gordon Growth Model: Terminal value =
projected cash flow for final year (1 + long-term growth rate) / (discount rate -
long-term growth rate).
For more on Discounted Cash Flow (DCF) go to
https://www.investopedia.com/terms/d/dcf.asp#ixzz5LXeauB6y

33. ©
Discounted Cash Flow (DCF) Example-2
CF = Cash Flow ; r = Discount Rate (WACC) ; n = Time in Years; PV = Present Value
Year FCF Growth Calc CF Calc DCF
1 50.00 1.10 =50.00*1.10 55.00 =55/1.081 50.93
2 55.00 1.10 =55.00*1.10 60.50 =60.5/1.082 51.87
3 60.50 1.05 =60.50*1.05 63.53 =63.53/1.083 50.43
4 63.53 1.05 =63.53*1.05 66.70 =66.70/1.084 49.03
5 66.70 1.05 =66.70*1.05 70.04 =70.04/1.085 47.67
Terminal Value =70.04
(1.03)/(0.08-
0.03)
1,442.75 =1,442.75/1.085 981.91
(NB: WACC = 8%) Startups PV 1,231.83

34. ©
The First Chicago Method
• The First Chicago Method (named after the
late First Chicago Bank ) uses a three
valuation average approach.
• Step 1: Define different future scenarios for
the Company
• worst case scenario
• normal case scenario
• best case scenario
• Step 2: Estimate terminal value for each
scenario using multiples
• Determine Terminal Value (TV) at the time of
the exit (divestment price) using Multiples of
KPIs like EBIT, Revenues etc. to compare
investment to other transactions within the
same peer group characterized by Enterprise
industry, stage and region.
• Step 3: Determine required return and
calculate valuation for each scenario
• Each scenario valuation is made using the
DCF Method (or internal rate of return (IRR)
or multiples).
Step 4: Estimate probabilities of scenarios
and calculate weighted sum
• You then decide a percentage reflecting the
probability of each scenario happening.
• Your valuation is the weighted average of each
case.

35. ©
The First Chicago Method Example
The First Chicago Method is meant for post-revenue startups.
To read more about the First Chicago Method, go to http://www.venionaire.com/first-chicago-
method-valuation/
Best Case
Mid/Normal Case
Worst Case

36. ©
The Venture Capital Method
• The Venture Capital Method (VC
Method) was first described by
Professor Bill Sahlman of
Harvard Business School and is
one of the useful methods for
establishing the pre-money
valuation of pre-revenue startup
ventures.
• It is based on the concept that:
• Return on Investment (ROI) =
Terminal (or Harvest) Value ÷
Post-money Valuation
• (in the case of one investment
round, no subsequent investment
and therefore no dilution)
• Then: Post-money Valuation =
Terminal Value ÷ Anticipated ROI
• An angel investor is always
looking for a specific return on
investment (let’s say 20x)
• The Angel believes that
according to industry standards
the startup could be sold for
100M in 8 years,
• Based on these two elements,
the investor can easily determine
the maximum price he or she is
willing to pay for investing in the
startup after adjusting for dilution
using the VC Method

37. ©
The Venture Capital Method Example
The Venture Capital Method is meant for pre- and post-revenue startups..
To read more about the Venture Capital Method, go to http://blog.gust.com/startup-valuations-101-
the-venture-capital-method/

38. ©
Finally
• Early stage startups offer great opportunities, but carry
various risks, which are hard to calculate.
• Best practice for early stage investing in pre-revenue
ventures is to use multiple methods for establishing the pre-
money valuation for these seed/startup companies.
• Remember that all the methods, except the comparative
funding recipients, are cumulative.
• Even if you exclude some of the methods from
consideration in any case, the analysis will prepare you for
the term sheet negotiations to follow.
• Precision is not the issue here! As an early stage investor
you should not spend more than five minutes arguing the
fine points of the last valuation naira.

39. ©
Thank You!
Get in touch!
TomiDee TomiDee@TomiDee
td@tomidavies.com
tomidavies.com