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Early Stage Startup Valuation
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- 2. EARLY-STAGE STARTUP VALUATION Stephen R.Poland June 14th, 2016
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- 4. Today’s Topics • WhenYou Need to Establish a Valuation • The Valuation Equation • Valuation and Raise Amount • Calculating Investor Ownership % • Talking About Your Valuation to Investors • Valuation Methods: How to determine your valuation 4
- 5. About Me… • Co-Founderof 4 Startups • Current Company – 1x1 Media • Corporate Roles – Disney, MacMillan, Bertelsmann • Advisor to Angel Investment Groups • Author of 7 Books on Startup Funding • Focus on helping startups become Investor-Ready • Live in North Carolina, USA 5
- 6. Contact Info Twitter: • @1x1steve LinkedIn: •https://www.linkedin.com/in/steve-poland- 9b545a6 Website: • www.1x1media.com 6
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- 8. Why You Needa Valuation • When you sell equity in your startup to an outside investor such as an angel group or venture capital firm the investor trades cash for a percentage ownership of the startup corporation. 8 • To determine the percentage of equity the investor’s cash buys him/her the total value (or valuation) of the startup needs to be agreed on before the investment occurs. How big is the Pie before I put my money in?
- 9. The Many Questionsin the Investor • Market Size. How big is the market the startup is going after? • Size of the Company. What are the revenue projections over the next three to five years? • Intellectual Property (IP). Does the startup have significant IP or other high competitive barrier advantages? • Founders and Team. How experienced is the founding team? Have they worked on a startup before, or is this their first go? • Product/Service or Technology. Is it revolutionary and disruptive, or merely evolutionary? 9
- 10. The Many Questionsof the Investor • Traction. Do you have customers or users? At what rate can you add new ones? • Amount Already Invested. How much money has already been invested, and how much time in terms of development, research, or innovation? • Stage of the Startup. What stage of development is the startup at: idea/business plan, product developed and tested, or other? • Competition. What is the competition like in the sector of the startup? • Need for Addition Investment. Does the startup need a significant amount of additional cash to reach its goals? 10
- 11. The First Ruleof Startup Valuation Your company is worth whatever you and the investor agree it’s worth. 11
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- 13. • Valuation increasesat each investment round* • Founder equity ownership decreases (dilution) 13
- 14. • Technology • Valuationis low or not needed • Founders use personal funds to get started 14
- 15. • Valuation isstill low • Friends & Family Investor invests small $ • Option Pool established 15
- 16. • Angel investorsinvest for 25% equity • Founders get diluted more • Valuation is increasing 16
- 17. • VCs takea 30% stake • Valuation is increasing • Founders own less, but valuation is much higher 17
- 18. THE BASIC VALUATIONEQUATION 18
- 19. The Valuation Equation Pre-moneyvaluation: How much your startup is worth before an investment… (negotiated amount) Investment amount: The investment… Post-money Valuation: How much the startup is worth after the investment… 19
- 20. HOW TO TALKABOUT YOUR VALUATION WITH INVESTORS IMPLIED VALUATION 20
- 21. How to TalkAbout Your Valuation 1. State your raise amount and equity expectation 21
- 22. How to TalkAbout Your Valuation 2. Calculate the Implied Post-Money Valuation. by dividing the raise amount by the equity ownership percentage: 22
- 23. How to TalkAbout Your Valuation 3. Calculate the Pre-Money Valuation. Subtract the raise amount from the post-money valuation giving the pre-money valuation 23
- 24. HOW TO TALKABOUT YOUR VALUATION WITH INVESTORS IMPLIED FOUNDER DILUTION 24
- 25. How to TalkAbout Your Valuation 1. Express your raise amount and pre-money valuation. 25
- 26. How to TalkAbout Your Valuation 2. Calculate the post-money valuation. Simply add the raise amount to the stated pre-money valuation, resulting in the post-money valuation 26
- 27. How to TalkAbout Your Valuation 3. Calculate the implied dilution percentage. Divide the raise amount by the post-money valuation, giving the founder dilution percentage 27
- 28. VALUATION & RAISEAMOUNT THE 2X TRICK 28
- 29. The 2X Trick 1.Multiply your raise amount by 2 The result is the minimum pre-money valuation you should target. 29
- 30. The 2X Trick Theinvestor ownership math: 30
- 31. Valuing the IdeaItself • Technology • Procedure • Policies • Benefits 31
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- 33. Valuation Factors • MarketSize. How big is the market the startup is going after? • Revenue Potential. What are the revenue projections over the next three to five years? • Intellectual Property (IP). Does the startup have significant IP or other high competitive barrier advantages? • Founders and Team. How experienced is the founding team? Have they worked on a startup before, or is this their first go? • Product/Service or Technology. Is it revolutionary and disruptive, or merely evolutionary? 33
- 34. More Valuation Factors •Traction. Do you have customers or users? At what rate can you add new ones? • Amount Already Invested. How much money has already been invested, and how much time in terms of development, research, or innovation? • Stage of the Startup. What stage of development is the startup at: idea/business plan, product developed and tested, or other? • Competition. What is the competition like in the sector of the startup? • Need for Addition Investment. Does the startup need a significant amount of additional cash to reach its goals? 34
- 35. VALUATION METHOD #1 THEMARKET COMPARISON METHOD 35
- 36. Market Comparison Method “Youare like startup X and it was just valued at $1.5 million pre-money, so your startup must also be in that same pre- money range.” 36
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- 38. VALUATION METHOD #2 THEVC QUICK METHOD 38
- 39. The VC QuickMethod 1. How much money do you need for the next 18 months? 39
- 40. The VC QuickMethod 2. Understand how much equity the VCs want. The VCs know they want to own at least 20% equity in your venture. 40
- 41. The VC QuickMethod 3. Calculate the post-money valuation. The $3 million raise amount divided by the desired equity ownership of 20% 41
- 42. The VC QuickMethod 4. Calculate the resulting pre-money valuation. 42
- 43. VALUATION METHOD #3 THERISK REDUCTION METHOD 43
- 44. Risk Reduction Method Assigningvalues to the tasks and accomplishments that reduce the RISK in your startup. 44
- 45. Risk Reduction Method Assignsdollar values to the accomplishments and validations of the startup in four categories of risk mitigation: 1. Technology: Does your product work as planned? 2. Market: Do customers care about your product or service? 3. Team: Is your team experienced in the segment you are targeting? 4. Financial: Do you have the funding needed to implement your plans? 45
- 46. Risk Reduction Method TechnologyRisk Mitigation – Prototype developed: $75,000 – 3rd party testing completed: $25,000 – IP underway: $25,000 Market Risk Mitigation – Market research: $20,000 – Early adopter program: $100,000 – Channel partners established: $40,000 Team Risk Mitigation – Experienced founders: $200,000 – Prior exit: $250,000 – Detailed execution roadmap: $50,000 Financial Risk Mitigation – Early funding: $50,000 – Two angel rounds needed: $100,000 Total Pre-Money Valuation: $935,000 46
- 47. WHAT QUESTIONS DO YOUHAVE? 47
- 48. Resources • How-To Guidesfor Startup Founders 1x1media.com • Startup Valuation: The App https://goo.gl/QxdRXf • The Ultimate Angel Funding Checklist: http://goo.gl/DHydWe 48
Editor's Notes
- #13 Use a section header for each of the topics, so there is a clear transition to the audience.
- #14 13* It’s possible for
- #15 Valuation Low or Not Necessary. At the idea stage, the valuation of the startup is expectedly low. Because typically few if any tasks have been executed to move the startup forward, no real need to actually put a valuation on the company exists. Personal Funding. Funding at the idea stage typically comes from the entrepreneur, with sources including personal savings, credit cards, or other opportunities such as pitch competitions. Friends and family money, government research funding, and occasionally independent angel investors can also fund the early steps at the idea stage.
- #16 Valuation Still Low, but Growing. At the startup stage, the valuation of the startup is still low, but efforts toward building the product and proving it with customers are well underway. These accomplishments help increase the valuation of the startup Pivots are Common. At the startup stage it is common for founders to change directions in terms of the product, its features, or even the customer being targeted—these changes are called “pivots” in startup lingo, and are common at the startup stage. Investors want to see how potential customers like the prototype, beta, or test version of your innovation. Seasoned investors know that founders have a high likelihood of needing to pivot during the early stages of the startup.
- #17 Customer Validation Drives the Traction Stage. The validation that people want and are willing to pay for your product is the Holy Grail for investors. The closer you get to true paying customers, the less risk the angel perceives in the venture. Angels Start To Play and Valuation Grows. At the traction stage, angel investors can talk to your paying customers, get a first hand view of the market segments you serve, and begin to assess the investment risks and potential rewards.
- #18 Investors in growth stage startups look at historical metrics of your company. Months, if not years, of actual financial data are available, and investors want to know: How efficiently have you used the capital you’ve received? How well have you controlled expenses? Are you at or close to a break-even level of sales/revenue? Are there major infrastructure costs needed to serve an ever larger number of customers
- #19 Use a section header for each of the topics, so there is a clear transition to the audience.
- #20 The Pre-money valuation is what gets negotiated with investors. When they ask “what’s your valuation”, they are talking about the Pre-money valuation.
- #21 Use a section header for each of the topics, so there is a clear transition to the audience.
- #28 The Founder Dilution % is also how much equity the investor owns after the investment deal is complete.
- #29 Use a section header for each of the topics, so there is a clear transition to the audience.
- #30 What will the audience be able to do after this training is complete? Briefly describe each objective and how the audience will benefit from this presentation.
- #39 Use a section header for each of the topics, so there is a clear transition to the audience.
- #44 Use a section header for each of the topics, so there is a clear transition to the audience.
- #46 What will the audience be able to do after this training is complete? Briefly describe each objective and how the audience will benefit from this presentation.
- #47 Can have a detailed conversation with investors about each line item. Shows the work you have accomplished.
- #48 Microsoft Confidential
- #49 Microsoft Confidential