Company valuations play an integral role in the development of an early-stage business or SME, and they carry significant implications for businesses that are in the process of raising capital. As such, we at Eureeca would like to shed some light on the valuation process and its importance for growing businesses. Questions to be addressed: What influences a company's valuation? How does a company valuation affect the funding raising process? What methods are available for determining my company's value? At what point should I attempt to valuate my business?

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How much is my company worth?
The importance of valuation

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• Valuation is the total price of a company at a specific point in
time
• In short, your company is worth what an investor is willing to
pay for it (ie what the market says it’s worth)
What is Valuation?

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When should you valuate business?
• Entrepreneurs will look to valuate their company prior to raising
funds, as the amount you want to raise determines valuation
• Raise just enough to achieve next milestone, and then come
back with higher valuation
• Entrepreneurs should approach the negotiating table with a
well formulated and supported valuation.

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Why is it so Difficult?
• “Valuation is more an art than a science”
• While there are commonly used methods to estimate company
value, rarely if ever are they the official “Valuation” of the
company

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Why is it so Difficult?
• Due to the factors mentioned earlier (market, industry
comparisons, company performance, etc), valuation is very
volatile and unpredictable
• Raising money puts a very un-ambiguous stamp of “worth” on
what you’ve worked so hard to create

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Difficulties for Early-stage Businesses
• For Early-stage businesses (which are almost always
private), this is even more difficult:
–Lack of historical data
–Lack of effective comparables (reporting and like-to-like)
–Lack of proof of concept

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• A lot of it comes down to negotiation
• The market wants a winner – it’s your job to convince the
investor that their investment can lead to exponential growth
Difficulties for Early-stage Businesses

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Bottom Line
• Be reasonable – value comes in with investment, so doesn’t
matter what numbers say, it’s about market validation
• No point valuing yourself high if no one invests in you

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Q&A

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Valuation Methods
• Comparables/Multiples
• Discounted Cash Flow (DCF)
• Cost to Duplicate
• Berkus

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Method 1: Market Multiple (Comparables)
• The market multiple approach values the company against
recent acquisitions of similar companies in the market.
• This method is a VC favourite, as it gives them a good idea of
what the market is willing to pay for the company

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Market Multiple (Comparables)
• First, you find a list of the closest companies to you
• i.e. industry, size, market performance
• A multiple is then assigned based on financial figures, such as:
–EV/Sales
–EV/EBITDA

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Market Multiple (Comparables)

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Market Multiple (Comparables)
• Advantages:
–Accurate and indicative of market demand
–This gets us closest to the answer above that “valuation is
what the market will pay.”

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Market Multiple (Comparables)
• Disadvantages:
–Difficult to find close multiples for early stage companies
–Private companies do not disclose figures

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Method 2: Discounted Cash Flow Method
• The value of a company today is equal to the present value of
the future cash flows discounted at a rate that reflects the
riskiness of those cash flows.

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Discounted Cash Flow Method
• In English, this means a company is worth today what it can
potentially achieve tomorrow.

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• Relies on the Time Value of Money principle, which assumes
that a dollar today is worth more than a dollar tomorrow
Discounted Cash Flow Method

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Discounted Cash Flow Method

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Discounted Cash Flow Method
Step 1: Forecast finance projections

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Discounted Cash Flow Method
• Step 2:
• Determine discount rate
• This is based on risk and potential return of the business:
• For early-stage businesses this tends to range from 20 - 50%

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Discounted Cash Flow Method
Step 3: Apply formula

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Discounted Cash Flow Method
• Advantages:
–Allows a company to value itself based on its future potential
–For companies with no comparables or tangible assets

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Discounted Cash Flow Method
• Disadvantages:
–A very volatile method
–Forecasting is often inaccurate

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Q&A

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Method 3: Cost to Duplicate
• Assumes a company is worth how much it would cost to build
another company just like it from scratch.
• The idea is that a smart investor wouldn't pay more than it
would cost to duplicate.

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• We’re in the shoe making business:
• $250,000 for 18 months development
• $50,000 equipment
• $150,000 labor costs
• Therefore, it would cost $450k to duplicate
Cost to Duplicate

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Cost to Duplicate
• An example of this is the Yahoo purchase ($164m) of Maktoob
• They bought it because it would take 18 months to build Arabic
functionality

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Cost to Duplicate
• Advantages:
–Easy and quick
• Disadvantages:
–Unreliable when it comes to intangible assets
–Doesn’t measure the potential of the business

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Method 4: Stage (Berkus)
• Values company based on the venture's stage of commercial
development
• The further the company has progressed along the development
pathway, the lower the its risk and the higher its value.

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Method 4: Stage (Berkus)
• Often used by angel investors
• Quick, rough-and-ready range of company value

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Stage (Berkus)
• Quality of the Management Team
• The soundness of the idea
• Whether there is a working prototype
• The Quality of the Board
• Product Rollout / Sales

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Stage (Berkus)
• A valuation-by-stage model might look something like this:

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• Advantage:
–Quick and easy
–Checklist
• Disadvantage:
–Overly simplistic and generic
Stage (Berkus)

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Q&A

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So What Can You Do?

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Combine
• DCF = 1,000,000
• Multiples = 750,000
• Berkus = 1,500,000
• Duplicate = 500,000
• Take an average: $900,000

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Tell a good story
• A valuation is only as good as you can sell it — an investor is
really interested in what a business can become rather than
what it is now.

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A final takeaway
• Be reasonable – value comes in with investment, so does’t
matter what numbers say, it’s about market validation
• Valuation is also contingent on the terms — more generous
terms can yield a higher valuation.

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Q&A

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Thanks for attending. We hope you enjoyed it.
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