Lunch and Learn: Valuation of Early Stage Companies

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AGENDA
FAIR MARKET VALUE
INTRODUCTION
REVENUE COMPANIES
BUSINESS VALUATIONS
INVESTOR EXPECTATIONS
PRE-COMMERCIALIZATION

INTRODUCTION
The Valuation of a company is the price to buy the entire company whether it
is public or private. It is usually quoted in the price of a share; however, for a
private company you need to know the total value usually stated as Pre-
Money Valuation before investment and Post- Money Valuation or Market
Capitalization 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.``

REVENUE COMPANIES
1. Multiple of EBITDA
2. Discounted Cash Flow
3. Comparable transaction method
4. Book Value
5. Total Enterprise Value
6. Market Value
7. Liquidation Value: Forced or Orderly

BUSINESS VALUATIONS
• Every valuation and Pricing is unique
• 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
• 65% of business owners don’t know what
their company is worth
• 85% have no exit strategy
• 75% of their worth is tied up in their
business

• , the most active M&A buyer paid < 20 mil with <20 people for 90 %
of it`s targets
• An Angel Investor has an expectation of 10X
• Survey conducted among USA angel groups by Bill Payne in 2012. Average
Pre-Money valuation is 2.96m & Median is 2.75m an increase over`11
• The usual range of valuation for an pre- commercialized company 1 to 3 mil
• A Convertible Debenture (last weeks lunch and learn) is a way to take the
valuation discussion off the table

• At the end of the day valuations are subjective
• Many VC`s will not discuss investment until a price is set
• A high valuation may create an orphaned financing or even worse a future
down round
• Businesses are sold not bought, a business should be preparing for an exit
from the start
• A company needs to understand the potential buyers universe (Financial vs.
Strategic buyers) and what they are looking for.

• A USA with concerning terms will have negative pressure on valuation
• 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`
• 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)
• Concentrated sales is negative for valuation
• Bootstrapping and obtaining traction will assist a company build valuation

PRE-COMMERCIALIZATION
METHODS
1. Venture Capital Method (ARI)
2. Scorecard Method (David Berkus)
3. Risk Factor Method (ARI)
4. The Shamrock Method (Buckley)

VENTURE CAPITAL METHOD

SCORECARD METHOD
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
• 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

SHAMROCK METHOD
• Credit for Actual Invested Capital (no sweat equity)
• Up to 250K for Management Team
• Up to 250K for Proof of Concept or Product Validation
• Up to 250K for Disruptiveness of Technology & Patents
• Up to 250K for Business Model, pricing, etc.
• Up to 250K for other including advisors, governance, financials,
company infrastructure, etc.
• Up to 250k for go to market strategy, traction, growth…
• Credit for 2 years of revenue run rate up to 3 years

CONTACT

Lunch and Learn: Valuation of Early Stage Companies

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