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Startup Valuation Tutorial
Transcript of Startup Valuation Tutorial
(Different investors require a different RoR). A multiple is then added to reflect the specific characteristics of your company. METHOD OF COMPARABLES Search for businesses comparable to yours (both past and present) and compare their valuations. Find a good comparable and adapt
their figures to yours.
The P/E ratio and the EV/Sales ratio are
the best figures to compare. METHOD After calculating the ratios of several comparable companies, average it out and use it as a multiple to estimate your company’s value. Mainly designed for Tech companies. BERKUS METHOD The 5 factors are essential to a successful enterprise. REASONING
Until you have something to show
for what you're offering,
it's just an idea. Alone, this method is too weak.
It is Rough estimate at best.
Pair it with other methods for more accurate results. DISADVANTAGES Assumes that no smart investor will value a business/product more than what it would cost to duplicate it. COST TO DUPLICATE Therefore in order to value your business, find out how much it would cost to build a company just like yours from the ground up. Use tangible assets to determine the cost. Doesn’t fully capture the future potential of a business. Doesn't reflect the value of
intangibles (brand name, patents, etc). The simplest, most generic method (often used by angels for quick valuations). The company is assigned a set of
generic milestones. For example a valuation metric for a web or software business may look like this: TABLE Inaccurate due to the differences between each start-up. Difficult to value companies this early. TELL A STORY Estimates of a company’s value ultimately come down to perception. This is where you come in. Tell your investors a story.
Sell them on your dream. Sell them on what the company could become. You don't want to make the valuation too high. A WORD OF CAUTION When the value of a company falls between two investment rounds. DOWNROUNDS If your company is successful, the initial valuation won't matter. This is discussed in the
Financial Forecasting video. FUTURE REVENUE This value (called the Net Present Value) is then added to the company's terminal value. The rate at which the projected values are discounted. REQUIRED RATE OF RETURN Made up of two parts. The extra return investors demand because they want to be compensated for investing in a risky business A RISK PREMIUM Rate of return on a risk-free security.
Treasury bills and notes are the primary examples.
Find a Treasury note of a maturity matching the amount of years you are discounting your company (eg. 2, 5, 10) RISK-FREE PREMIUM TERMINAL VALUE The value of the company X years from now discounted to the present at the RoR.
This value is predicted by the managers. While helpful to calculate, few serious investors pay much attention to this valuation method. At each milestone,valuation rises as more uncertainty/risk is eliminated. ADVANTAGES
Provides a measurable benchmark and gives some idea as to how much the business should be valued. The higher the initial valuation, the greater the risk of a "down round". In other words, new investors obtain their shares for a lower price than the older investors did.
This is called share dilution. It helps to create different ranges for your investors to look at.
These ranges can be based on various valuation mechanisms and milestones. A bad management team will drive a good idea into the ground.
Without a growing market, many investors won't even look at your company. You add up to $500,000 for each of the following five factors: Companies rarely release their valuation numbers, so finding comparables is difficult.
Websites like Crunchbase are a good place
( http://www.crunchbase.com/funding-rounds?page=1 ) This method is the one most often used by Venture Capitalists VALUATION BY STAGE Valuation is one of the most challenging elements of being an entrepreneur.
More of an art than a science, raising capital is a numbers game. How then do you come up with a valuation in order to get investments? This video will cover five of the most popular methods, as well as their pros and cons. RoR = Great Management Team Exploding Market Segment Complete Beta or Prototype Distribution Sales DISADVANTAGES DISADVANTAGES http://bit.ly/5w3m1Z Seed Stage Capital | Startup valuation - How much is your DISADVANTAGES