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October 2015
Start-up
valuation 101
1
2
How much is my company worth?
Where do I even start?
Finance stuff, must be complicated.
Are you scared?
3
Relax
4
What is it that you don’t get in this simple formula?
5
Value
Anonymous
6
“Ideas are worth
nothing, execution
is worth everything”
What are we talking about?
1. Money – Knowledge – Execution - Influence
2. Value of stuff the firm owns
3. Value of future cash flows
7
Future value is a function of
• Market size
• Market growth
• Market competition – margins
• Leadership – premium / discount
• # clients / users
• Revenues
• EBITDA
• Share of media attention
• Development stage
• Team capacity to execute!!!
8
9
Methods
10
More Art than Science
Methods
1. Net worth
2. VC method
3. Comparable transactions
4. Multiples
5. DCF
6. …
+ The Rule-of-Thumb method
11
Net worth
Assets – Liabilities
Bottom value
12
VC Method
13
Used by practitioners
Based on how much VCs need to return for
each investment
6 steps – Take company “Ubooker” raising €3M
VC Method
14
Step 1:
Determine future results in 5y (or later)
Make an assumption for revenues/EBITDA
e.g. €36 M revenues in 2020
VC Method
15
Step 2:
Determine Terminal Value in year 5 (or later)
Identify comparable mutliples e.g. 4x
Multiply comp.mult.by the revenues 2020
Terminal Value : 4x36 = 144M
VC Method
16
Step 3:
Determine Dilution
Size of successive stock option plans +
Number and size of rounds and expected share
of capital
e.g. employees get 10% over 5Y and company gets one additional
financing where investors get 25% equity (dilution from 100% to 65%)
VC Method
17
Step 4:
Determine Required Rate of Return
VC Method
18
Step 5:
Determine Share of Value Pie
To meet the investor’s return goal of 60% per year
A 3M investment after 5Y should become €31M
If Terminal Value is 144M the investor needs to get
33,6% of the capital today
VC Method
19
Step 6:
Derive Company Value
If you get 33,6% of Ubooker in exchange for
3M you are implicitly valuing the company at
8,93M POST-MONEY
Valuation terms
20
€1 M €2 M
33%
67%
+ =
Investment Pre-money valuation Post-money valuation
What’s the pre-money of Ubooker?
21
Online Tool
22
Market Practice
Whatever the amount you raise
Investors will want 25-50% of the company at
each funding round
VCs only invest in exchange for min c.30%
23
But in the end…
24
Supply and demand
for investment opportunities
drive the valuation
Seed  stage  deals  are  growing
0
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012 2013 2014
Number of Seed-Stage Deals
(Jan 09 - Aug 14)
Europe
USA
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2009 2010 2011 2012 2013 2014
Median Seed-Stage Deals Amount
(Jan 09 - Aug 14)
Europe
USA
Source:	
  BrightSun
EU seed stage deals rose by 600%
EU  Series  A  availability  but  has  not  improved
0
100
200
300
400
500
600
700
800
2009 2010 2011 2012 2013 2014
Number of Series A Deals
(Jan 09 - Aug 14)
Europe
USA
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
2009 2010 2011 2012 2013 2014
Median Stage A Deals Amount
(Jan 09 - Aug 14)
Europe
USA
Source:	
  BrightSun
EU series A stable but valuations going up
27
Source:	
  BrightSun,	
  TechCrunch
Deal statistics
Valuation Considerations
28
Questions	
  to	
  answer with	
  
K
K	
  required Sources
Pre-­‐M
Value
SEED
Early	
  Dev
Pre-­‐MVP
Product:	
  does	
  it	
  work?
Market:	
  is	
  there	
  a	
  market?
Timing:	
  if	
  so	
  when	
  does	
  it	
  start?
€50K-­‐500K
Max	
  €1M
• FFF
• B-­‐Angels
• Pre-­‐seed	
  funds
€100K to	
  
€1M
1st Round
Launch and	
  
refine
Product:	
  does it	
  work	
  for	
  users?
Target	
  Market:	
  is	
  this	
  the	
  right	
  
market	
  and	
  biz model?
Timing:	
  how	
  does it	
  start?
€1-­‐5M
• B-­‐Angels
• Seed	
  Funds
• Early	
  Stage	
  VC
€2M to	
  
€10M
2nd 3rd Rounds
Scaling Market	
  timing:	
  can	
  the	
  market	
  
grow	
  fast	
  enough?
Scale:	
  can	
  we	
  grow, develop,	
  sell,	
  
manage,..?
€5-­‐25M
• Early	
  Stage	
  VC
• Late	
  Stage	
  VC
• CVC
• Growth
€10M	
  to	
  
€50M
29
Mitigation
What if I stretch valuation?
Natural tendency is to try and inflate value
To Boost the share of equity you keep
But…
30
Full Ratchet & Washout
The Arsenal
Liquidation Preference Adjustments
1X	
  Double	
  dip
participating
1X	
  Single	
  dip
34
Valuation to do
what?
35
Base for a transaction
You sell the right to future cash flows
in exchange for
Resources – most important one is
time to the next round
36
Takeaways
ü Be realistic – balancing act
Understand the mechanics, the negotiation
ü Focus on identifying good investors. Focus
on growing the company, don’t be
obsessed by dilution. Value will follow.
ü Paper valuation means nothing as long as
investors don’t get liquidity.
37
Jérôme Wittamer
https://lu.linkedin.com/in/jwittamer
@JeromeWittamer
Thank you and
good luck!
38

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Start-up Valuation 101 Venture Fundamentals

  • 2. 2 How much is my company worth? Where do I even start? Finance stuff, must be complicated. Are you scared?
  • 4. 4 What is it that you don’t get in this simple formula?
  • 6. Anonymous 6 “Ideas are worth nothing, execution is worth everything”
  • 7. What are we talking about? 1. Money – Knowledge – Execution - Influence 2. Value of stuff the firm owns 3. Value of future cash flows 7
  • 8. Future value is a function of • Market size • Market growth • Market competition – margins • Leadership – premium / discount • # clients / users • Revenues • EBITDA • Share of media attention • Development stage • Team capacity to execute!!! 8
  • 10. 10 More Art than Science
  • 11. Methods 1. Net worth 2. VC method 3. Comparable transactions 4. Multiples 5. DCF 6. … + The Rule-of-Thumb method 11
  • 12. Net worth Assets – Liabilities Bottom value 12
  • 13. VC Method 13 Used by practitioners Based on how much VCs need to return for each investment 6 steps – Take company “Ubooker” raising €3M
  • 14. VC Method 14 Step 1: Determine future results in 5y (or later) Make an assumption for revenues/EBITDA e.g. €36 M revenues in 2020
  • 15. VC Method 15 Step 2: Determine Terminal Value in year 5 (or later) Identify comparable mutliples e.g. 4x Multiply comp.mult.by the revenues 2020 Terminal Value : 4x36 = 144M
  • 16. VC Method 16 Step 3: Determine Dilution Size of successive stock option plans + Number and size of rounds and expected share of capital e.g. employees get 10% over 5Y and company gets one additional financing where investors get 25% equity (dilution from 100% to 65%)
  • 17. VC Method 17 Step 4: Determine Required Rate of Return
  • 18. VC Method 18 Step 5: Determine Share of Value Pie To meet the investor’s return goal of 60% per year A 3M investment after 5Y should become €31M If Terminal Value is 144M the investor needs to get 33,6% of the capital today
  • 19. VC Method 19 Step 6: Derive Company Value If you get 33,6% of Ubooker in exchange for 3M you are implicitly valuing the company at 8,93M POST-MONEY
  • 20. Valuation terms 20 €1 M €2 M 33% 67% + = Investment Pre-money valuation Post-money valuation
  • 21. What’s the pre-money of Ubooker? 21
  • 23. Market Practice Whatever the amount you raise Investors will want 25-50% of the company at each funding round VCs only invest in exchange for min c.30% 23
  • 24. But in the end… 24 Supply and demand for investment opportunities drive the valuation
  • 25. Seed  stage  deals  are  growing 0 500 1,000 1,500 2,000 2,500 2009 2010 2011 2012 2013 2014 Number of Seed-Stage Deals (Jan 09 - Aug 14) Europe USA $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 2009 2010 2011 2012 2013 2014 Median Seed-Stage Deals Amount (Jan 09 - Aug 14) Europe USA Source:  BrightSun EU seed stage deals rose by 600%
  • 26. EU  Series  A  availability  but  has  not  improved 0 100 200 300 400 500 600 700 800 2009 2010 2011 2012 2013 2014 Number of Series A Deals (Jan 09 - Aug 14) Europe USA $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 2009 2010 2011 2012 2013 2014 Median Stage A Deals Amount (Jan 09 - Aug 14) Europe USA Source:  BrightSun EU series A stable but valuations going up
  • 28. Valuation Considerations 28 Questions  to  answer with   K K  required Sources Pre-­‐M Value SEED Early  Dev Pre-­‐MVP Product:  does  it  work? Market:  is  there  a  market? Timing:  if  so  when  does  it  start? €50K-­‐500K Max  €1M • FFF • B-­‐Angels • Pre-­‐seed  funds €100K to   €1M 1st Round Launch and   refine Product:  does it  work  for  users? Target  Market:  is  this  the  right   market  and  biz model? Timing:  how  does it  start? €1-­‐5M • B-­‐Angels • Seed  Funds • Early  Stage  VC €2M to   €10M 2nd 3rd Rounds Scaling Market  timing:  can  the  market   grow  fast  enough? Scale:  can  we  grow, develop,  sell,   manage,..? €5-­‐25M • Early  Stage  VC • Late  Stage  VC • CVC • Growth €10M  to   €50M
  • 30. What if I stretch valuation? Natural tendency is to try and inflate value To Boost the share of equity you keep But… 30
  • 31. Full Ratchet & Washout
  • 33. Liquidation Preference Adjustments 1X  Double  dip participating 1X  Single  dip
  • 35. 35
  • 36. Base for a transaction You sell the right to future cash flows in exchange for Resources – most important one is time to the next round 36
  • 37. Takeaways ü Be realistic – balancing act Understand the mechanics, the negotiation ü Focus on identifying good investors. Focus on growing the company, don’t be obsessed by dilution. Value will follow. ü Paper valuation means nothing as long as investors don’t get liquidity. 37