Presentation I gave at a workshop on the basic principles of startup valuation to help entrepreneurs raise money.

1. October 2015
Start-up
valuation 101
1

2. 2
How much is my company worth?
Where do I even start?
Finance stuff, must be complicated.
Are you scared?

3. 3
Relax

4. 4
What is it that you don’t get in this simple formula?

5. 5
Value

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

9. 9
Methods

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

22. Online Tool
22

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

27. 27
Source:
BrightSun,
TechCrunch
Deal statistics

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

29. 29
Mitigation

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

32. The Arsenal

33. Liquidation Preference Adjustments
1X
Double
dip
participating
1X
Single
dip

34. 34
Valuation to do
what?

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.
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38. Jérôme Wittamer
https://lu.linkedin.com/in/jwittamer
@JeromeWittamer
Thank you and
good luck!
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