Defending your corporate valuation to Angels & VCs is nearly impossible. In this program, we will discuss valuation methodologies, metrics, tactics, and tips for early-stage corporate valuations.

1. Kent Bennett @kentbennett
Partner, BessemerVenture Partners
Pete Sally @PeterJSally
Director, Zaffre Investments
DavidVerrill @dlvdigital
Founder, Hub Angels and Chairman,Angel CapitalAssociation
TCN FastTrack – March 10, 2015
Valuing an Early Stage Company
#TCNLive

2. Sources of early-stage capital
• Bootstrapping
– Founder’s capital and credit cards, bank lines of credit, loans (SBA)
• Equity Financing (Early)
– Friends and family, crowdfunding, individual angels, organized angel
groups, early stage venture capitalists
• Equity Financing (Early to Later)
– Venture capitalists, corporate venture funds, private equity firms,
hedge funds, and ultimately the public markets
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3. Investment “Size”
Investment
“Cost”
Traditional VC
MicroVC
Equipment Financing
Angel GroupsAngels
AngelList
Corporate / Strategic
Venture
Customers
Portal Funding
Vendors
Founder
Friends & Family
Crowdfunding
Grants
Venture
DebtBank
Loans
Personal
Loans
Private Equity
Sources of Early-stage Capital – Cost:Size
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4. • Common Equity
– Typical for Founders
– Not typical for new, sophisticated investors
– Restricted stock and Options
• Debt and Convertible Notes
– Often used by early stage companies to avoid valuation
– Can be cheaper
– Not the best mechanism for aligning Founders and investors
• Preferred Equity
– Primary mechanism for sophisticated angels, angel groups andVCs
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Equity Investment Vehicles

5. Pre-money $ 1,500,000 $ 2,000,000 $ 2,250,000 $ 2,500,000 $ 2,750,000 $ 3,000,000 $ 3,250,000 $ 3,500,000
Note $ 610,717 $ 610,717 $ 610,717 $ 610,717 $ 610,717 $ 610,717 $ 610,717 $ 610,717
Series A $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000
Option Pool
(8.25%) $ 297,884 $ 339,134 $359,759 $ 380,384 $ 401,009 $ 421,634 $ 442,259 $ 462,884
Post-money $ 3,908,601 $ 4,449,851 $ 4,720,476 $ 4,991,101 $ 5,261,726 $ 5,532,351 $ 5,802,976 $ 6,073,601
Investor
Ownership 54% 47% 45% 42% 40% 38% 36% 35%
Management
Ownership 46% 53% 55% 58% 60% 62% 64% 65%
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Dilution –Valuation’s Relationship to Ownership

6. Capital Needs
Time
High Risk
Low
Risk
Crystallize
Ideas
Demonstrate
Product
Early Scaling
Growth
Sustained
Growth
Market Entry
• Raising money takes place over and over
again because different lenders and
investors match the current capital
amounts and risk profile
Risk vs. Return
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7. • Understand the capital needed today, and the total capital
needed to get to milestones (e.g. exit!)
– Type of business (e.g. SaaS, Medical Equipment)?
– Cost of getting to market?
– Cost of ramping and running the business?
• Compensate the management for getting to this point
– What do they need for future motivation?
– How many more senior people will be hired w/ options?
• Look at comparable exits to understand likely exit multiple
– Don’t forget to account for invested capital!
• Is this a business investors can afford to invest in?
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The LongView –Total Capital Requirements
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8. • Valuation Based on Measuring….
– Sales (Multiple of revenue –P/R)
– Net Income (P/E)
– Cash Flow (EBITDA or Free Cash Flow)
– Discounted Cash Flow (DCF)
– Discounted Future Earnings
– NetWorth or BookValue
– Real Options, Black Scholes, etc.
 NONE OFTHESE APPLYTO STARTUPS!
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Quantitative Methods –Valuing Mature Companies
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9. Valuation Issues
• Terms of Previous Rounds
• Current Round Size andTotal Capital Requirements
• Source of Capital (Angel,VC, Strategic etc.)
• OtherTerms with Financial Impact (Option Plan,
Participation, Liquidation Preferences, etc.)
• Comparables

10. Qualitative & Quantitative Factors
• COMPARABLES
– Valuation of deals recently
completed in a similar space
• KEY ASSETS OFTHE
COMPANY
– Management:Commitment
Knowledge & Experience
– Intellectual Property &
Defensibility
– Financials &Time to Profit
– MilestonesAchieved
– Revenue
– Customers and Feedback
– Barriers to Entry
• FINANCING HISTORY / NEEDS
– Funding to Date
– Future Funding Needs
– Last Round Post-MoneyValuation
– When was last round completed
– Is the stock option pool sufficient
• SIZE AND GROWTH OF
MARKET
– Current Size &Targeted Market
• NOT theTotal Available Market
– Growth - CAGR
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11. Early Stage CompanyValuation Methodologies
• Venture Capital Method (used also by many angels)
– Future revenue x industry multiple x pro rata percentage x IRR = current value
• Discounted HypotheticalCash Flow / Net PresentValue
– Based on fiction
• Chicago (DCF x probability tiers)
– Same issue as above
• Berkus (finger in the air)
– Maximums per attribute (max $2.5m)
• OTA/Payne – Comparison to average x weight
– Helpful for biotech/cleantech
• Risk Factor Method
– Highly subjective – a more detailed version of Berkus Method
• Opportunity Cost / Contribution Model
– Based on sweat and lost alternative revenue
• 1/3 Max rule
– Treats angels like co-founders and weight cash versus sweat
• TransactionComparables
– Hard to find like deals; general market trends may apply

12. Investor-Driven Method (akaVenture Math)
• VALUATION - Investor Requirements
– Return rate required by investor (VC driver)
– 10X to 20X – what is it?
– Time Frame – 3-5-7 years
– Any initial ownership goals
– Valuation can be determined by working in reverse from exit
valuation assuming hypothetical intervening dilution
• VALUATION - Investor Internal Dynamics
– What you can sell to your syndicate partners
– Size of fund and time since fund inception
– Minimum Investment = meaningful percentage?
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13. Berkus, Payne and Risk Factor Methods (aka Angel Math)
Berkus
• Sound Idea, Prototype, QualityTeam, Quality Board, Initial Sale
• Each has maximum value of $500k
Payne
• Management, Size of Opportunity, Product/Service, Sales Channels,
Stage of Business
• Weighting against 100% and Multiplier (1.75x)
Risk Factor
• Management, Stage, Funding Risk, Regulatory, Manufacturing, Sales &
Marketing, Competition,Technology, Litigation, International,
Reputational, Exit
• Measure each as +/- $500k plus Baseline $1.75 million
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14. Structure to Allow Value Growth Over Time
• Underlying Assumption
– All business is a risk adjusted cash flow
– Structuring a deal is “guessing” what the exit valuation will be
• Valuation is a “BlackArt”
– Goal is to quantify a qualitative assessment, and then….
– Negotiate the deal so that everyone feels just a bit unhappy
• Setting Deal Structure
– MUST understand total capital requirements and likely capital sources
– Need to understand option pool needs
– Other economic terms include: liquidation preference, dividends, anti-
dilution adjustment and vesting of founder’s stock and option pool
GOAL: Founders, Management, Early Investors and Later Investors all
have great risk adjusted returns
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15. Angel Data
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16. Angel Round Sizes Remain Steady OverThree-Year Period
$0.00
$0.50
$1.00
2011 2012 2013
Median Round Size Mean Round Size
*Angel rounds include angels & angel groups only
$950K $857K
$931K
$610K $600K $600K
$M

17. • Average valuation across all angel deals :
$2.45million pre-money
$350k invested
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Angel Data 2013
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18. 18
The average
pre-money
valuation for a
pre-revenue
company
across the US
is $2.1 million
Average Valuations for ACA Groups
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19. TCN FastTrack
March 10, 2015
Valuing an Early Stage Company
Kent Bennett
BessemerVenture
Partners
@kentbennett
kent@bvp.com
Pete Sally
Zaffre Investments
@PeterJSally
Peter.sally@zaffreinvestments.com
DavidVerrill
Hub Angels and ACA
@dlvdigital
dverrill@hubangels.com