Methods and approached to startup and company valuations. Please be free to send me any additions/correction proposals. Prepared for Startup&co lecture in Freud cafe, Kyiv, April 30, 2014

1. Startup Valuation
ликбез

2. Who am I?
- Startup Weekend organizer
- Lonely Walls founder & CEO,
- Flowersense co-founder & CMO
www.lonely-walls.com
www.flowersenseapp.com
http://about.me/siyasha

3. Startup valuation is more an
art than a science
They all say that:
but..

4. Valuation exercises are needed to
get the rage for further negotiations
with investors.

5. That is why...
.. the more valuation methods you will use,
the more accurate figures you will have:
https://www.equitynet.com/

6. The valuation of your startup
is what the market is willing
to pay
But, at the end:

7. Some (must know) terms and definitions
Pre-money valuation (PRM)
Post-money valuation (POM)
Option Pool
Dilution
Rounds: (fff, angel, seed, Series A, B, C)
Return on Investment (ROI)
Compound Annual Growth Rate (CAGR)
Revenue Return Rate (RRR)
EBITDA, EBITA, EBIAT,

8. A short recap on investment
rounds

9. Purpose: hypothesis validation
Amounts: Typically the range is $0-250k
fff, Angel, pre-seed:

10. Seed
Purpose: Figuring out the product and
getting to user/product fit.
Amounts: Typically the range for seed is
$250 K-$2 million.

11. Series A
Purpose: Scaling the product and getting to
a business model (aka getting to true
product/market fit)
Amounts: Used to be $2m-$15million with a
median of $3-$7 million. Series A amounts
have gone up dramatically recently to more
of a $7-15 million raise being typical.

12. Series B
Purpose: The Series B is typically all about
scaling. You have traction with users, and
typically you also have a business model
that has come together.
Amounts: Anywhere from 7 million to tens of
millions.

13. Series C
Purpose: The Series C is often used by a
company to accelerate what it is doing
beyond the Series B. This may include going
international, or costly acquisitions
Amounts: This can range from tens to
hundreds of millions.
and IPO :)

14. First things first:
What kind of company are you evaluating:
- a traditional brick and mortar company?
- a flying startup/IT?

15. It is all about risks!
The higher risks, the lower chances of
succeeding, the higher valuation multiples.

16. PRE money
Notraction/
norevenue
POST money
Traction/
revenue
:(
:)
Validate idea, work on
traction!
You got a great team,
awesome idea and you are a
lucky bastard!
Bootstrapping or
fundraising full speed!
Seems. that things are good. Work
on scaling!

17. Basic truth for fundraising on
the early stage:
To an angel investor business consists of:
- 50% of the team
if the team is weak, idea is irrelevant
- 25% idea
(understanding that the team will pivot)
- 25% revenue plan
hope is NOT a plan :)

18. Team - experience, working full/part time
Market - how big is the market? Is it
growing? If so by how much?
Competitors - how big are the barriers to
entry against competitors?
Assets - what type of assets do you own?
Customers - how many customers do you
have at this very moment? Are these
repeating or one off?

19. Method 1: The Dave Berkus Model
for early stage companies
http://files.meetup.com/1731388/Valuation-011712.pdf

20. Method 2: Scorecard method for
early stage
http://files.meetup.com/1731388/Valuation-011712.pdf
1. Start with the median value for the pre-revenue
companies in the region
2. Determine valuation factors and weights
3. Determine performance level for each factor
4. Calculate the weighted total for factors
5. Multiply median value by weighted total
Assumption:
For the [area] based on [data] we assume that valuation
ranges from $1.5M to $2.5M, with a $2.0M median

21. Method 2: Scorecard method
http://files.meetup.com/1731388/Valuation-011712.pdf

22. Method 2: example, company Z
Z company has the following characteristics:
1. A strong team (125% of norm)
2. Average technology (100% of norm)
3. Large market opportunity (150% of norm)
4. Single angel round needed (100% of norm)
5. Competition is stronger (75% of norm)
6. More work needed on sales/partners (80% of norm)
7. Excellent initial customer feedback (100% - 1other)

23. Method 2: example
2 mil average valuation x 1.125 multiple = 2,25 mil

24. Method 3: Investments In
At a minimum, your startup should be worth
the amount of money+ man-hours* that have
been invested in it by the founders during all
the time of startup existence.
*1 man-hour costs an average salary one would get
working elsewhere

25. Method 4: Industry Comparables
Compare your startup to one that has had
an exit or is at the similar stage. Mind
different geographical regions!
www.vcexperts.com
www.myfrenchstartup.com
www.angel.co

26. MoneyTree report: get more industry
intelligence
https://www.pwcmoneytree.com/MTPublic/ns/index.jsp

27. Method 5: Industry Multiples
What is your:
- User engagement
- # of installs
- CAC (customer acquisition cost)
- Customer LTV (lifetime value)
- ARPU (average revenue per user)
- Customer attrition (churn rate)
- Conversion rate (funnel)
Knowing the data above, estimate year RRR
(revenue run rate = revenue projections)

28. RRR x industry multiple = valuation

29. Method 6: DCF
Discounted Cash Flow utilizes cash flow
projections for the business in future years,
discounting them due to the inflations and
risks.
DCF is not appropriate for early stage
companies with extreme lack of predictability
of cash flows

30. DCF formula
DCF=
1
(1+R)
n
R - interest rate, assuming 10%, influenced
by the riskiness of the business, its liquidity
other opportunities, etc
N - ordinal number of year you are
calculating it for
Years: 1 2 3 4
Cash flows assumptions 90 m 100 m 110 m 100m ...
Interest rate: 10%
For ex, DCF for year #2: 1/(1+0.1) = 0.83 * 100 m = 83 m
Company’s value = DCF year 1+ DCF year 2 + DCF year 3..
2

31. Method 7: P/E Ratio
Applicable for the mature companies.
A valuation ratio of a company's current share price
compared to its per-share earnings. P/E ratio =
Market Value per Share
Earnings per Share (EPS)
For example, if a company is currently trading at $43 a share and earnings over
the last 12 months were $1.95 per share, the P/E ratio for the stock would be
22.05 ($43/$1.95).
Company’s value = 1 years revenue * P/E ratio

32. Method 8: Ratios
Company’s Valuation = Multiple *
EBITDA/Sales
Multiple = Market capitalization of the
company (enterprise value)/EBITDA or
Sales (if no revenue yet)

33. Method 8: example
Enterprise Value = Share Price * # Shares
+ Preferred + Debt – Cash
let’s say $ 300 MM
Multiple = Enterprise Value / EBITDA
for ex: $300 MM/ $50 MM = 6.0x
Enterprise Value = Multiple * EBITDA
Enterprise Value = 6.0x * $40 MM = $240
MM

34. Method 9: asset based
approach
A type of business valuation that focuses on a company's
net asset value, or the fair-market value of its total assets
minus its total liabilities (=debts). The asset-based
approach basically asks what it would cost to recreate
the business.
The cost of assets (servers,buildings, machines, patents
etc) is taken from the balance sheet.

35. Startup/company’s valuations
online tools
www.equitynet.com
www.equidam.com
www.ownyourventure.com/equitySim.html
www.worthworm.com/getting-started-guide

36. Tetiana Siianko
tsiyanko@gmail.com
http://about.me/siyasha
Thank you!