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CeBIT Presentation v4, 7May15
The document discusses various methods for valuing start-up companies, including the asset approach, discounted cash flow (DCF) analysis, and price-earnings ratio. It notes that the asset approach is not suitable for start-ups, while DCF and price-earnings ratio methods are better suited but still difficult given the high risk and lack of financial history for most start-ups. Angel and VC investors typically use valuation approaches that emphasize ownership percentage over precise valuation figures early on, with valuations often in the $1-2 million range for seed or Series A funding.
CeBIT Presentation v4, 7May15
- 1. Valuing Start-Ups Justifying PriceNot Fairy Tale Valuations 7 May 2015
- 2. Theory Practice Lessons CONTENT
- 3. 2 The image partwith relationship ID rId8 was not found in the file. The asset method values the assets of a business and does not assume a going concern Source: Eric Tachibana VALUATION METHODS Theory You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches
- 4. 3 The image partwith relationship ID rId8 was not found in the file. Valuing a business based on actual assets is the simplest and most intuitive way; however, it doesn’t work for start-ups and is generally used during liquidations Assets Liabilities Current Assets Cash Accounts Receivables Inventory Total Current Assets Current Liabilities Accounts Payable Tax Liabilities Provisions Total Current Liabilities Non-Current Assets Equipment Buildings Intangible assets Total Non-Current Assets Non-Current Liabilities Long-term loans Long-term provisions Total Non-Current Liabilities Net Assets Equity ASSET APPROACH You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory
- 5. 4 The image partwith relationship ID rId8 was not found in the file. Source: Eric Tachibana VALUATION METHODS Theory You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches DCF* models are premised on the fundamental tenet of corporate finance: the value of a company today is equal to the present value of future (but uncertain) cash flows
- 6. 5 The image partwith relationship ID rId8 was not found in the file. The discount rate reflects the level of risk and the opportunity cost NET PRESENT VALUE METHOD − 0 = Initial Investment = Cash Flow = Discount Rate = Time NPV Formulas You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory So what’s the discount rate? * DCF = Discounted Cash Flow
- 7. 6 The image partwith relationship ID rId8 was not found in the file. Investments in early stage businesses are high risk with more than 50% not returning the capital initially invested 52% 33% 8% 3% 4% 0% 10% 20% 30% 40% 50% 60% <1x 1x to 5x 5x to 10x 10x to 30x >30x 3.3 years 3 years 4.6 years 4.9 years 6 years Distribution of Group-Affiliated Angel Returns Source: Wiltbank, Returns to Angel Investors in Groups, 2007 INVESTOR RISK You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory
- 8. 7 The image partwith relationship ID rId8 was not found in the file. A principal cause is the lack of information at the time of the investment Seed Funding Angel Funding Series A, B, C Trade Sale / IPO Available Information Low High LACK OF INFORMATION You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory Bridge Funding Source: Efrat Kasznik
- 9. 8 The image partwith relationship ID rId8 was not found in the file. The higher the risk the higher the discount rate Source: Efrat Kasznik, Harvard Business Review; How Venture Capital Works Harvard Business Review: A Method for Valuing High-Risk Long-Term Investments 80%+Seed 50-70%Angel 40-60%Series A 30-50%Series B 25-35%Bridge 15-25%Mezzanine DISCOUNT RATE You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory Discount rate: risk and opportunity cost
- 10. 9 The image partwith relationship ID rId8 was not found in the file. -0.25 0 0.25 2.5 10.0 Year 1 Year 2 Year 3 Year 4 Year 5 The NPV* of an early stage venture forecasting a year 1 loss of $250 thousand and a $10 million profit in year 5 is $624 thousand EXAMPLE NPV = Net Present Value Source: www.biz.yahoo.com, extract only Start-Up Profit Profile, NPV and IRR - in million $ - Seed investment = 80% ) You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory While VC firms regularly use DCF analysis it is best suited for projects
- 11. 10 The image partwith relationship ID rId8 was not found in the file. The price earnings analysis leverages the wisdom of crowds … Source: Eric Tachibana Theory You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches VALUATION METHODS
- 12. 11 The image partwith relationship ID rId8 was not found in the file. … whereby the value of a business should be similar to the value of similar firms, in similar industries PRICE EARNINGS RATIO -0.25 0 0.25 2.5 10 Year 1 Year 2 Year 3 Year 4 Year 5 EV at Exit 15x 150 Sector P/E* Application Software 45.5 Asset Management 15.7 Beverages-Brewers 31.5 Biotechnology 102.8 Food Products 15.9 Medical Equipment 44.9 Waste Management 35.5 IT Services 19.1 Source: www.biz.yahoo.com, extract only P/E Ratios and EBIT Multiples - in million $ - You are worth what you own You are worth what you own in the future You are worth what the market says you are worth 1 2 3 Valuation Approaches Theory Method is best suited for (more) mature, profitable businesses
- 13. Theory Practice Lessons CONTENT
- 14. 13 The image partwith relationship ID rId8 was not found in the file. Convertibles notes defer the cumbersome negotiation of EV to times when more quantitative information is available Angel Invest? End How? No Yes Not Priced Priced Convertible Note Ordinary Shares Source: Efrat Kasznik ANGEL VALUATION APPROACHES Practice Angel Investment & Valuation
- 15. 14 The image partwith relationship ID rId8 was not found in the file. Angel investors’ valuation of start-ups is driven by the desire to hold a sizeable shareholding Funds Raised ($) Valuation ($) Ownership 10%-30%$1.5m* $300k * Pre money Source: Efrat Kasznik Practice Angel Valuation Triangle ANGEL VALUATION APPROACHES
- 16. 15 The image partwith relationship ID rId8 was not found in the file. DAVE MCCLURE’S VALUATION MODEL Revealed by Dave McClure (500 Startups) at a TechCrunch Disrupt Event (2011) Each point is worth $1 million (‘million dollar points’) 1. Market 2. Product 3. Team 4. Customers 5. Revenue Question: is IP considered? Dave McClure’s approach to valuing start-ups is based on 5 simple criteria each worth a maximum of $1 million Max valuation is $5 million Practice Source: Efrat Kasznik
- 17. 16 The image partwith relationship ID rId8 was not found in the file. In the US valuations of start-ups have risen from $2.5 million to $3 million in just over 12 months START-UP VALUATIONS-US Source: HALO Report Practice Start Up Valuations in the US USD 3.0m Median USD 1.5m 1st Quartile USD 4.0m 3rd Quartile USD 0.3m USD 10mUSD 2.5m Median 2013 2014
- 18. 17 The image partwith relationship ID rId8 was not found in the file. Industry Software 141 Physical 33 Health 11 Other 7 Software (web & mobile) dominates at 73% Valuation Sought < $1m 19 $1m - $2.5m 55 $2.5 - $5m 31 Other 88 A large number at 0 or outside Sydney Angels Criteria Capital Sought < $300k 51 $300k - $500k 63 $500k - $1m 32 Other 46 3% chance of being funded in 2014 START-UP VALUATIONS-SYDNEY ANGELS At Sydney Angels a majority of entrepreneurs have realistic valuation expectations of below $2.5 million; angels negotiate valuations down anyway Practice Source: Sydney Angels
- 19. 18 The image partwith relationship ID rId8 was not found in the file. Assumption VC VALUATION APPROACH The VC approach to valuation is exit driven and combines DCF analysis with the P/E method Practice 15x = P/E Multiple 80% Discount Rate = 20x ROI 50% future dilution $10 million $150 million ~$8 million ~$4 million Profit in year 5 EV in year 5 Value today Fully diluted value today Shareholding: 33.3% IRR: 194% Return: 75x Investment: $2m
- 20. Theory Practice Lessons CONTENTS
- 21. 20 The image partwith relationship ID rId8 was not found in the file. MISTAKES TO AVOID Lessons 5 per cent of something is better than 100 per cent of nothing Dos … Don’ts Do your homework and be prepared to justify your valuation Don’t pull a number from thin air Be realistic Don’t be greedy & alienate investors Don’t be obsessed and procrastinate Focus on what matters: raise capital quickly & accelerate growth No need to raise too much Balance funding requirement, dilution & time to raise capital Don’t succumb to a common mistake by thinking: the grass is greener in the US Concentrate on the environment you are most familiar with
- 22. 21 The image partwith relationship ID rId8 was not found in the file. Dependent on the level of traction a valuation of $1.5 to $2 million is likely to avoid unpleasant discussions Scientific approaches to valuing start-ups have limited validity; Start up valuation of $1.5 to $2 million is a safe bet; Expedite the capital raise process, minimise disruption and focus on what matters: growing the business. SUMMARY Lessons
- 23. Theory Practice Lessons Appendix CONTENTS
- 24. 23 The image partwith relationship ID rId8 was not found in the file. The comparison of enterprise values for start ups and mature businesses often lead to counterintuitive results The Valuation Paradox Characteristics Electrical Services Provider Start-Up Year of Establishment 1985 2014 Product/service Well defined Proof of concept Business model Proven Unproven, big dream Scalability Low Perhaps Revenues $10 million None Cash flow Positive, $1.5 million Burn rate $60 thousand p.m. Profit $1 million None for the next 4 years Enterprise Value $2 million $2.5 million Source: Efrat Kasznik VALUATION COMPARISON Valuation Methods