Investor readiness: Startup valuation by Startups.be
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Check out the most reliable methodologies and become aware of the risk factors. More information on getting investor-ready: www.startups.be/fundraising
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Investor readiness: Startup valuation by Startups.be
- 2. Agenda • First remarks • Pre-Money / Post-Money & dilution • Dangers of wrong valuation • Factors impacting valuation Startup valuation www.startups.be 2
- 3. Agenda Methodologies • Rule of thumb • Traditional methods • VC method • Scorecard method (not analyzed here) • Dave Berkus Method • Risk Factor Summation • Multiples & comparables Startup valuation www.startups.be 3
- 4. Reviewed by Patrick Polak Partner Startup valuation www.startups.be 4 Frank Maene Partner
- 5. First remarks • 1st rule : there is no rule • Rule of thumb • More an art than a science • Price is not (always) the value Startup valuation www.startups.be 5
- 6. First remarks • Don’t compare - With US or other countries - With your friends • More mature, more rational - From people/potential to metrics • Valuations evolve all the time • Be realistic and flexible Startup valuation www.startups.be 6
- 7. First remarks • Professional (not personal) discussions • Always too diluted for entrepreneurs and too expensive for investors • Investment terms are as important as valuation Startup valuation www.startups.be 7
- 8. Dangers of wrong valuation • Too high valuation - Not attract the right investors - Difficult for futher rounds (down rounds, weak progresses) - Time to close is longer - Pressure & expectations - Terms Startup valuation www.startups.be 8
- 9. Dangers of wrong valuation • Too low valuation - Too much given, not enough equity for further investors, employees - Founders’ motivation - Difficulty to justify good valuation later Startup valuation www.startups.be 9
- 10. Pre & Post Money Valuation • Pre-money - Value of your company before investors’ money • Investment • Post money - Value of your company after investment Startup valuation www.startups.be 10
- 11. Dilution Example • Company worth 1M€ before investment (Pre) • Investors invest 250k€ • Post Money valuation : 1M€ + 250k€ = 1,25M€ • Ownership after investment : - Founders : 1M€/1.25M€ = 80% - Investors : 0.25M€/1.25M€ = 20% Startup valuation www.startups.be 11
- 12. Dilution Startup valuation www.startups.be 12 Calculate # shares & share price =>%
- 13. Factors Impacting Valuation • Economy & market conditions • Location • Business Sector / industry 13 Startup valuation www.startups.be
- 14. Factors Impacting Valuation • Stage of Development • Team • Market Size • Competition 14 Startup valuation www.startups.be
- 15. Factors Impacting Valuation • Revenue & (gross) margins • Unit economics, metrics & traction • Use of funds and next milestones • Round size & competition to invest • Further round(s) / past rounds 15 Startup valuation www.startups.be
- 16. Valuation (Rule of thumb) • (Net) Burn rate for the next 18-24 months • Achieve milestones for next round • Investors want to have 20-35% of the company to have substantial returns • Multiples regarding your industry / your company 16 Startup valuation www.startups.be
- 18. 18J. De la RochebrochartStartup valuation www.startups.be
- 19. Valuation (Rule of thumb) 19
- 22. 22
- 23. Traditional methods • (Past : assets) -> not for tech startups • Present : multiple • (Future : Discounted Cash Flow) -> not for early stage startups 23 Startup valuation www.startups.be
- 24. Different methods • VC method • Scorecard method (not here->pre-revenue) • Dave Berkus Method • Risk Factor Summation • Multiples 24 Startup valuation www.startups.be
- 25. VC method • Size of the fund • IRR to their LP’s • # of investments • # of rounds per company • Ticket size • Time to exit • Further rounds needed (further dilution) • Ownership 25 Startup valuation www.startups.be
- 26. VC method • What value at exit? • Post-Money = Exit Value / (1+IRR)^time Example • Time : 5 years • IRR : 20% • Exit : 25M€ (+/- average exit price in Europe) • Post Money : 25M€/(1,2^5) = 10,047M€ 26 Startup valuation www.startups.be
- 27. VC method Example • Time : 5 years • Invest 2M€ @ 10M€ (Post-money)->20% • Further investment : 3M€ @15M€ • Dilution of 20% (VC doesn’t follow-on in this case) • Ownership : 16% ->4M€ return on 2M€ • IRR : 15% -> NOT OK => lower valuation 27 Startup valuation www.startups.be
- 28. VC method • Fund size : 50M€ • Investments : 40M€ (Fund - mgt fees) • IRR (expected) : 3X on 10 years (12% IRR) • # investments : 22 28 Investments in a startup (M€) #startups 5 5 1,5 4 1 5 0,5 8 40 22Startup valuation www.startups.be
- 29. 29 Case 1 – 2,75X (10,65%) Amount invested (M€) #startups Return Exits (M€) 13,5 11 0 0 8 4 1 8 12 4 3 36 6,5 3 10 65 40 22 109 Portfolio 1)5@0,5M + 3@1M+2@1,5M+1@5M 2)1@0,5M + 1@1M+1@1,5M+1@5M 3)1@0,5M + 0@1M+1@1,5M+2@5M 4)1@0,5M + 1@1M+0@1,5M+1@5M This is a theoretical case Many VCs don’t have this returns and few have much better Portfolio repartition is never pre- determined
- 30. 30 Case 2 – 3,02X (11,69%) Amount invested (M€) #startups Return Exits (M€) 13,5 11 0 0 7 4 1 7 8,5 4 4 34 11 3 10 110 40 22 151 Portfolio 1)5@0,5M + 3@1M+2@1,5M+1@5M 2)2@0,5M +1@5M 3)1@0,5M +2@1,5M+1@5M 4)2@1M+2@5M This is a theoretical case Many VCs don’t have this returns and few have much better Portfolio repartition is never pre- determined IRR on 50M€ not 40M€
- 31. 31 Case 3 – 2X (7,18%) Amount invested (M€) #startups Return Exits (M€) 13,5 11 0 0 2 2 1 2 7 3 1,5 10,5 7 3 3 21 5,5 2 4 22 5 1 5 25 40 22 80,5 Portfolio 1)5@0,5M + 3@1M+2@1,5M+1@5M 5) 1@0,5M + 1@5M 2)1@0,5M + 1@1,5M 6) 1@5M 3)2@1M+ 1@5M 4)1@0,5M + 1@1,5M+1@5M This is a theoretical case
- 32. 32 VC method CB Insights BUT majority of the startups die before any exit Average exit in Europe/Benelux : 23M€
- 33. Berkus Method (seed stage) 33 Criteria Range Sound idea Basic Value 0-500.000€ Prototype Reducing technology risk 0-500.000€ Quality management team Reducing execution risk 0-500.000€ Strategic relationships Reducing market risks 0-500.000€ Product roll out & sales Reducing production risks 0-500.000€ Startup valuation www.startups.be
- 34. 34 Risk Factors Summation Criteria Range Management -2 / -1 / 0 / +1 / +2 Stage of the business -2 / -1 / 0 / +1 / +2 Legislation/ Political risk -2 / -1 / 0 / +1 / +2 Sales & marketing risk -2 / -1 / 0 / +1 / +2 Funding risk -2 / -1 / 0 / +1 / +2 Competition risk -2 / -1 / 0 / +1 / +2 Technology risk -2 / -1 / 0 / +1 / +2 Ligitation risk -2 / -1 / 0 / +1 / +2 International risk -2 / -1 / 0 / +1 / +2 Reputation risk -2 / -1 / 0 / +1 / +2 Exit -2 / -1 / 0 / +1 / +2
- 35. Risk Factor Summation 35 Score Management 1 Stage of the business -1 Legislation/ Political risk 2 Sales & marketing risk -2 Funding risk 1 Competition risk 0 Technology risk -1 Ligitation risk 1 International risk -1 Reputation risk 1 Exit 1 Total 2 Average valuation 1M€ Unit = 250k€ 500k€ Total 1,5M€
- 36. Multiples • Multiple of few metrics like • Revenue • Growth • (EBITDA) -> most of the time negative • (P/E ratio) -> most of the time negative • (Price book ratio) -> no sense • (Dividend Yield) -> most of the time none Shares of a public companies are more liquid then you will have a discount as a private company => lower valuation 36 Startup valuation www.startups.be
- 41. 41 Multiples • The next slides are about US publicly traded companies • Goal is to show difference by sectors • Difference between private and public companies exists • Public companies have a premium valuation • Leader companies too Mahesh.vc
- 47. One tool that can help you https://www.seriousfunding.be/ 47 www.seriousfunding.be Startup valuation www.startups.be
- 52. Appendix 52
- 53. 53 Appendix Less money invested in Europe but also less pressure regarding exits
- 54. Appendix 54 A good assessment is to look at your competitors through two Databases
Editor's Notes
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