pre-money valuation
TRANSCRIPT
Pre-Money Valuation
Welcome
• Matt Rampe, ASA
Agenda
• Pre-money value – What is it?– Why does it matter?
• How to arrive at your pre-money value– Financial perspective– Investor perspective
• Putting it all together– The numbers and the story
• Q&A
What is Pre-Money Value?
What is Pre-Money Value?
• Value of a company prior to an investment• Example
– Before this financing round Company ABC is worth $1.0 million (pre-money value)
– They raise $200k in angel financing– Their post-money value is $1.2M ($1.0M + $0.2M)
Why It Matters
• Used to determine how much equity to ask for in a round of financing
• Example– $1.2M post money, $0.2M raised– Angels get 16.7% ownership in ABC Co. ($0.2M /
$1.2M)
Why It Matters
Investor Dilution
Pre-Money Value ($M)
% Equity Bought for
$0.2M
$1.00 16.7%
$1.20 14.3%
$1.40 12.5%
$1.60 11.1%
$1.80 10.0%
$2.00 9.1%
Why It Matters
• Higher the pre-money value the lower percentage equity you give up
Pre-Money Value ($M)
Raised for 16.7% Equity
$1.00 $0.20
$1.20 $0.24
$1.40 $0.28
$1.60 $0.32
$1.80 $0.36
$2.00 $0.40
Why It Matters
• Or the more money you can raise for each share sold
Why It Matters
Avg. Raised ($MMs)
Pre-Money ($MMs)
New Ownership %
Seed $3.8 $11.6 25%
Early Stage $5.6 $33.6 14%
Expansion $11.9 $69.4 15%
Later Stage $12.0 $110.1 10%
Source: Cooley LLP, NVCA. Average of 2013 & 2014 national data.
Why It Matters
• Take Aways– Maximize your pre-money value in early rounds– Later stage company values increase – costs investors
more to buy in
How to Value Your Company
How to Value Your Company
How many ping pong balls does it take to fill a 747?
Valuation - Financial Perspective• Based on financial theory
– Cost Approach– Market Approach– Income Approach
Cost Approach
• Not generally applicable• Adjust asset & liability values to market• Doesn’t capture future value
Market Approach
• Use of private or public company comparable multiples
• Factors to consider– Business model– How recent is the indicator– Public/Private– Financial characteristics
• Size, growth, leverage, profitability• Example
– Price/Revenue 2.00 x $5M Rev = $10M
Market Approach
• Challenges for startups
1 2 3 4 5 6 7 8 9 10$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
Revenue Forecast
Income Approach
• Discounted cash flow– Forecast– Risk rate– Present value today
• May be best approach for a young startup if enough data is available
How to Create a Forecast
• Tells the story of your operations quantitatively and qualitatively– High growth– Profit isn’t necessary– 3-5 years
How to Create a Forecast
• Top Down Approach– 300M prospects in your
total market– 5% conversion – $10 price /unit = $xx
revenue– 15% annual growth– Percentage of revenue to
calculate margins
How to Create a Forecast• Bottoms Up Approach
– Detailed analysis by customer– Detailed expense forecast by line item– Don’t get too bogged down, it will be wrong anyway
How to Create a Forecast
• Gut Check– Stand back – does it make sense?– Do you believe it?– Does it tell your story? Is it consistent with the
company’s vision, mission, plans?• What is the high, medium, low case?• What are the top three assumptions that impact
financial results the most?– Build as much defense as you can for these
Risk and ReturnYou
Weighted Average Cost of Capital (WACC)
Company Specific Risk
Small Size
Equity Market Return
Risk Free Rate
Cost of Debt
Company Specific Risk Factors
• Common risk factors– Technology may not work, may be leapfrogged– Rate of customer adoption– Larger competitors may enter the market– Depth and breadth of management team– Ability to hire and retain qualified employees– Financial position– Exposure to litigation and regulation
Investor Perspective
• They see a lot of deals in the market you may not have visibility into
• They are investing with a portfolio approach (your company needs to fit what they need in a bigger picture)
• How they arrive at value• What they want from you
Putting it All Together
It’s a Long Journey – Be Patient
Emotions May Cloud Your Judgment• Don’t value based on
– How much you “need” it to be worth– Whatsapp’s multiple
19x Revenue
The Story
• Balance out your numbers with a great story
Pixar Pitch
• Once upon a time _______________. • Every day, _______________________.• One day __________________. • Because of that, ____________________.• Because of that, ____________________. • Until finally, ________________.
From: Daniel Pink – To Sell is Human
Articulating and Defending Your Value• It’s a conversation
– Be armed with the best facts to support your position– Be able to talk competently and convincingly about
the key value drivers
Next Steps
