startup valuation methodology svm
TRANSCRIPT
Startup Valuation Methodology “SVM”
Prabir Mishra
Managing Partner
SAATRA Capital Advisory
How do we value a Startup ?
• The most difficult question • How do we value ?
• Any clue ?
• Depends on Investor ?• NO, Yes , No clue
• Dependent on market force ?• Comparable Values
• Eye Balls , Tractions, Unique Visits, Service calls ?
• GMV “ GROSS Merchandise Value”• What about discounts , Returns
What an Early Stage Investor looks ?
• EXIT, and EXIT Value
• Time , When He can EXIT and what is the “VALUATION”
• Multiple Returns
4.45x 5.31x 6.24x 7.25x 8.35x
20.64x
29.80x
41.76x
57.03x
76.19x
150% 175% 200% 225% 250%
Val
ue
Mu
tip
les
Growth
Value Mutiples
Stage 2 (Beginning of Yr. 3) Stage 3 (Beginning of Yr.5)
1.00x 1.96x4.18x
10.45x
24.31x
42.63x
0.00x
5.00x
10.00x
15.00x
20.00x
25.00x
30.00x
35.00x
40.00x
45.00x
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Val
ue
Mu
tip
les
Value Mutiples
General Adopted Practice (Now a days)
• First Chicago Method
• Score Board Method
• Basic VC formula
First Chicago Method
• A situation specific valuation methodology
• Mainly used for valuation for dynamic growth companies
• Step 1 • Analyses the terminal values in different scenarios
• Upside• Base Case • Downside
• Step2• Estimate the divestment price for each scenario
• Step 3• Determine the required return and calculate the valuation in each scenario
• Step 4• Estimate the probabilities of scenarios and calculate the weighted sum
First Chicago Method (An Example)
Scenarios Discounting Factor(Return Expectation)
Valuation Weightage (Probability)
Weighted Valuation
Upside18.5%
$ 7.5 Million 35% $2.625 Million
Base Case $ 5.0 Million 40% $ 2.000 Million
Downside $ 3.0 Million 25% $ 0.750 Million
Value $ 5.375 Million
Scorecard Method
• Compare the target company to an typical angel-funded startup
• Adjust the average valuation of recently funded venture
• Step 1• Determine the average pre-money valuation of pre-revenue venture
• Same region, similar business sector/segment
• Step 2 • Use Scorecard method to compare target companies to your perception and
derive the score factor
• Step 3 • Multiply the score factor to the average pre-money to arrive your valuation.
Scorecard Method
Value Driver Weight
Strength of Management 0-30%
Size of opportunity 0-25%
Product/Technology 0-15%
Competitive Environment 0-10%
Marketing/Sales channel/Partnership 0-10%
Need for additional Investment 0-5%
Others 0-5%
• In one parameter If your venture is stronger than the average (say) then write 125%
• In other parameter if it is weaker than the average (say) then write 75%
How to calculate ?
Value Driver Weight Your Venture
Score Factor
Strength of Management 30% 150% 0.4500
Size of opportunity 25% 125% 0.3125
Product/Technology 15% 125% 0.1875
Competitive Environment 10% 75% 0.0750
Marketing/Sales channel/Partnership 10% 100% 0.1000
Need for additional Investment 5% 100% 0.0500
Others 5% 125% 0.0500
Sum 1.2250
• Multiply this Score factor to average pre-money valuation (Say $1.25 Million) $1.25X1.2250 = $1.53 Million
Basic VC formula
• What VC Considers • Required “IRR” (Internal Rate of Return) of Fund• “Investment” Amount • Term (“Year”) of Investment ( 3 years, 5 years)• Assumed “income” for Term • Comparable company “PER” (Price Earning Ratio)
• Required future value(Investment)= (1+IRR)Year X(investment) = A
• Future value of venture =PER x income = B
• Final ownership required (%) = A/B
Basic VC formula
• Required “IRR” (Internal Rate of Return) of Fund = 50%
• “Investment” Amount = $3.5 Million
• Term (“Year”) of Investment ( 3 years, 5 years) =5 Years
• Assumed “income” for Term = $2.5 Million
• Comparable company “PER” (Price Earning Ratio)= 15
• Required future value(Investment)= (1+0.50)5 X ($3.5 million)= $26.6 Million
• Future value of venture = 15X$2.5 Million= $37.5million
• Final ownership required (%) = $26.6/$37.5 = 70.9%
Basic VC formula
• Previous calculation holds good for no future Dilution
• What in case of multiple rounds of investments
• Assumed• 50% IRR in Year 0 (Round 1) Assumed $2.5Million Investment
• 40% IRR for Year 2 (Round 2) Assumed $1.0 Million Investment
• 25% IRR for year 4 (Round 3) Assumed $ 1.0 Million Investment
• Round 1 dilution = {(1+0.50)5 X ($2.5 million)}/ {15X$2.5 Million} =30.4%
• Round 2 dilution = {(1+0.40)3 X ($1.0 million)}/ {15X$2.5 Million} =7.3%
• Round 3 dilution = {(1+0.25)1 X ($1.0 million)}/ {15X$2.5 Million} =3.3%
Founder Equity Dilution
100%
90.00%
51%
26%
10.00%
5.67%
1.64%
28.7%
15%
1
3.33
16
50
1 2 3 4
-
5
10
15
20
25
30
35
40
45
50
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pre-Seed Post -Seed Post Series A Post Series B
Founder Equity Dilution and Valuation
Founder Seed Investors Series A Investors Series B Investors Option Pool Valuation (Million)
