Premium Essay

Valuation of Startup Companies

In: Business and Management

Submitted By saturn945
Words 1160
Pages 5
The valuation of a business is a critical element that depending on the accuracy of the valuation can be the difference between large positive returns or devastating losses for investors. The importance of valuation is why differing methods are always being debated and analyzed. The valuation of traditional companies with historical data and comparative industry examples can be a bit confusing for the average person but with practice they really are not overly complicated. The discounted cash flow method, or DCF, is a widely academically accepted method that uses the concept of the time value of money to discount future expected cash flows. While often these DCF calculations can be fairly straightforward, there are instances where estimating future cash flows can be quite difficult. Startup companies pose significant challenges to the discounted cash flow model because of a lack of historical data. It may not be difficult to estimate future cash flows for a billion dollar company with years of data, but what about a 6 month old company with limited revenue and few tangible assets? In situations like this it is more important than ever for investors to look beyond numbers and to look deeper into the makeup of a company, its management, and their products or services.
Difficulties in Using DCF to Value Startup Companies With discounted cash flows and almost all other valuation techniques, the less guesswork or estimation the better. The “Human Element” when making critical assumptions like growth rate can be affected by biases including excessive optimism and overconfidence. “Biases in traditional discounted cash flow valuation arise in connection with the cash flows themselves, for example, excessive optimism, or misframing, as is the case with the way free cash flows are defined” (Shefrin 2007). Excessive optimism is a bias as it relates...

Similar Documents

Premium Essay


...Venture Capital valuation 31 responses When your startup company raises capital, valuation is a key question that must be tackled Rey Maualuga style. (If you are unfamiliar with “Rey Maualuga style,” click here for a Youtube example.) The two main valuation concepts in a venture capital financing are pre-money and post-money valuation. In a venture capital transaction, the venture capital firm invests cash in the startup company in exchange for newly-issued (preferred) stock. The startup company’s value immediately before the funding is called “pre-money valuation” while the startup company’s value immediately after the transaction is called “post-money valuation.” (Technically, pre-money and post-money are more about price than a startup company’s valuation.) Pre-money Valuation and Post-money Valuation Equations (1) Pre-money Valuation = Post-money valuation – Venture Capital Investment (2) Post-money Valuation = Venture Capital Investment/Venture Capital Ownership Percentage You can determine share price by the following equation: (3) Share Price = Pre-money Valuation/Number of Pre-money shares. You can determine how many shares to issue the venture capital firm by this equation: (4) New Shares Issued = Venture Capital Investment/Share Price Pre-money Valuation and Post-money Valuation Examples Example 1 Let’s say Google’s new venture fund comes to you and offers to invest $3MM into your startup for 30% of the company. Plugging the numbers into equation (2), we...

Words: 355 - Pages: 2

Premium Essay

How to Raise Money Essay

...How to Raise Money Want to start a startup? Get funded by Y Combinator. September 2013 Most startups that raise money do it more than once. A typical trajectory might be (1) to get started with a few tens of thousands from something like Y Combinator or individual angels, then (2) raise a few hundred thousand to a few million to build the company, and then (3) once the company is clearly succeeding, raise one or more later rounds to accelerate growth. Reality can be messier. Some companies raise money twice in phase 2. Others skip phase 1 and go straight to phase 2. And at Y Combinator we get an increasing number of companies that have already raised amounts in the hundreds of thousands. But the three phase path is at least the one about which individual startups' paths oscillate. This essay focuses on phase 2 fundraising. That's the type the startups we fund are doing on Demo Day, and this essay is the advice we give them. Forces Fundraising is hard in both senses: hard like lifting a heavy weight, and hard like solving a puzzle. It's hard like lifting a weight because it's intrinsically hard to convince people to part with large sums of money. That problem is irreducible; it should be hard. But much of the other kind of difficulty can be eliminated. Fundraising only seems a puzzle because it's an alien world to most founders, and I hope to fix that by supplying a map through it. To founders, the behavior of investors is often opaque—partly......

Words: 10709 - Pages: 43

Premium Essay

The Future of Start Up Funding

...Want to start a startup? Get funded by Y Combinator.  | August 2010 Two years ago I wrote about what I called "a huge, unexploited opportunity in startup funding:" the growing disconnect between VCs, whose current business model requires them to invest large amounts, and a large class of startups that need less than they used to. Increasingly, startups want a couple hundred thousand dollars, not a couple million. [1] The opportunity is a lot less unexploited now. Investors have poured into this territory from both directions. VCs are much more likely to make angel-sized investments than they were a year ago. And meanwhile the past year has seen a dramatic increase in a new type of investor: the super-angel, who operates like an angel, but using other people's money, like a VC. Though a lot of investors are entering this territory, there is still room for more. The distribution of investors should mirror the distribution of startups, which has the usual power law dropoff. So there should be a lot more people investing tens or hundreds of thousands than millions. [2] In fact, it may be good for angels that there are more people doing angel-sized deals, because if angel rounds become more legitimate, then startups may start to opt for angel rounds even when they could, if they wanted, raise series A rounds from VCs. One reason startups prefer series A rounds is that they're more prestigious. But if angel investors become more active and better known, they'll......

Words: 4010 - Pages: 17

Free Essay

Investment in Cloud Startups

...angel network is a platform for entrepreneurs and has a unique model of an incubator which is investor led and based on value added mentoring. The Network has met with early successes and has already invested in companies across multiple sectors and geographies, and helping create ventures which give 5x returns over 1 to 2 years. The project deals with analysing the Cloud start up ecosystem in India as a potential investment sector by the Angel and Venture capitalist firms. It includes deep understanding of the Software as a service (SaaS), Platform as a service ( PaaS), Infrastructure as a service ( IaaS) technologies and their applications. A thorough understanding of the existing players’ business model is done along with understating their scalability potential and valuation methodologies. Project deal sourcing is the first stage of the cycle which involves gathering primary data of start-ups by attending several networking sessions. In the Second stage short listing of the firms is done on the basis of their business models and other factors. Later the start-ups Pitch for the investments against the Angels / High Net worth Individuals. After getting screened through this process, valuation of the firms is done (Pre valuation and Post valuation). This valuation is based on the expected future cash flows discounted to the present value. Also a possible potential exit strategy to earn the returns is developed. It could be an acquisition or selling to a VC and can......

Words: 551 - Pages: 3

Premium Essay

Analysis of Entrepreneurial Finance

...1/12/15 What does Portal Instruments do? - a Cambridge company seeking to develop needle-free drug delivery systems, which is designed for administering viscous biologics as well as other formulations. - enhancing both safety and patient compliance What do you think are the prospects for Portal Instruments? - liquid needle How do you think Patrick Anquetil thought about the terms of the series A - A start-up entrepreneur has to be very comfortable with that uncertainty. But even if you solve the problem, you still need to sell your idea. You have to demonstrate that you have the right skills and the right team. You also have an obligation to make sure that the technology you develop will be used properly to help people Customers Industry Products Geography Size Form Debt: you have to pay back, cost of capital – interest rate Equity: you get part of the shares for paying back, cost of capital – CAPM calculate the equity capital Equity investments come in: assets go up, equity go up Institutional VC: financial Corporate VC: Info flow, sourcing, spying , HR Determine the cost of capital Equity capital 1/13/15 Nest: smart, next generation thermostat maker, where it can automatically learn about you, what temp you like, your schedule, your home, also it can help with saving energy Customers: people who own their own house – to equipped better device Form: corporation Geo: Palo Alto, California Industry: technology Product: connected home devices / home......

Words: 745 - Pages: 3

Premium Essay

Risk with Capital Valuations

...Risks with Capital Valuations Seth M. Gunn American Military University FINC 625 8 June 2014 Risks with Capital Valuations Attracting both capital research and capital valuations will start when you, as the entrepreneur, walk into a venture capitalist’s office and present your idea. That meeting is the key that may unlock the door to untold amounts of funding, backing, and support. Venture capitalists want to see a business model that has been thoroughly mapped out. This includes the tracing of every potential dollar in revenue, and the costs that are associated with making that dollar. Venture capitalists are looking for seasoned professionals who have a sense of the market, the intended customer, and an idea that will revolutionize the world. With all this being said, there are inherit risks that will be taken on through capital research and capital valuation. I will now discuss several risks that will be taken on by the entrepreneur and the venture capitalists. Valuations are an interpretation of your existing idea, business, team, and assets. When an entrepreneur and the idea at hand are undergoing a valuation process, every aspect of the proposed business will be thoroughly looked over. The disclosing party is without doubt the more vulnerable party in the due diligence procedure, as it will be exposing confidential information to an outsider (Braet & De Cleyn, 2007). The first inherent risk to the entrepreneur is that the operation being discussed may......

Words: 633 - Pages: 3

Free Essay


...1. GSM Nation LLC Seattle, Washington Founded: 2010 What it is: Through its e-commerce platform, GSM Nation offers a wide selection of smart-phones, tablets and other wireless accessories. The company not only sells the physical device but offers a no-contract wireless service plan for consumers who don't want to be locked into long-term agreements. Besides BtoC, GSM Nation offers solutions for organizations ranging from the government agencies to Fortune 500 companies.  How it started: When Ahmed Khattak arrived to the U.S. from Pakistan, the first thought was to call his parents to let them know he was safe. Yet, when he went to buy a phone he was shocked he couldn’t afford to buy one without committing to a two-year contract. Plus, he didn’t he even qualify, because he lacked a Social Security number or credit history. It was that moment he decided he'd find a way to help customers in the U.S. enjoy the benefits similar to the international community, where phones are unlocked and mobile plans are available contract-free. GSM Nation was soon born out of a Yale incubator. Why it's a winner: With expectations it will hit $100 million in revenue in 2013 -- only three years after launch -- GSM Nation is a winner in our books. Plus, it is helping consumers save thousands of dollars and offers some individuals, who may not have otherwise qualified for a wireless device, the chance to own one. 2. PENCILS OF PROMISE New York, N.Y. Founded: 2008 What is it: Pencils...

Words: 2170 - Pages: 9

Premium Essay


...Executive Summary Zynga Inc. (Zynga), is a provider of social game services with 240 million average monthly active users over 175 countries. The Company develops, markets and operates online social games as live services played over the Internet and on social networking sites and mobile platforms. The Company’s games are accessible on Facebook, other social networks and mobile platforms to players globally, wherever and whenever they want. It operates its games as live services. All of its games are free to play, and it generates revenue through the in-game sale of virtual goods and advertising. In March 2012, the Company acquired New York-based social game developer OMGPOP, makers of the cultural hit mobile game, Draw Something, and over 35 additional social games. In 2012, the Company launched several new games, including Hidden Chronicles, Zynga Bingo, Scramble With Friends, Slingo and Dream Heights. Zynga is a social network game development company located in San Francisco, California. The company develops browser-based games that work both stand-alone on mobile phones and as application widgets on social networking websites such as Facebook, Orkut, Google+ and Myspace. As of May 2012, Zynga's games on Facebook have over 250 million monthly active users. Five of Zynga's games, CityVille, Zynga Poker, FarmVille, CastleVille, and Hidden Chronicles, are the most widely used game applications on Facebook, with CityVille having over 40 million monthly active users. Zynga......

Words: 1751 - Pages: 8

Premium Essay

Creative Entrepreneurship - Kbs Ventures to create a curated resource for creative entrepreneurs. This book is the teaching and inspirational aid for our kbs+ Ventures Fellows – a highly select group of kbs+ staffers from all levels and areas of the agency – who go through a six-month educational program to immerse themselves in the startup and venture capital world. Share this entrepreneurial inspiration with friends using @kbspvc or #kbspvcbook. If you would like to share any inspiration, thoughts or feedback, please contact us at @kbspvc anytime – we look forward to hearing from you. Thank you for downloading our book! Darren Herman Taylor Davidson Creative Entrepreneurship Darren Herman Taylor Davidson a kbs+ partner We have received explicit permission from all authors of the works found in this book. Unless otherwise stated, we do not claim to have written or own any of this work. We are purely aggregating it into a simple book format for the education of anyone who picks up this book. The price of this book is free; if anyone tries to sell this book to you, please report them to us. Hopefully this book inspires you as much as it does us. We do not guarantee you will start the next successful startup after reading this book but we do think it will make you at least one IQ point smarter. Enjoy it and after you are done with it, hand it to someone else to read. Sharing means caring. The author and publisher have taken care in the preparation of this book, but make no expressed or implied......

Words: 88947 - Pages: 356

Premium Essay

The Knot

...constantly reevaluate and adjust the four factors to create value. People The category people include the key players of the entrepreneurial venture. Within this category, the strengths and weaknesses and the experience of the people involved is critical. The entrepreneur has to determine if something is missing in the team, thus if people should be added or replaced. The Knot’s management team consists of four ex New York University’s Film School students. All of them are experienced entrepreneurs. First, Liu and Roney are co-founders of the CD-ROM development company RunTime Inc. Pervious, Liu was an experienced manager and Roney spent six years as creative director and editor. Second, Wolfson and Fassino are founders of the Digital Media Division for Margeotes Fertitta + Partners. Before, Wolfson was founder of a creative production company and Fassino has experience in the advertising industry. The two different companies successfully collaborated at the Sotheby’s project. The four partners emphasize the potential of their collective experience and know-how, including management, advertising, the creative industry and production. They found Element Studios in 1995 to capitalize their abilities. After the acquisition of Bridal Search, Russ and Becky Casenhiser were added to the management team. Both of them were successful entrepreneurs as well. Russ developed the industry’s largest, searchable database and Becky procured and maintained relationships...

Words: 2554 - Pages: 11

Free Essay


...Ten Rules for Web Startups #1: Be Narrow Focus on the smallest possible problem you could solve that would potentially be useful. Most companies start out trying to do too many things, which makes life difficult and turns you into a me-too. Focusing on a small niche has so many advantages: With much less work, you can be the best at what you do. Small things, like a microscopic world, almost always turn out to be bigger than you think when you zoom in. You can much more easily position and market yourself when more focused. And when it comes to partnering, or being acquired, there's less chance for conflict. This is all so logical and, yet, there's a resistance to focusing. I think it comes from a fear of being trivial. Just remember: If you get to be #1 in your category, but your category is too small, then you can broaden your scope‹and you can do so with leverage. #2: Be Different Ideas are in the air. There are lots of people thinking about‹and probably working on‹the same thing you are. And one of them is Google. Deal with it. How? First of all, realize that no sufficiently interesting space will be limited to one player. In a sense, competition actually is good‹especially to legitimize new markets. Second, see #1‹the specialist will almost always kick the generalist's ass. Third, consider doing something that's not so cutting edge. Many highly successful companies‹the aforementioned big G being one‹have thrived by taking on areas that everyone......

Words: 1361 - Pages: 6

Premium Essay

Dropbox Creator is used to view it. Files placed in this folder also are accessible through a website and mobile phone applications. Dropbox was founded in 2007 by Drew Houston and Arash Ferdowsi, as a Y Combinator startup company. Feasibility study Is it technical feasible? Dropbox provides client software for Microsoft Windows, Mac OS X, Linux, Android, iOS, BlackBerry OS and web browsers, as well as unofficial ports to Symbian, Windows Phone, and MeeGo. Is there a market? Dropbox has received a total venture capital funding of US$257.2 million from several investors, including Y Combinator, Sequoia Capital, and Accel Partners. In 2011, tech entrepreneur Praveen Yajman speculated that Dropbox's valuation was more than $1 billion.[27] TechCrunch, VentureBeat, Business Insider, and Financial Post speculated that Dropbox's valuation could be up to $5 to $10 billion. Dropbox's 2011 revenue was expected to be $240 million. Dropbox is based in San Francisco, and is funded by Sequoia Capital, Accel Partners, and Amidzad.[5] Starting in mid-2009, they began releasing new features gradually to help measure customer interest, a Lean Startup technique. On April 3, 2012, Dropbox announced Bono and The Edge, two members of the Irish rock band U2, were individual investors in the company. Dropbox uses a freemium business model, where...

Words: 384 - Pages: 2

Premium Essay

Sheep and Me the mean time. Corporations generally invest in debt or stock securities for one of these three reasons: Corporations may have excess cash, to generate earnings from investment income, and for strategic reasons. A large technology, drug or medical device company may invest in a promising startup that is developing new products which may be complementary to the buyer's product line. If the new technology holds promise, the buyer may buy the startup outright and make it a secondary if not, the buyer may sell or write off the investment. The rationale is simple, it is often cheaper to invest in a startup than to develop a new technology in-house, besides, stock ownership gives the buyer the right to examine the books and become privy to inside information. Large technology companies such as Intel or Cisco have large portfolios of technology startups through their venture capital arms. Companies may elect to use the fair value measurement option at the time the financial instrument is originally recognized or when some an event triggers a new basis of accounting. Market to market accounting can change values on the balance sheet frequently. In contrast the historical cost is based on the past transactions. Valuation guidelines are mainly useful to compare the market value of investments with book value of investments. An investment can be accounted for by the cost, equity or consolidated methods of accounting. The ownership level determines the accounting method. ......

Words: 676 - Pages: 3

Premium Essay

Love and Pain

...conclude that manipulating these forces is the essence of fundraising. They hear stories about stampedes to invest in successful startups, and think it's therefore the mark of a successful startup to have this happen. But actually the two are not that highly correlated. Lots of startups that cause stampedes end up flaming out (in extreme cases, partly as a result of the stampede), and lots of very successful startups were only moderately popular with investors the first time they raised money. So the point of this essay is not to explain how to create a stampede, but merely to explain the forces that generate them. These forces are always at work to some degree in fundraising, and they can cause surprising situations. If you understand them, you can at least avoid being surprised. One reason investors like you more when other investors like you is that you actually become a better investment. Raising money decreases the risk of failure. Indeed, although investors hate it, you are for this reason justified in raising your valuation for later investors. The investors who invested when you had no money were taking more risk, and are entitled to higher returns. Plus a company that has raised money is literally more valuable. After you raise the first million dollars, the company is at least a million dollars more valuable, because it's the same company as before, plus it has a million dollars in the bank. [1] Beware, though, because later investors so hate to have the......

Words: 929 - Pages: 4

Free Essay


...sense because valuations appear to be quite high. * The incentive to invest privately is that early stage investors are allowed to cash out of their investments. This forces investors to need a liquidity event. * A strategic acquisition rather than an IPO may be the preferred exit opportunity. * Private markets on the other hand, may benefit here since going public is a burden. * ETFs, Mutual Funds, and other retail investment vehicles now invest into these private transactions. This gives the retail investor a way to invest in private markets. This will make going public a sub optimal exit strategy. Why bother to do an IPO? * If a company can stay private and find money and liquidity why do an IPO? IPOs have the following problems for company founders. * 1) Six month lockup and continual restriction on stock sales. 2) Expensive and burdensome reporting regulations. 3) Having to manage your company quarter to quarter and worry endlessly about meeting analyst expectations rather than concentrate on strategic milestones. Cost of an IPO * IPOs can be a very long and expensive process. Obtaining SEC approval is a 6-9 month process. * Costs such as legal counsel, auditors, underwriters, and registration fees, all add up fast. These costs on average are $13 million for a company raising $100-$200million (PriceWater House Cooper). * Besides the ongoing costs of remaining a public company, consider that a new public company must;......

Words: 874 - Pages: 4