Startup Finance & Valuation Flashcards
Startup lifecycle
usually not more than 2-3 business angels in the beginning
seed: idea, prototype
early stage: first customers, local growth
later stage: global growth, exit
often startups run out of money at the end
-> various runs to collect
Exit: best time to get out as an investor,
getting money back
phases of financing
29.11.17 on page 13
Early stage: Seed - Startup
-> Founder Resources, Public Sources, Venture Capital
Expansion stage: Expansion
-> Venture Capital, Debt Financing, Private Equity
Late stage: Bridge - MBO/MBI
-> Debt Financing, Private Equity, Capital Markets
categories of investors
- Family and friends:
altruistic idealistic motivation
(seed) - business angels or angel investors:
monetary motivation and idea of being a mentor
(seed and early stage) - incubators, accelerators or other initiatives
monetary motivation
(seed) - venture capital investors:
monetary motivation (return on investment)
(seed, early stage and later stage) - corporate venture capital investors:
strategic motivation
(seed and early stage)
process of a Venture Capital round
Better to get to know the investors personally at an event as they get hundreds of ideas a day!
- Pitch Deck: team, solution, market projections
- Term Sheet: major deal terms, exclusivity, break up fee
- Due Diligence: technical, financial, legal
- Signing:Investment agreement, Shareholders agreement
- Closing: capital increase, payment of investment amount
money and control
major terms
Money:
- Valuation
- Pre vs Post Money (val. before and after investment)
- Milestones
- liquidation or exit preference
Control
- vesting of founders shares (Unverfallbarkeit)
- transfer restrictions
- Veto and Information Rights
Investors
- they do not gamble
- they need their money back within 3-5 years
- they need more money back than invested
- they have to report to the investors of the vc fund
- their personal income is heavily based on the ROI
- investment decisions are generally taken by an
investment committee - limited funding resources
Traditional VC under pressure
- designed for massive, capital intensive R&D with
potential enormous returns - lean startups require less capital but much more speed
and market access - traditional VCs re not aligned (ausgerichtet) for that
too much capital, too little know how
-> goal: faster exits, Small M&A, new paths
the german startups ecosystem
- most BA invest in non high-techs
- VC invest in high-techs an non high-techs
- most startups are founded in the east of Germany and
Bavaria
occasions of valuation
its not only about getting money from investors!
- valuation as support for credit assessments by banks
- corporate restructuring
- aquisitions / sale of companies
- mergers of companies
- resignation of a partner
- initial public offering
- VC / Private Equity
-> of great importance in the business world
what is valuation
- valuation mix of art
- in startup / early stage
- more art than science
- negotiations skills are really important
- not easy to put a value on a startup!
problems of valuing a startup
- short history - no basis for predictions
- lack of resources
- great importance of intangibles (immateriellem)
- high flexibility
- high risk and high change at the same time
- difference between value and price
other ways to valuate
comparables
valuation of deals recently completed in a similar space
key assets of the company management: commitment, knowledge, experience intellectual property , defensibility (Verteidigungsfähigk.) - financials and time to profit - milestones achieved - revenue - customers feedback - barriers to entry
financing history / needs
- funding to date
- future funding needs
- last round post-money valuation
size and growth of market
- current size and targeted market
-> you can not just pick one of them to value a startup
but you can use multiples ( benchmarks ) as rough
method. Then you multiply earnings before tax by a
certain number
valuation methods
NPV
calculating the NPV
- forecast of profit (turnover-costs) / discount rate (risk
that my forecast is wrong)
–> does not really work for startups because of the
definition of risk
valuation methods
DCF
CF / (1+dr)^1 + CF^2 / (1+dr)^2+…
–> as well very uncertain as you have to assume a future
cash flow what can end up being totally wrong
- costs and profits must be validated, no information
provided on cost / profit validation - short history - no data - no room for predictions
- hard to find a correct risk rate for an individual case
valuation methods
Dave Berkus
If it exists then add for each 500k USD (or less) to the company value
- sound idea
- prototype - quality of the product
- quality of the team
- quality board / strategic relationships
- initial sale / marketing
Valuation range = USD 0 - USD 2.5 MIO
- -> good for a rough estimation!
- -> straight forward and very easy
- -> based on benchmarks
- -> anyway there are better methods
