Rating startups without profits always leads to interesting discussions, because it is fundamentally different from the valuation of a Mature company. Quantitative analysis and financial forecast are not always able to predict the success of a young company, so some business angels provide entrepreneurs more than really worth their company. In addition, there is no single method of valuation of the company to receive foreign investment. Therefore, business angels need to learn how to combine different methodologies used by other entrepreneurs and investors.
One of the most common methods is the use of assessment sheets. It was offered by a famous business angel Fund, Frontier Angel Fund bill Payne. In this case, a startup that attracts angel investment, is compared with the already received Finance start-UPS depending on region, market and investment stage. The first thing you need to determine the average cost of a startup, which is still not profitable.
This information is collected and updated by different groups of business angels, for whom it serves as a good benchmark. For example, in the guide to using the evaluation sheets, bill Payne analyzed data from 13 such groups in 2010, and depending on the region, the average cost of a startup with no profits in the United States ranged from a million dollars to two million dollars. In different regions different levels of competition, which sometimes leads to an increase in estimates. Therefore, the real data may be presented above.
Most often in the dataset Payne found a value of $1.5 million, which he uses as a General average value a startup with no profit. I also recommend the website AngelList. It is a good resource for learning data about the evaluation of the start-UPS are the result of thousands of transactions.
You can keep track of scores, depending on location, market, neighborhood and previous experience of the founder. Then you compare the startup with other projects from the region, using such factors as. The ranking of these factors is very subjective, but the main emphasis, in addition to scalability, is on the team.
“When creating business success depends on the quality of the team. A great team can improve a weak product, but not Vice versa,” says Payne. You then need to calculate the value of each factor. Below is a table used by Paine.
In this example, Payne suggests that the company in which he is about to invest a strong team (125%), good market opportunity (150%), but the company plays in a competitive market (75%). Multiplying the total factor (1,0750) to the average value of the evaluation start-up to profit ($1.5 million), we come to the conclusion that the valuation of the company that is going to invest Payne, is $1.6 million.
This is a very subjective method, but given the risks that take on business angels, it is suitable for investment at an early stage. I like it in part because that reflects the significance of the team. For entrepreneurs, the knowledge of this method will allow you to better negotiate with investors about the valuation of the company. “The best practice for business angels investing in startups that have not yet bring profit, is the use of multiple methods of assessment of their market value,” wrote bill Payne.
Method venture capital became popular thanks to Professor at Harvard business school, bill Salman. It allows you to calculate the value of the company to obtain foreign investment with the companys valuation after the investment attraction. To use the method, you need to solve the following equation.
The terminal value is the estimated value of an asset by a certain date. The most common period is the range of four to seven years. For the valuation of the company before obtaining the investment, you can use two different approaches. You first need to know what the average price of the companys sales in its industry, then multiply this value by two.
For example: your company raises $500 thousand, and you plan to sell it in five years for $20 million. Terminal value = $20 million * 2 = $40 million. According to statistics, 50% of investments business angels are unsuccessful, so investors expect a return from each investment in 10-30-fold.
Suppose that the return on a startup, which is still not profitable, will exceed the initial investment 20 times. Ratio “multiple of profits” may also be used as a multiplier in the valuation of a startup, which is still not profitable. If your target profit after taxes by the time of sale of the company for five years is 15%, you will receive $3 million ($20 million * 15%).
Then this value must be multiplied by “multiple of profits”, which is calculated based on open data of other companies in the industry. Assume that the coefficient is 15, and the ROI will remain the same — 20. Typically, investors use both approaches, and then calculate the average value. Thus, the approximate value of your company before obtaining the investment will amount to $1,625 million.
This is a very simple picture of the method of venture capital, because I did not take into account the numerous investment rounds and the expected blur share. If future rounds of investment shares will be less than 50%, then the current will also halve to $812 500. Venture capital method is based on quantitative data to a greater extent than the evaluation sheets.
However, these will vary depending on the areas of the company, so I recommend to experiment with the table service VCMethod.com to enable you to find the optimal values of for themselves and investors.