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EARLY-STAGESTARTUP VALUATION

Stephen R. PolandJune 14th, 2016

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Welcome

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Today’s Topics

• When You Need to Establish a Valuation• The Valuation Equation• Valuation and Raise Amount• Calculating Investor Ownership %• Talking About Your Valuation to Investors• Valuation Methods: How to determine your

valuation

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About Me…

• Co-Founder of 4 Startups• Current Company – 1x1 Media• Corporate Roles – Disney, MacMillan, Bertelsmann• Advisor to Angel Investment Groups• Author of 7 Books on Startup Funding• Focus on helping startups become Investor-Ready• Live in North Carolina, USA

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Contact Info

Twitter:• @1x1steveLinkedIn:• https://www.linkedin.com/in/steve-poland-

9b545a6Website: • www.1x1media.com

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LET’S GET STARTED…

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Why You Need a Valuation

• When you sell equity in your startup to an outside investor such as an angel group or venture capital firm the investor trades cash for a percentage ownership of the startup corporation.

• To determine the percentage of equity the investor’s cash buys him/her the total value (or valuation) of the startup needs to be agreed on before the investment occurs.

How big is the Pie before I put my money in?

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The Many Questions in the Investor

• Market Size. How big is the market the startup is going after?• Size of the Company. What are the revenue projections over

the next three to five years?• Intellectual Property (IP). Does the startup have significant IP

or other high competitive barrier advantages?• Founders and Team. How experienced is the founding team?

Have they worked on a startup before, or is this their first go?• Product/Service or Technology. Is it revolutionary and

disruptive, or merely evolutionary?

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The Many Questions of the Investor

• Traction. Do you have customers or users? At what rate can you add new ones?

• Amount Already Invested. How much money has already been invested, and how much time in terms of development, research, or innovation?

• Stage of the Startup. What stage of development is the startup at: idea/business plan, product developed and tested, or other?

• Competition. What is the competition like in the sector of the startup?

• Need for Addition Investment. Does the startup need a significant amount of additional cash to reach its goals?

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The First Rule of Startup Valuation

Your company is worth whatever you and the investor agree it’s worth.

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VALUATION, FOUNDER DILUTION AND STARTUP STAGES

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• Valuation increases at each investment round*• Founder equity ownership decreases (dilution)

• Technology

• Valuation is low or not needed• Founders use personal funds to get started

• Valuation is still low • Friends & Family Investor invests small $• Option Pool established

• Angel investors invest for 25% equity• Founders get diluted more• Valuation is increasing

• VCs take a 30% stake• Valuation is increasing• Founders own less, but valuation is much higher

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THE BASIC VALUATION EQUATION

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The Valuation Equation

Pre-money valuation: How much your startup is worth before an investment… (negotiated amount)Investment amount: The investment…Post-money Valuation: How much the startup is worth after the investment…

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HOW TO TALK ABOUT YOUR VALUATION WITH INVESTORSIMPLIED VALUATION

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How to Talk About Your Valuation1. State your raise amount and equity expectation

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How to Talk About Your Valuation 2. Calculate the Implied Post-Money Valuation. by dividing the raise amount by the equity ownership percentage:

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How to Talk About Your Valuation

3. Calculate the Pre-Money Valuation. Subtract the raise amount from the post-money valuation giving the pre-money valuation

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HOW TO TALK ABOUT YOUR VALUATION WITH INVESTORSIMPLIED FOUNDER DILUTION

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How to Talk About Your Valuation

1. Express your raise amount and pre-money valuation.

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How to Talk About Your Valuation

2. Calculate the post-money valuation. Simply add the raise amount to the stated pre-money valuation, resulting in the post-money valuation

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How to Talk About Your Valuation

3. Calculate the implied dilution percentage. Divide the raise amount by the post-money valuation, giving the founder dilution percentage

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VALUATION & RAISE AMOUNTTHE 2X TRICK

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The 2X Trick

1. Multiply your raise amount by 2

The result is the minimum pre-money valuation you should target.

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The 2X Trick

The investor ownership math:

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Valuing the Idea Itself• Technology • Procedure• Policies• Benefits

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Early-stageValuationMethods

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Valuation Factors• Market Size. How big is the market the startup is

going after?• Revenue Potential. What are the revenue

projections over the next three to five years?• Intellectual Property (IP). Does the startup have

significant IP or other high competitive barrier advantages?

• Founders and Team. How experienced is the founding team? Have they worked on a startup before, or is this their first go?

• Product/Service or Technology. Is it revolutionary and disruptive, or merely evolutionary?

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More Valuation Factors• Traction. Do you have customers or users? At what rate can you

add new ones?• Amount Already Invested. How much money has already been

invested, and how much time in terms of development, research, or innovation?

• Stage of the Startup. What stage of development is the startup at: idea/business plan, product developed and tested, or other?

• Competition. What is the competition like in the sector of the startup?

• Need for Addition Investment. Does the startup need a significant amount of additional cash to reach its goals?

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VALUATION METHOD #1THE MARKET COMPARISON METHOD

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Market Comparison Method

“You are like startup X and it was just valued at $1.5 million pre-money, so your

startup must also be in that same pre-money range.”

Market Comparison Method

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VALUATION METHOD #2THE VC QUICK METHOD

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The VC Quick Method1. How much money do you need for the next 18 months?

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The VC Quick Method2. Understand how much equity the VCs want. The VCs know they want to own at least 20% equity in your venture.

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The VC Quick Method3. Calculate the post-money valuation. The $3 million raise amount divided by the desired equity ownership of 20%

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The VC Quick Method4. Calculate the resulting pre-money valuation.

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VALUATION METHOD #3THE RISK REDUCTION METHOD

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Risk Reduction Method

Assigning values to the tasks and accomplishments that reduce the RISK in

your startup.

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Risk Reduction MethodAssigns dollar values to the accomplishments and validations of the startup in four categories of risk mitigation:

1. Technology: Does your product work as planned?

2. Market: Do customers care about your product or service?

3. Team: Is your team experienced in the segment you are targeting?

4. Financial: Do you have the funding needed to implement your plans?

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Risk Reduction MethodTechnology Risk Mitigation– Prototype developed: $75,000– 3rd party testing completed: $25,000– IP underway: $25,000Market Risk Mitigation– Market research: $20,000– Early adopter program: $100,000– Channel partners established: $40,000Team Risk Mitigation– Experienced founders: $200,000– Prior exit: $250,000– Detailed execution roadmap: $50,000Financial Risk Mitigation– Early funding: $50,000 – Two angel rounds needed: $100,000

Total Pre-Money Valuation: $935,000

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WHAT QUESTIONS DO YOU HAVE?

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Resources

• How-To Guides for Startup Founders1x1media.com

• Startup Valuation: The Apphttps://goo.gl/QxdRXf

• The Ultimate Angel Funding Checklist:http://goo.gl/DHydWe