Startup Business Valuation
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Transcript of Startup Business Valuation
Course Objective
To learn how to value a private company for the purposes of raising money.
Key Learning Outcomes
● Learn how assets are valued● Determine the value of any business● Understand how to have the conversation of
valuation with investors
What is Valuation
Valuation is value of an asset.
The asset in a private company is its "stock" or equity which represents the % ownership stake in the company.
How is Valuation set?
Requires an educated guess by the seller to start with an "asking price":● What have similar assets sold for?● Why have they sold?● What will be / are the primary drivers of value?
Valuation is "set" where the buyer and the seller of an asset meet at a price.
Valuation: Every Asset Has Value
And it can be negative!
How Value Determined?
How Value Determined?
How Value Determined?
How Value Determined?
To bring in an investor, a Business Owner has to sell something - that something is Equity ("Stock").
The amount of stock sold to the investor represents a percentage ownership in the company.
The "Asset" of a Business = Stock
● What have other similar companies been valued at?
● What percentage of the company are you willing to give up for $x
● Create a market and get people to "bid" - i.e. make an offer to invest
How to Value Stock
A Financial Model with a Discounted Cash Flow Model "DCF"
The Formal way to Value Stock
● Cash flow can be interpreted many ways – there are no “right” or “wrong” answers
● You need to define the context of cash flow and be consistent in its analysis
● Stocks: Many use earnings before interest tax depreciation amortization (EBITDA) and subtract Capital Expenditures
● Cash Flow needs to be what you as an owner will reap from your investment – after everyone else is paid.
You define Cash Flow
1. Future cash flows are estimated2. Discounted back at an appropriate rate
(often a firm’s cost of capital)3. Divided by ownership rights (shares) to
determine the value per owner (per share)
Discounting the Cash Flow
● Every asset is only worth what someone is willing to pay for it
● Supply vs. Demand● All valuations have highly subjective inputs
that need to be evaluated by the buyer (and seller)
Every DCF Valuation can be argued
Valuation thru Modeling: Myth #1
Since Valuation is quantitative, Valuation is objective
While quantitative, inputs leave plenty of room for subjective judgments
Final values derived from models are colored with human bias
Valuation thru Modeling: Myth #2
A well-researched model and well-done valuation is timeless
Valuation can change everyday with constant inputs from the marketplace
Summary. Valuation of an Asset is:
● Often subjective, colored by the bias of its inputs
● Determined by ○ investor perceptions about it○ Supply and Demand
● The Present Value of the future cash flows
Keys to Success
● Create a market. The only way to sell stock is to have a group of willing buyers!
● Leave the valuation conversation to the end - get potential investors enamored with the story first.
FAQs
Who sets a valuation?
Once you decide your valuation, do you put a stake in the ground and that's what it is?
Pros and Cons of having a high/low valuation.
FAQs
Is there a right or wrong valuation?
Can valuation change over time?
Does my valuation change each time I try to bring money in?
FAQs
What are typical valuations for startup companies? Range?
Do I have to set a valuation before I know how much money to raise?
Is the equity I have to give to investors affected by my valuation?
FAQs
Does a higher valuation make me looked at as more likely to succeed?
Do I have to have a valuation when seeking capital?
Does a valuation play into investor psychology?
FAQs
When and how do you negotiate Valuations?
Action Plan● Discover an Estimated Valuation
○ What have other companies sold stock for?○ What are you willing to give up?○ Be informed of the economic upside of your
company● Engage potential buyers● Ask them to offer you a term sheet
○ Great video < 2 minutes○ Engaging write-up○ Unique rewards
Next Steps
● Join our Master Fundraising Course ● Join us now for 50% off ● "FAN" www.udemy.com/raisemoneyusingdigitalmedia/
● Feedback: Jason (at) INVESTyR.com