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