How to assess a startup valuation ?

The usual valuation methods are generally based on comparable values or discounted cash flow… and on a company’s history. Since venture capital-backed companies, by definition, have no history of profitability, these methods are not suitable.

The logic of the first round

The entry price for the first round of financing in a young company can be considered as a convenience/market price that investors will estimate on the basis of the following main criteria :

• traction/deployment
• revenue model
• innovation/differentiation/barriers to entry
• intellectual property
• team
• financial forecasts
• future rounds
• comparables
• anticipated exit price coupled with the investor’s target multiple (according to the formula below)

INVESTORS’ MULTIPLE = COMPANY VALUE AT EXIT (per share) / AVERAGE SHARE PRICE PAID BY THE INVESTOR

Extract from a termsheet : 

“The proposed valuation was determined on the basis of (i) the presentation of the company and its business that you gave us, (ii) the information you have provided on the company’s forecasts as set out in the business plan, (iii) its current assets, in particular industrial property, (iv) the presence of the CEO and the COO within the company and their commitment to participate in its development, and (v) the company’s initial achievements.”

The logic for more advanced companies

Inclusion of significant KPIs in the valuation :

• revenue,
• ARR,
• EBITDA,
• customer typology,
• life time value,
• churn…

The first-round criteria Traction/deployment, revenue model, innovation/disruption, team, financial forecasts…are still present and will also influence the value calculated using the KPIs.

WHAT SHOULD YOU REMEMBER ?

Quote from Samantha Jerusalmy (Partner Elaia) (JDN)

“Valuation doesn’t mean much at seed stage, when the start-up isn’t recording sales, etc. So we value potential, goodwill. The company claims to make so much sales in such and such a timeframe, and we can claim to sell it for so much in such and such a timeframe. We ask ourselves what risk we’re willing to take, and what we’re prepared to pay in view of the forecasts, the market potential and the exit potential. The two people on the case define a valuation, knowing that there are psychological thresholds beyond which it’s difficult to go”.