Author: Jeremy Pressman

How to value a startup (part 2)

As discussed in part 1 of this post on How To Value A Startup, valuing a pre-revenue stage startup is an art in and of itself. But, once a company has revenue, even if minimal, it becomes yet another factor worth considering in its valuation. The question becomes: Just how important, if at all, are early stage revenues in determining an accurate valuation? When it comes to valuing startups with revenue, there are 3 basic schools of thought: Quantitative: A company’s value is based heavily/solely on future cash flows – its ability to make money in the future. Hybrid: The ability to make money in the future is important, but there are other value-based metrics that also contribute to an accurate early stage valuations. Qualitative: Projecting a company’s future cash flows is a waste of time as it is not only inaccurate, but unrelated to its current valuation.  The 1st School of Thought: Quantitative The following methods are based on the assumption that people value a company based on its ability to earn money in the future. DCF (Discounted Cash Flow) DCFs are...

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How to value a startup

Valuing a startup is hard.  And it’s probably as much an art as it is a science. It’s hard because early stage companies are at the very beginning of their lifecycles. I mean, how do you value a company with little to no revenues that makes promises of being the next Facebook? Why valuing a startup is important The reason this whole discussion even starts is that when a company raises money, it does so at a certain valuation — Company X raised $Y at $Z valuation. If a company grows from scratch to be a $500M company, that’s great for early stage investors but it really matters what valuation the investors put their money in at. In this example, there’s a big difference between putting money in at a $5M valuation vs. a $100M valuation. First, get the lingo down Professionals talk about “pre-” and “post-” money valuations. Pre-money is simply the value of the company at the start of the investment round – before any additional funds have been added. Post-money is the value of the startup...

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Make turn at next exit: a roadmap for startup investing

Angel investors as a whole have done exceptionally well lately.  A recent study by Prof. Robert Wiltbank that made noise in the angel scene claims that angel investors make 2.5x their investment in just 3.5 years when diversifying properly – which, if you think about it, is a ridiculous nearly 30% year over year return and more than double the returns of the S&P 500 over that same timeframe. How do angels make money? Angel investors make money when a startup they invested in exits, but what exactly qualifies as an exit? From an investor’s perspective, an exit is an event where the investor realizes gains or losses from original investment through a liquidation event, public offering, or a merger.  Sometimes exits are highly profitable events where investors receive a 20 or 30 times return on investment– in the VC/investing world these are called home-runs.  However, more often than not, returns from individual startup exits are more modest, or negative, and as such don’t receive press attention.  Finally, there are also those exits that startups are notoriously famous for producing and every investor should...

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How to choose a winning startup (hint, start with the founders)

The 3 M’s angel investors consider before investing As an investor (whether angel, VC, or seed) arguably the most essential element in identifying a promising investment is the management team.  This idea led to the famous mantra that just like in real estate there are 3 L’s – Location, Location, Location; in the startup investing world there are 3 M’s – Management, Management, Management. In fact, many VCs prioritize talented, creative, and experienced management over a great idea, product, or booming sector.  Carlos Eduardo (not the European soccer player) is the co-manager and partner of Seedcamp (a leading micro-seed investment fund in Europe) — he claims that: “A startup’s management team is its lifeblood… no amount of awesome ideas will ever overcome a fundamentally flawed management team.”  (Source) Still not convinced?  Why do startups with great ideas fail? According to research from the University of Tennessee, while almost all startup failure is due to some sort of mismanagement, 30% of all startup failures can be directly attributed to what it describes as Unbalanced Experience or Lack of Managerial Experience....

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