Startup How To

A Deeper Look Into Internal Rate of Return (IRR)

This guest post was written by Shmuel Bornstein, a Business Development and Finance Associate at OurCrowd. Shmuel focuses on the secondary financing of OurCrowd’s portfolio companies. ——- With access to increasing investment opportunities spanning global markets and asset classes, it is no wonder that many investors feel overwhelmed by their choices. One of the challenges of navigating the decision waters of where to invest is the seeming inability to compare between different opportunities; what does the risk-reward profile of an Australian REIT have to do with a 10-year US government backed bond? To overcome this, the financial world has engineered tools that allow comparing oranges and apples—the IRR being a staple. What is the Internal Rate of Return (IRR)? Here’s the technical definition. Bear with me. The internal rate of return on an investment is the annualized effective compounded return rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero. It can also be defined as the discount rate at which the present value of all future cash flows are equal to...

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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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How do I make money investing in startups?

I wish investing in a startup was as easy as “buy low, sell high“, but it’s a bit more complex. Angel investors must consider a variety of factors when they put their capital to work in an early stage company like: Startup valuation: Figuring out how much a startup is worth is as much an art as it is a science. Choosing the right founders: Team plays a critical role in a startup’s success. Investors want to invest in successful founders. Portfolio management: What’s the right number of startups to hold in a portfolio? (Hint: Kauffman Foundation research says at least 6). Taxes: You gotta pay Uncle Sam at some point, right? and lots more…  With all this in mind, a startup investor has to juggle lots of things at once — but ultimately, it’s all about the money. How do I make money investing in startups? As OurCrowd and other equity crowdfunding startups democratize early stage investing, we get asked a lot about how investors make money in startups. Basically, there are 4 ways a startup investor can...

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3 Warren Buffett-inspired tips for investing in promising startups

Widely considered one of the most successful investors of all time, Warren Buffett attributes much of his success to his disciplined adherence to an investment formula. Primarily a value investor, Buffett sticks to a rigid set of parameters when evaluating investment opportunities. Given his success, it’s not surprising that over the years, so many have tried to emulate his investing style when making decisions about their portfolios. Difficult as this may be when assessing stocks, trying to apply his philosophies when evaluating startup investments is even more challenging. Startup ventures typically have little or no income, making many of Buffett’s models for evaluating the intrinsic value of a company extremely hard to calculate. Furthermore, startups don’t have track records that can be studied to understand their stability. The result is that startup investors that seek to invest using Buffett’s principles, a.k.a Buffettologists, must rely on some of Buffett’s more qualitative parameters when assessing an early-stage company. Outlined below are three Warren Buffett-inspired investment tips to help you identify promising startup investment opportunities. 1) Invest in a great team One...

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