Startcelerate workshop startup investing and valuation

STARTUP INVESTMENT AND VALUATION

In 2004 Peter Thiel invested $500k in Facebook for 10.2% of the company Thiel’s total Facebook cashout by 2012 > $1bn

What is a startup?

Steve Blank: A startup is a temporary organization used to search  for a repeatable and scalable business model.   Eric Ries: A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.    Paul Graham: A startup is a company designed to grow fast.

When do angels invest in startups?

What are their motivations?

•  getting involved with exciting projects

•  reuse expertise without the challenges of managing the project

•  work with (and sometimes for) amazing people

•  branding themselves as experts in certain spaces

•  MAKE PROFIT, as they are investors

Could it work for a company?

•  invest  resources  that  otherwise  would  be  wasted  

•  invest  resources  that  otherwise,  even  if  profitable,  would  lose  you  money    

•  use  their  internal  talent  and  exper9se  in  ways  you  can’t  as  services  provider  

•  get  in  touch  with  entrepreneurial  people  and  poten9al  partners    

•  achieve  higher  ROIs  

Issues to consider?

•  Where  do  you  find  the  startups?  

•  How  do  you  pick  the  winners?  •  How  much  to  invest?  

•  What  legal  agreements  do  you  need?  

•  …?    

What do you need?

•  access to capital

•  proprietary dealflow

•  good judgment*

What is a deal flow?

How  do  you…  

•  find  good  deals?  •  evaluate  them?  

•  process  them  efficiently?  

How do you find good deals?

•  Angel investors set up syndicates

•  Companies?

•  Startcelerate comes with a solution

How do you evaluate a startup?

•  idea

•  team

•  product

•  traction

•  ?

What kind of transaction you enter?

Investment Pre-money Valuation Post-money Valuation

Why does a startup raise a seed round?

How much of the company will you own?

Investment value Startup value

How much equity?

25% is about the norm* Mark Suster - Partner at Upfront Ventures, the largest venture capital firm in Southern California

How do the valuations look?

*AngelList – Europe

What makes a startup valuable?

Startups build value by:

•  getting investment

•  building a track-record of financial performance

•  making an exit

•  real value is known only on exit

•  no investor = no value

Do you really have to valuate a startup?

•  No

•  Cap

•  Discount

Valuation methods

•  financial

•  non-financial

Financial methods:

•  Discounted Cash Flow

•  Multiples method

•  Market valuation

•  Comparable transactions

Non-financial methods:

•  The VC method (First Chicago)

•  The Berkus Method

•  The Scorecard Method

The VC method

Terminal value ÷ post-money valuation = return on investment (ROI)   Post-money valuation = terminal value ÷ anticipated ROI

The Dave Berkus Method

Five drivers:

•  Sound Idea (basic value, product risk)

•  Prototype (reducing technology risk)

•  Quality Management Team (reducing execution risk)

•  Strategic relationships (reducing market risk and competitive risk)

•  Product Rollout or Sales (reducing financial or production risk)

The Scorecard Method

Step 1: Gather valuations for other pre-revenue companies in your

sector within your geographic region (i.e. AngelList).

Then, calculate the average of those valuations.

Step 2: Valuation Calculation using these comparison factors

•  Strength of Entrepreneur and Team

•  Size of the Opportunity

•  Product/Technology

•  Competitive Environment

•  Marketing/Sales/Partnerships

•  Need for Additional Investment

•  Other factors (great early customer feedback)

The Scorecard Method

Q&A Session

Our focus: European startups

•  seed stage

•  early stage

How can Startcelerate help you?

What we do

•  build a large pool of startups

•  provide tools for finding interesting startups

•  assist the investing company throughout the deal flow

How can Startcelerate help you?

Risks: The inherent risk of failure Startcelerate gives you control Even a failed investment is an opportunity to: get to know talented professionals in different markets perform a product exercise in real world conditions get visibility and network in different environments …so you can leverage investments to develop your brand and existing business.

How can Startcelerate help you?

Opportunity: What do you do with the profits?

Through Startcelerate you can use your resources in a way

that can bring you much more value on the longer terms than

you can get in the usual ways.

How can Startcelerate help you?

Why does this matter?

•  you already have something very valuable

•  investing in startups opens new doors and opportunities

•  you get in touch with talent abroad

•  it makes sense to Google

•  it made sense to Whatsapp

How can Startcelerate help you?

What does it take?

You have to be able to allocate sufficient resources to develop what a startup needs (minimum 100-200 man-hours/year)  

How can Startcelerate help you?

What does Startcelerate provide for you?

•  a growing pool of startups

•  legal support

•  a monitoring tool

•  further connections

How can Startcelerate help you?

Hands-on session

Conclusions

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