VALUATION & STORYTELLINGIn other terms, when numbers meet narrative and vice versa
1) Basics on valuation2) Story&Numbers3) How to build up your valuation case4) The Uber case
Workshop Break-Down
September 2016 –Equidam BV
Overview
Goal
Offer a mental framework to negotiate your own valuation
Demystifying Valuation
September 2016 –Equidam BV
The business valuation process is ultimately an agreement between two parties,
buyer and seller, where the object of transfer is a business or part of it.
What matters in negotiations is TRANSPARENCY
because nobody can predict the future
Demystifying Valuation
September 2016 –Equidam BV
Equity % = Investment / Valuationor
Valuation = Investment / Equity %or
Investment = Valuation * Equity %
Understand what’s the sensitive variable for your counterpartYou need a good argument for at least 2 of these terms (the 3rd is a derivative, DUH!)
Ranges of acceptance
September 2016 –Equidam BV
Most investors have a range of Equity % in mind based on your stage
Your job is to negotiate within these ranges or prove them wrong!
Angel5% - 20%Investors
angels, incubators, co-
founders..
Seed10% - 20%Investors
angels, early-stage VCs
Series A15% - 35%Investors
Super angels, VCs, CVCs
Series B10% - 25%Investors
VCs, PEs, CVCs,
Series C5% - 15%InvestorsPEs, CVCs,
Hedge Funds (sometimes)
Demystifying Valuation
September 2016 –Equidam BV
Valuation is- an instrument to support your claim- a disciplined process to measure and quantify the
future (based on a set of assumptions)
Valuation is NOT:- a purpose on its own: numbers are just numbers- a science – i.e. a perfect and undisputable picture of
the future
Numbers or story?
September 2016 –Equidam BV
The current valuation landscape is divided into two categories of people
Numbers people believe that valuation should be about numbers and that narratives/stories are distractions that bring in irrationalities into investing.
e.g. most valuation practitioners
Narratives people believe that valuation and investing is really about great stories and that it is impossible to try to estimate numbers, when you face uncertainty.
In both cases, things are changing
How to build your valuation case
September 2016 –Equidam BV
Valuation is a mix of narrative and data crunching
The NarrativeThe story: make people see the
vision, the potential, and convert it into numbers.
The NumbersThe assumptions: make them
look realistic and back them up with market data and/or your
story
Find a common ground
September 2016 –Equidam BV
“if you believe the story attached to it, you believe the valuation”
Investors are ultimately buying into the potential of your firm: if they are not doing any math then they are lying
A valuation state-of-mind: INVESTMENT VALUATION
September 2016 –Equidam BV
Credits: Aswath Damodaran
How to tell a story
September 2016 –Equidam BV
Develop a vision, a feeling of mission, a credible plan with milestones
and communicate that with a sense of urgency.
Problem-Solution Clear?
Inevitable? Right timing? Right people?
Winning factors:- experience / track-record / network
- charisma / leadership / assertiveness- enthusiasm / Passion / Drive / HUNGER
Test your story
September 2016 –Equidam BV
Choose a story that is possible, plausible and probable. Test it and be receptive to feedback.
StoryPeople understand 1 to 2 layers of
complexity. If it takes more than that to understand your story it’s too
complex.# inevitable
FeedbackTry different audiences and take their
feedback with a pinch of salt: not EVERYBODY can understand it, but
the more the better.
Identify value drivers
September 2016 –Equidam BV
Convert the story to value drivers: in other terms, attach numbers to reinforce your narrative and make it concrete
Top-down ApproachOutside inside
Focus on the big picture (e.g. market size) and break it down in terms of conversion rates and other assumptions to estimate the company’s
expected performance.
Bottom-up ApproachInside outside
Focus on the company and it’s drivers (productivity, price, hiring etc.) and make
assumptions on their future evolution and derive the company’s expected performance.
Both need to be back by evidence that the company can reach those goals. The choice of either of the two depends on the type of company and the data available. The top-down is preferable for young,
high-growth companies.
Down to valuation
September 2016 –Equidam BV
Connect your drivers / plans to a valuation model and keep the feedback loop open.
Estimate Valuation
Use online templates, make your own template or use online valuation tools (equidam.com).
Challenge Assumptions
Focus on the assumptions of the valuation, not the valuation per se. If the other party agrees on
those, then that’s the valuation.
If you do steps 1 to 3 right, chances are step 4 and 5 will go pretty smoothly, but get ready for negotiations (patience, rationality and leadership). Remember that trust remains an important aspect
of every investment: without trust it will take much much longer.
Give a structure to your discussions
September 2016 –Equidam BV
Feedback loop: feel attached to a story but don’t make it a dogma. Defend it but be receptive to criticism
Some suggestions• Make assumptions and value drivers clear and ask for feedback on them!! easier to
set common milestones• When in disagreement, try to pinpoint the main criticism to your assumptions
How about convertible?
September 2016 –Equidam BV
“Convertibles are a shortcut to valuation discussions”
This is not true.Convertibles come in most cases with a cap (maximum valuation at
conversion)The cap maximum valuation investors are willing to pay for your company
TODAY
They are anyway giving you a valuation !
Valuation of a startup
September 2016 –Equidam BV
The Uber Narrative: Damodaran
September 2016 –Equidam BV
Narrative September 2014: Uber Addressable Market
PossibleCar ownership
market:Is Uber going to
take over the entire market of car
manufacturing by eliminating car
ownership?
PlausibleUrban + suburban
car service and rental market: is
Uber going to address the total market for road
private transportation
market?
ProbableUrban taxi market
worldwide
The probable scenario
September 2016 –Equidam BV
Total Market
x
Market share Revenues (sales)
-
Variable costs
-
The global taxi business is estimated to be worth $100 billion in 2013, and expected to grow 6% YoY.
Net sales
Operating Expenses
Despite competition, Uber has a sustainable advantage, but their expansion approach is city-by-city and therefore without global network effects but only local. Target market share is 10%
Uber will maintain its 20% commission on the ride fares because of its superior technology and first mover advantage.
Uber will maintain its current low-infrastructure cost model. Target pre-tax operating margin at 40%
(note: in lack of reliable figures look at financial ratios of the industry/similar companies, or use the bottom up approach)
The probable scenario
September 2016 –Equidam BV
Operating Income
-
Taxes Profit
-
Reinvestment Cash FlowBased on the corporate tax rate of the country (an AVG will do)
Uber has a low capital intensity model (typical of car companies, most reinvestment goes into growth and salaries). Target reinv. 20% of Sales
Once cash flows have been calculated, one should estimate the cost of capital and combine it with the probability of failure.
Uber is still a young company heavily investing in the future (thus taking on more risks). Let’s assume a cost of capital of 12% (which will decrease overtime to 8%). Also, let’s assume a probability of failure of 10%
Connecting narrative and numbers
September 2016 –Equidam BV
Credits: Aswath Damodaran
September 2014: $5.9 billion (based on current assumptions)
Keeping the feedback loop open
September 2016 –Equidam BV
Credits: Aswath Damodaran
On September 2014 the valuation of Uber was $17bn, based on its recent investment of $1.2bn. How can numbers explain that?
Keeping the feedback loop open
September 2016 –Equidam BV
There are different speculations
Uber is not only cab hailing companyBill Gurley, in his post in reply to Damodaran, claims that Uber is a car company (it will replace car ownership), is not only urban but suburban too, and it has global network effects. Based on that, he claims Uber’s valuation is at least 25X than Damodaran’s (>$50bn)
The investment in Uber is basically debtSome argue that later stage deals are bear so many special rights to the investors that the shares are more similar to debt than to real shares (they are basically slightly junior than debt)
Bottom line
September 2016 –Equidam BV
Uber experienced such a high offer of funds that the valuation could have been much higher than $17bn at that point in time (as Bill Gurley admitted).
Most investors, however, are not as visionary and are simply victim of the “herding behavior” (I’m doing because they do it; fear to miss out; etc.)
As a matter of fact, Uber is growing so fast that everything seems possible. But is it? Time will tell..
My gut feeling: Uber will lose growth to competition and to “lack of novelty” in many non-American markets
Interesting reads
Damodaran: http://fivethirtyeight.com/features/uber-isnt-worth-17-billion/Bill Gurleyhttp://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/
Closing Remarks
September 2016 –Equidam BV
On Uber and its competitors – the car ownership scenario
http://techcrunch.com/2016/05/24/uber-and-toyota-confirm-strategic-deal/
http://techcrunch.com/2016/01/04/lyft-now-worth-5-5-billion-plans-to-get-into-the-autonomous-car-race-with-general-motors/
http://techcrunch.com/2016/05/24/vw-invests-300m-in-uber-rival-gett-in-new-ride-sharing-partnership/
http://techcrunch.com/2016/05/12/apple-invests-1b-in-didi-chuxing-chinas-largest-ride-hailing-app/
Closing Remarks
September 2016 –Equidam BV
Thanks for your attention
Gianluca Valentini – founder of equidam.com [email protected]
What is your startup valuation? Sign up for free atwww.equidam.com
September 2016 –Equidam BV