Startup valuation

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


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



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


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)



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?


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


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


“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


Credits: Aswath Damodaran

How to tell a story


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


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


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


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


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?


“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


The Uber Narrative: Damodaran


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


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


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 2014: $5.9 billion (based on current assumptions)

Keeping the feedback loop open



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


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


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


http://fivethirtyeight.com/features/uber-isnt-worth-17-billion/



http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-alternative-look-at-ubers-potential-market-size/



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


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/















Thanks for your attention

Gianluca Valentini – founder of equidam.com [email protected]

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