How to Value a Start-Up…
for Venture Capital
Afif Khoury
Managing Member, Scatter Ventures LLC
CEO, SOCI Inc.
CA Bar
Patent Bar
UCSD Grad
10+ yrs Venture Capital, Corporate Governance Law
afif@scatterventures.com
Multiple Methods
The Scorecard Method
The Venture Capital Method
The Dave Berkus Method
The Risk Factor Summation Method
The Golden Rule
Subjectiveness
The rules can be subjective
Even more “standard” formulas may yield dramatically different results.
•Strength of the Team
•Size of the Opportunity
•Product/Technology
•Competitive Environment
•Marketing/Sales Channels/Partnerships
•Need for Additional Investment
•Regulatory Climate
•Trends
By the time you are through answering these questions…
The Scorecard Method
1. Determine the Avg Pre Money valuations: Look at companies in the
region and business sector of target co.
Assume $2N
2. Compare Target to your perception of similar deals :
Strength of Management Team
0-30%
Size of Opportunity
0-25%
Product/Technology
0-15%
Competitive Environment
0-10%
Marketing/Sales Channels/Partnerships
0-10%
Need for Additional Investment
0-5%
Other
0-5%
The Scorecard Method
3. Make the Valuation Calculation
Comparison Factor
Range
Target Co
Factor
Strength of Management Team
0-30%
125%
0.375
Size of Opportunity
0-25%
150%
0.375
Product/Technology
0-15%
100%
0.150
Competitive Environment
0-10%
75%
0.075
Marketing/Sales Channels/Partnerships
0-10%
80%
0.080
Need for Additional Investment
0-5%
100%
0.050
Other (great early customer feedback)
0-5%
100%
0.050
Total
4. Multiply the sum by the Avg: $2M*1.075 = $2.15
1.0750
The Venture Capital Method
LEXICON
•Pre-Money: Value assigned before the investment
•Post-Money:
– Pre-Money + Investment
– Terminal Value / Anticipated ROI
•Terminal Value: Anticipated Selling Price
•Anticipated Selling Price:
– Industry specific multiple of revenues (2x Expected Revenues)
– Expected Revenues in yr of sale (eg, $20M), which allows you to estimate
earnings in the yr of sale from industry specific stats (eg, 15%, $3M earnings),
which allows you to use industry specific P/E ratios to determine Terminal Value
(eg, 15x)… $45M
•Anticipated ROI: 27% IRR in 6 yrs (“Wiltbank Stud”)…
– so need a 20x or more on 1 of 10 (assuming other 9 pay back capital)
The Venture Capital Method
What is the Pre-Money Valuation?
Post Money = Terminal Value / Anticipated ROI
$45M/20x… $2.125M
Pre Money = Post Money - Investment
If investment is $500K, Pre Money is $1.625M
The Venture Capital Method
What If Subsequent Investment Will Be Needed?
Another layer of complexity and subjectiveness
Pre Money x Anticipated Dilution
New money dilutes 50%, then Pre Money is ~ $800K
The Dave Berkus Method
Dave Berkus is a founding member of the Tech Coast Angels in
Southern California
Characteristic
Add to Pre-Money Valuation
Quality Management Team
Zero to $0.5 million
Sound Idea
Zero to $0.5 million
Working Prototype
Zero to $0.5 million
Quality Board of Directors
Zero to $0.5 million
Product Rollout or Sales
Zero to $0.5 million
Missing some characteristics: competitive environment, IP, size of
opportunity, etc.
Doesn’t allow for pre-money higher than $2.5M
The Risk Factor Summation Method
Ohio TechAngels: The higher the # of risk factors, the higher the overall risk
•
•
•
•
•
•
Management
Stage of the business
Legislation/Political risk
Manufacturing risk
Sales and marketing risk
Funding/capital raising risk
•
•
•
•
•
•
Competition risk
Technology risk
Litigation risk
International risk
Reputation risk
Potential lucrative exit
Each risk (above) is assessed, as follow:
+2 very positive for growing the company and executing a wonderful exit
+1 positive
0 neutral
-1 negative for growing the company and executing a wonderful exit
-2 very negative
Add $250K for every +1, and subtract $250K for every -1
The Golden Rule
He who has the gold, makes the rules
There is a market standard
There is an expectation on ownership
Breaking the mold is hard… create competition!