Jakob Feigl
Allonca Esquivel Abogados – Legal and Business Consulting
May 2014
Startup valuation is a relative
science, and not an exact one.
Therefore the answer to the
question “how do investors value
startups” is: it depends.
How Venture Capitalists value
Startups
The golden rule: “He who has the gold makes the
rules”. Nevertheless you have some negotiating power
especially if you have the know-how.
 BUT: not even the golden rule forces you to accept a deal
if it does not meet your expectations.
Venture Capitalists use number of formulas and
subjective factors to value your startup, which will be
outlined in the following slides.
Factors affecting the valuation
Type, Outlook and positioning in the industry
Companies in innovative industries such as a biotech business
would get priced at a higher valuation than yet another family
diner or widget manufacturer.
Study the valuations achieved in recent seed investments in your
industry.
Regulatory Climate of the Industry
Factors affecting the valuation
Use of Intellectual Property Laws
Startups that protect their Intellectual Property Rights through
patents, trademarks and copyrights tend to receive higher
valuations.
Management Team:
Serial entrepreneurs can generally command a higher valuation
since a good team gives shows investors you can execute.
Functioning Product
Products that have been tested and validated in the market
increase the value of the Startup.
Calculating the value of a Startup
Forecasted earnings Growth
typically the #1 driver of a startup valuation. Startups with 25%
net income growth may see a 25× net income multiple valuation.
Multiples of Investment until IPO
EBITDA
multiples of valuation can range from 3× to 10×.
Discounted cash flow method (DCF)
rarely used because Startups have little or no historical financial
data.
Terminology: “Before” and “After”
investment valuations
Before: the value of the firm before the receiving
funding in form of a venture capital investment.
After: the value of the firm after initial investment has
been received: Pre money valuation + new funding
For Example: A VC fund might invest 1 million for 25%.
This means the firm is worth 4 million “before” the
investment and 5 “after” investment.