Why isn’t asset based valuation for startups?
Many entrepreneurs have the misconception that the value of their businesses is the sum of their parts e.g. assets minus liabilities. The value of an early stage 3D printing startup that owns one machine worth $2M and has outstanding debt for $0.5M seems to be the acquisition price of the asset minus the outstanding debt, or $1.5M. In the financial jargon we call this approach the asset-based…
Valuation Multiples: Why Do We Use Them & How [Video]
Multiples is a term widely used in lots of valuation theories.
But why do we use valuation multiples?
We assume that a peer group of comparable firms for which the market value is available can be used as a proxy for the valuation of the company we are evaluating right now.
The multiple is a ratio, composed of two variables. In the numerator you have the valuation and in the denominator…
How To Value A Business
While it is true that valuing a business is part art and part science,
specific methodologies are available to determine the valuation of your company.
In this article, we are going to work out an example of how to value a business using 5 of the most frequently used valuation methodologies.
But first, we need to talk about what a business valuation is
Valuing a business means…
An Angel Investor And Economist On Dilution
There are two statements in general you can hear out there related to dilution:
Future rounds are going to dilute my participation so you should allow me a larger share now to prevent this from happening!
Cash is neutral; you are diluted in terms of control, but if you'd like to avoid dilution you can either buy more shares now or in future rounds
The first statement was offered by an angel…
How Do Investors Value A Startup?
Valuing companies is tricky. The methods used to value a company are dependent on the stage of development of the startup.
Coming up with the price for early-stage startups is particularly difficult because they have little-to-no track record.
So here comes the question:
How do angel investors value a startup?
If you are in this sector, you have probably heard quite often that:…
Understanding Investors’ Required Return
In the previous article we discussed Discounted Cash Flow valuation methods. These well-known methods discount future cash generated by the company to understand its value today. The cash flows are discounted according to the risk of realization. Indeed, the higher the risk that these cash flows will materialize, the lower their value today.
However, the discount rate used has another…
Startup Valuation and Division of Equity between Entrepreneurs and Investors
Not the usual article!
This article is not the usual article you can find in our blog. Instead this is an essay on startup valuation that I wrote a couple of months ago. It presents a completely new way of looking at startup valuation and division of equity. The answers to a survey on valuation are presented first while later on the new framework and its advantages are discussed. Do you want…
Valuation Principles: Liquidation, Time Value Of Money, Multiples
Can you actually put a price on something that changes as quickly as businesses?
The answer is…yes!
But before we do that, we need to talk about the underlying valuation principles and lay down a framework for valuing businesses.
To understand the valuation of a company we first have to identify what the definition of the term “company” is.
The definition I like the most is one that…
The Discount Rate in Startup Valuation
If you approach a Venture Capitalist or a Business Angel, you will probably hear that “I need to be compensated for the risk I'm taking” or “I want a larger return than that”. But, what does it mean? What’s the link between discount rate and required return and how it is related with the amount of equity you will have to grant them to seal the deal?
The value of one euro today is not…
5 KPIs to Grow your Business
Business metrics are important measures of company processes, and unlike gut-feeling (which needless to say is also an important managerial tool) can be both quantifiable and meaningful. These numerical representations are critical components of a managers’ role in monitoring company practices. Obvious examples of useful metrics include a CFO checking the status of revenues across quarters, or a…