STARTUP VALUATION Venture Capital Method

Why is valuation necessary? Before investing in a startup, the first question many investors ask is: what is the company worth? (FUTURE) For an already established company, valuation is much easier. Why? Valuation of a pre-revenue company (In this case our various ventures) however is not easy. Why? -We are not sure of revenues yet (all we have are projections) -Your company is worth different amounts to different parties

How much will you pay for each of these items? Ampomah (2015)

Now… what value will you give to these items? Ampomah (2015)

Value Drivers Demand & Supply -product/service being offered -funders/investors Type & Size of Industry Stage of the business (Blueprint stage, validation etc.) Level of risk Barriers to entry

Venture Capital Method (VCM) This is a valuation method mostly used by startup investor to value pre-revenue companies This method was proposed in 1987 by Prof. William Sahlman of the Harvard Business School VCM Term Pre-Money Valuation: The value of the venture before investors come in with their money Post-Money Valuation: The value of the venture after investors have added their money -i.e Post-Money Valuation = Pre-Money Valuation + Investment Amount Terminal Value: The value of the company at exit -One common method is to estimate earnings in the Exit year Return on Investment (ROI)

Return on Investment (ROI) Expectations Ampomah (2015)

Venture Capital Method Calculation

Finding the Right P/E Ratio P/E Ratio is used to determine how much investors are willing to pay for a stock relative to its earning. Useful for comparing companies that operate in the same industry E.g. Facebook Inc. (FB) has a P/E of Alphabet Inc. (GOOG) has a P/E of How much do you think investors are willing to pay for 1 cedi of earning? Rule of Thumb: (Advanced by The Motley Fool) P/E ratio should be about the same as the percentage annual growth in Earnings Why? Businesses where profits are growing rapidly will command a higher earnings multiple than firms where profit growth is low. - This explains why Facebook has such a high P/E.

Assignment Develop financial projections for the first 12months of the business -Sum up the figures for the various months to get Year 1 financials Assume a reasonable growth % Project figures for the Year 2, Year 3, Year 4, Year 5 -Where Year 5 is the assumed exit year i.e where investor(s) terminates their investment Value your venture using the VC Method.