On October 17th I posted on seed and early stage startup valuations. This morning I read a post by Marty Zwilling on startup valuations. Here it is. Marty’s posts are solid in my opinion – short and content driven. His post on startup valuations lists the following rules of thumb (i.e., possible inputs) for the calculation (and he explains each):
- Place a fair market value on all physical assets (asset approach).
- Assign real value to intellectual property.
- All principals and employees add value.
- Early customers and contracts in progress add value.
- Discounted Cash Flow (DCF) on projections (income approach).
- Discretionary earnings multiple (earnings multiple approach). .
- Calculate replacement cost for key assets (cost approach).
- Look at the size of the market, and the growth projections for your sector.
- Assess the number of direct competitors and barriers to entry.
- Find “comparables” who have received financing (market approach).
I was a little surprised that his list did not include the following:
- Demand for your deal, measured by the number of term sheets you have obtained.
- The reality that an early stage VC is going to want to typically obtain between 20-35% of your company in the financing (the point of my original post).
I actually think that these 2 are probably the most important. And just for fun here is my quick take on the others that he did list; these factors will help drive where in the 20-35% range you end up. Critically, I am only talking about seed and early stage company valuations as opposed to valuations for more mature companies:
- Place a fair market value on all physical assets (asset approach) – pretty much a waste of your time.
- Assign real value to intellectual property – only worth something if patents have actually issued or the invention is so unique that the application and eventual patent could really serve to block competitors.
- All principals and employees add value – the team is very valuable. The better the team, the better the valuation.
- Early customers and contracts in progress add value – completely agree that real customers are big boosters.
- Discounted Cash Flow (DCF) on projections (income approach) – worthless.
- Discretionary earnings multiple (earnings multiple approach) – worthless.
- Calculate replacement cost for key assets (cost approach) – worthless.
- Look at the size of the market, and the growth projections for your sector – sure, big markets are more attractive.
- Assess the number of direct competitors and barriers to entry – see number 2 above.
- Find “comparables” who have received financing (market approach) – very difficult to ascertain as the information is well guarded and the media is usually wrong on this one.
Add to the list……