Valuations for Startup Companies Melissa Gragg CVA CFE

Valuations for Start-up Companies Melissa Gragg, CVA, CFE

How Do Investors Value Pre-Revenue Companies? Leo Polovets, Partner at Susa Ventures “Deciding how to value pre-revenue companies is hard. There are many signals to process, and even after you’ve taken all of them into account, the final estimate is as much art as science. ” “Deciding how much a startup should be worth is like deciding how much a oneof-a-kind painting should be worth: there are guidelines to move you in the right direction, but in the end you’re basically making an educated guess. ” “What’s worse, you don’t truly know if your guess was good until long after you’ve made the investment. ”

What is of Value? Intellectual Property EBITDA Future Revenue Projections • What has value? • Patent, trademark, process, technology • Current profitability, EBITDA, revenues • Future profitability, EBITDA, revenues

Valuation Approaches Cost (Asset) Approach Market Approach Income Approach • Very different application when approaching start-up companies • Every dollar you spend may or may not create an equal dollar of value • Cost Approach – how much cost has been incurred to date? • Market Approach – are there comparable companies? • Income Approach – are there current revenues or projections?

Cost (Asset) Approach Historical or future costs Substitution Absolute Reproduction • Cost to obtain or reproduce the asset • Purchase the asset today • Replacing the asset with a substitute of equality • Create a reproduction of the asset • Direct costs: materials, designs, marketing, legal fees, personnel, engineering • Indirect costs: development time, overhead

Market Approach Active market Comparable transactions Most direct method – if there are comps available • Often necessary to work with less than optimal comparable transactions • Limited data for business owners • Fairly costly databases • Look at the context for the transaction (bankruptcy, divorce, litigation)

Income Approach Future benefits Expert judgment is key Most widely used • How reliable are the current projections? • What can substantiate growth and customer acquisition rates? • What other economic and industry factors are present?

Value Drivers Founding Team Near-Term Revenues Growth Market Size Competition Business Plan • What is the reputation and/or background of the founding members? • How quickly can revenue start? • What is the expected growth? • How large is the potential market? • Are there any current competitors? • How are the competitors performing? • Is there a solid business plan? • What are you willing to give up in equity? • Who are your available investors?

Questions? Melissa A. Gragg, CVA, CFE Certified Valuation Analyst Certified Forensic Examiner mgragg@Stone. Carlie. com (314) 889 -1199