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  Venture Valuation
 
Question:

• Do you know how to value your venture opportunity?
• Which valuation methodology is best for your venture opportunity?
• What is the value of your venture opportunity?

Description: The Valuation tool applies the information gained from the Risk Readiness Level and other information and data provided to determine a realistic pre-money and post-money valuation. The tool provides multiple methodologies to determine valuation. Different valuation methodologies are more appropriate to different stages of venture development. The discounted cash flow method is more dependable and reliable for companies with actual products and revenues versus a startup or seed stage company with no product or revenue. The multiple earnings method is most appropriate for service-based companies with several years of revenue. The Goldsmith Risk Readiness Level Method is most appropriate for startups that are pre-product and pre-revenue and early-stage companies with product and limited revenue. This method is based upon industry comparisons of average pre-money and post-money valuations of venture-backed investments by stage of development for the previous year. The traditional hypothetical valuation is a default valuation method which provides a traditional investment perspective based upon typical investor and entrepreneur criteria such as expected return on investment and percentage of equity participation. The traditional valuation is a hypothetical approach and incorporates no specific qualitative values or quantitative data relevant to the venture other than the amount of investment capital required.

Purpose: The Valuation tool provides several methodologies to generate a value of the business prior to investment (pre-money valuation), the value of the business after the investment (post-money valuation) and the resulting percentage of ownership (equity) the investor receives for the investment. The user should determine which methodology(s) is most applicable for the valuation depending on the stage of the company, and the quality of the financial model.

Directions: To use the Valuation tool requires that the Risk Readiness Level assessment is complete and the information requested is provided in the “Client Survey” under “Valuation.” The first information requested is the Price Earnings ratio for the industry sector. This can range from 5 to 80 given market conditions. Currently “20” is a good number to use if you are in doubt of the number. The P/E industry sector average can be found in financial web sites and business newspapers. Next enter the amount of investment capital being sought. Use the pull down menu to select the “Stage” of your investment opportunity:

  • Pre-seed stage
  • Seed-stage (no product, no revenue)
  • A-round or early-stage (product, no revenue)
  • B-round or mid-stage (product and revenue)
  • C-round or late-stage (growing market share)
  • Mezzanine (bridge financing for acquisition or IPO)

Next enter 5 years of Net Income (earnings before income tax, depreciation, and amortization) beginning with the current year of operation. If numbers are not available, it will not be possible to generate a Discounted Cash Flow or Earnings Multiple Valuation. Once the information is provided, click “calculate valuation.”

Reminder: Select the “radio button” of the valuation method for which you want to generate a capitalization table. This can repeated for each of the methods to create multiple cap tables. If you fail to select a valuation methodology, you cannot generate a capitalization table.

Score: For Pre-seed stage, Seed-stage, and A-rounds, the Default and Goldsmith (comparable risk) Methods are the most appropriate. The Multiple Earnings Method is most appropriate for Service-based companies with a history of revenue. The Discounted Cash Flow is most appropriate for companies with revenue. These valuations are based upon venture capital averages for pre-money, average investment, and post-money valuations. Valuations will vary by industry sectors and geographic locations. Interpretation of valuations should be taken as a realistic but general representation of industry averages. The Valuation is ultimately a mutually agreeable value between the company and the investor.

Readiness Level Tools: The Valuation tool is one of several tools to assist entrepreneurs and investors in evaluating the status, quality, and value of a startup or early stage ventures. Database support for these tools are based upon national venture capital funding averages by stage of development, generally expected investor rates of return, and expertise gained from direct interaction with hundreds of startup and early-stage angel and venture capital financed business ventures.  The recommended sequence for using the Readiness Level Tools is as follows:

  1. Entrepreneurial Readiness Survey
  2. Risk Readiness Survey
  3. Venture Readiness Model
  4. Business Plan Readiness Survey
  5. Venture Valuation
  6. Capitalization Table.

The Entrepreneurial Readiness Survey is FREE so give it a try, or click here to subscribe to the full Readiness Level Tool Set

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