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FINAL RESEARCH PROJECT2014-2016

(MID TERM REVIEW)

Valuation of Early Stage Start-up Companies

Under the Guidance ofDr. Vishakha Bansal


Area: Finance

Presented byAdish Vinayak


171/2014

FLOW OF PRESENTATION
AN OVERVIEW
OBJECTIVES
LITERATURE REVIEW
RESEARCH METHODOLOGY
WAY FORWARD

OVERVIEW
Determining the economic valuation of a company is one of the more

challenging and important discussions an entrepreneur can have with investors


Research that provides operational guidance on such economic valuation, is,
however, lacking. Experts say little work is available on the valuation of
venture capital investments. Furthermore, some venture capitalists maintain
that: the truth about valuing a start-up is that its often a guess.
Firm resources, external ties, and market opportunities jointly influence firmlevel profitability, which can serve as the fundamental basis for the economic
valuation of a new venture.
Venture capitalists (VCs) invest only 1% of the value of their investments in
the seed stage (5% of the deals), 18% in the start-up stage and the rest is
provided to expand the company .

OBJECTIVES
The primary objective of this project is, to understand

how venture capitalists value a start up company before


funding.
To understand how large companies value start ups preacquisition.

LITERATURE REVIEW
There is a general scarcity in research about experts valuations of private

companies. More specifically there is an insufficiency not only in the research


about the determinants of valuations in private equity but also especially about
angel investors and their investment decisions. Elnathan et al. (2010),
Venture Capitalists reputation, size, and limited attention impact their
bargaining power and consequently valuations in addition to venture quality
and market conditions. Cumming and Dai (2011)
There is lack of information of financials , which becomes critical when
investors try to evaluate companies based on the information they are provided
by the founders or are able to collect, information asymmetry can lead to
opportunistic behaviour in form of adverse selection (i.e. hidden information)
and moral hazard (i.e., hidden actions). For this reason, investors struggle to
get valuable and reliable information.

Data collection
Data from publicly available RED HERRING

PROSPECTUS.
Market data from Bloomberg.
Publicly available valuation data from various
successful funding rounds completed by startups

Data analysis
Absence of historic, or (often) accurate means to predict
future revenues and cash flow, makes it virtually
impossible to use traditional models like DCF used
frequently
Some methods used are:

Venture Capital Method


First Chicago Method
Berkus Method
Scorecard Method
Comparables
Negotiation
WAG

Data analysis contd.


Venture Capital Method (Bill Sahlman, Harvard)
If we know the value of something in the future and we know what kind
of ROI we need to induce us to make an investment, then we figure out
its present value to us.
Present value = valuation
Incorporates some elements of DCF insomuch that we apply risk
premium (expressed as return/discount/hurdle rate), and are
determining PV, but it is based on future terminal value rather than
cash flows

Data analysis contd.


First Chicago Method
First Chicago approach simply does three different projections: Best,
Worst and Survival scenarios & assigns probability estimates to each
i.e. Success - 30% chance; Failure - 20% chance; and Survival - 50%
chance
When utilized, the First Chicago method results in a separate valuation
for each of the three potential outcomes.
These are than added and the valuation and pricing is determined.

Data analysis contd.


Berkus Method
Dave Berkus noted angel investor, speaker, author
Method only really used or accurate for pre-revenue companies
Still requires subject evaluation/assessment of key value metrics
Also named as Keg Steakhouse Method or A La Carte Menu Method
Valuation Metric

Value

Cool idea/concept/tech

$.5 million

Experienced management

$.5 million

Prototype/build

$.25 million

Strategic relationships

$.25 million

Board of Directors

$.25 million

Paying customers/traction

<> $.5 - $1 million

Data analysis contd.


Scorecard Method
Not really a valuation method in itself
Ranks various factors consider predictors of entrepreneurial success
Somewhat subjective but balanced on the whole
Best for comparing a number of companies against each other, by type,
or by region

Data analysis contd.


Comparables
Accurate, reasonable approach to valuation, in the absence of, or
willingness, to apply other valuation methods
Simply research valuations, of similar companies who have raised equity
capital, at same stage, in same region
Regional pricing applies. Valuations in India are NOT the same as
Silicon Valley.

Way Forward
Valuation of Caf Coffee Day, InfoEdge & Infibeam
Comparison of different methods of valuation based

on the value calculated for each firm


Suggest most probable method adopted for each
particular industry studied

REFERENCES
Valuation of Early Stage High-tech Start-up Companies
Gunter Festela, Martin Wuermseherb, Giacomo Cattaneoc

Valuing Young, Start-up and Growth Companies: Estimation Issues and

Valuation Challenges
Aswath Damodaran .Stern School of Business, New York University

New Venture Valuation by Venture Capitalists: An Integrative Approach


Dingkun Ge ,James M. Mahoney ,Joseph T. Mahoney

THANK YOU

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