RTC #30: How much is your startup worth?

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📢 Top 7 links of the week

👉 The ONE advice for LinkedIn success (I don’t follow it though, too scary 😱 ) (Link) - My favorite this week

👉 The best company social accounts (X, LinkedIn, IG, Tiktok) (Link)

👉 Is this the end of SaaS? (Link)

👉 A new trend for Seed VCs (Link)

👉 Stopping overthinking getting funded (Link)

👉 The top 23 Seed Investors for 2024 (based on actual value created) (Link)

👉 Why VCs love seeing an option pool before they invest (Link)

📖 Report of the week

How to create fundraising momentum

🤿 How much is your startup worth?

This is the golden question for any company: How much is your business worth?

From my experience, two of the first questions I always ask when speaking with founders about a potential investment are:

“How much is the valuation?” and “What are the terms?”
(if not already stated in the deck).

Why is that?

Because it gives me the basis for our discussion and puts the entire business case and the story into perspective.

Unfortunately, it is not as easy as it sounds when Peter Thiel speaks about valuation.

The tricky part is that there is not ONE way to determine a value, especially in the early phases where a startup is sometimes just an idea or trying to find a first traction and Product-Market Fit.

There was a great fireside chat with valuation expert Paul Resch a few months ago 👇

Today, I will explain the Venture Capital Method (“VC Method”) to you and go through it step-by-step using an example case to show you how a valuation is derived.

Why is the VC Method a common valuation approach?

What it does is combine two of the most common valuation approaches:

• “Discounted Cash Flow”

• “Comps”

What is the concept?

It is a method applied by many venture capital firms working backward from an eventual exit.

It is based on the venture capitalist’s desired rate of return and the expected timeframe for the investment and helps them to determine:

• How much money to invest

• At what terms and pricing

This results in the respective ownership share they need for their investment.

Let’s have a look at the steps to determine this:

Step 1: Estimate the investment needed

👉 Founder comes in the office and asks for a EUR 2.0m Seed Round

Step 2: Assess the the financial performance/potential of the company (sales/earnings/cash flow etc)

👉 Founder presents the following business plan

Note: Assuming 5 years for simplicity (usually 7-10 years more likely).

Step 3: Determine the timing of the exit

👉 VC assumes an exit in year 5

Step 4: Calculate the multiple at exit (based on comps)

👉 According to Pitchbook or other databases, we know that companies in this space currently trade at 12.0x earnings

Step 5: Discount back to today at the desired rate of return

👉 What are VCs assuming as a rate of return? A pretty high one given the risk involved in their investments

👉 Let’s go with a return rate of 35%

➡️ EUR 96m / (1.35%) ^ 5 = EUR 21.4m

This is the VC post-money valuation of the startup based on the above assumptions.

What does this mean for the ownership stake the VC will ask you for?

👉 Based on the Venture Capital Method, the VC will come back and say:

“I will give you EUR 2.0m and you give me a 9.3% share in the company”

➡️ EUR 2.0m / EUR 21.4m = 9.3%

Seems in line/a bit on the lower end based on the latest dilution numbers Peter Waker from Carta shared with us for a EUR 2.0m round 👇

💰 Struggling to come up with a valuation to propose to investors?

I am here to help you on your very own Road-To-Capital.

➡️ Book one of my “20 minutes for EUR 20” sessions and I get you covered.

Explore today’s topic further with these useful reads

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We'll hear us next week,
Stephan 👋

Issue #30 | 09 July 2024