PRE-MONEY VALUATION
5+1 VALUATION METHODS
HOW DOES IT WORK?
Our pre-money methodology is the result of the weighted average of different valuation systems. The use of several methods is a best practice in company valuation, as looking at the business from different perspectives results in a more comprehensive and reliable view.
QUANTITATIVE METHODS
OUR QUALITATIVE APPROACH
We have streamlined and standardised our methods, especially when tackling the more subjective and qualitative aspects of valuing a company. We do this through a set of questions that we ask each and every start-up. Our Questionnaire, groups all the qualitative factors that will influence both the Scorecard and the Checklist Methods.
THE SCORECARD METHOD
The scorecard method was conceived by William H. Payne of Ohio TechAngels group when he faced the decade old question on how to value early-stage businesses. The valuation of the company depends on how its characteristics differ from the average of comparable companies. Different markets and different ecosystems have different levels of valuations, and this method takes into account different geographic benchmarks. The qualitative traits of each start-up are divided in 6 criteria and then they are given a score, in percentage, according to whether they are better or worse than the average company.
DEFAULTS WEIGHTS OF THE CRITERIA
- Quality of the core team: 30%
- Quality of the idea: 20%
- Product roll-out and IP protection: 15%
- Strategic relationships: 15%
- Operating stage: 20%
THE CHECKLIST METHOD
DEFAULTS WEIGHTS OF THE CRITERIA
- Quality of the core team: 30%
- Quality of the idea: 20%
- Product roll-out and IP protection: 15%
- Strategic relationships: 15%
- Operating stage: 20%
The creator of this method is David W. Berkus, one of the most prominent Californian angel investor and venture capitalist. The checklist method uses building blocks that sum up to a maximum pre-money valuation. This maximum is composed by 5 different criteria that are weighted differently according to their importance. The company is awarded portions of these maximum criteria valuations according to how close its qualitative traits are to the most desirable ones. These values are then compared to the benchmark valuation in the analysed market.
THE VC METHOD
The Venture Capital method, or VC method, is one of the most common approaches when valuing early stage companies. How this works is by figuring out the return that an investor wants, in order to deploy cash into the business. The company will have a valuation that is therefore consistent with a predetermined return at the exit. The potential exit value is derived from the specific EV/EBITDA multiple of the benchmarked market. The final valuation equals this exit value discounted by a required return on investment (ROI). This depends on a number of factors, including the startup’s stage of development, as well as the kind of investors that might invest in the company.
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THE DCF METHODS
The Discounted Cash Flows technique involves deriving the value of a business by calculating the present value of its expected future cash flows. Projected cash flows, inferred from the Business Plan, are used for the five years ahead while the Terminal Value is adopted for the remaining foreseeable future. In this sense, the value of the company is the sum of the enterprise value, calculated on the 5 years cash flow, and the residual amount of its terminal value. Both these values are discounted in order to equalise their value to today’s real value. The DCF model calculates the present value of the business future cash flows.
WITH LONG TERM GROWTH (LTG)
The DCF with Long Term Growth assumes the cash flows beyond the projected ones will grow forever at a constant rate based on the industry and computes the Terminal Value accordingly.
WITH MULTIPLES
The DCF with Multiples assumes the TV (Terminal Value) is equal to the exit value of the company computed with an industry multiple based on EBITDA or Revenues.
THE DILUTIVE METHOD
The dilutive method helps to understand which percentage of the company investors will likely require in order to deploy the requested funds.
The dilutive method is not a methodology meant to pinpoint an accurate valuation, but it’s a tool that finds its usefulness in understanding which percentage of the company investors will likely require in order to deploy the requested funds. In this sense, this technique is totally dependent on the round size and, for venture or growth investments, normally ranges anywhere between 10% and 30%.
WHEN TO USE A THIRD PARTY VALUATION
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There are several situations in which an entrepreneur might want to consider using a third party pre-money valuation:
If you’re looking to bring on outside investors, a pre-money valuation can help you negotiate the best deal possible. It provides a clear understanding of your company’s value, which you can use to set a fair price for your equity and a third-party valuation may be a good starting point for your negotiations.
If you’re thinking about retiring or selling your company, a pre-money valuation can help you determine its fair market value. This will ensure that you get the best price possible when the time comes to make a deal.
If you’re considering issuing equity to employees as part of their compensation, a pre-money valuation can help you determine the fair value of the equity you’re offering. If you need a 409A or CSOP valuation visit this page!
If there is disagreement within the company about its value, a pre-money valuation can provide an unbiased assessment to help resolve the issue. Please note that this report is not audited and the final result is heavily dependant on the quality of your inputs, and therefore its assumptions might be heavily challenged by your counterpart. If you need a pre-money valuation to use in court, or in a highly challenging environment, please reach out to us in order to receive a dedicated quote
Overall, a pre-money valuation can be a useful tool for entrepreneurs in a variety of situations where an accurate understanding of their company’s value is needed.
SOME OF THE COMPANIES WE'VE VALUED
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F.A.Q.
We’ll get in contact with you and set up a call. We’ll need to better understand your business and its stage of development.
Depending on the complexity of your company and business model, we need 1 to 2 weeks to complete the valuation (assuming we have received all the info we need)
We will need some qualitative information and some quantitative data. Generally we want a business plan, or your company’s projections for the next 3-5 years, as well as many other details. We’ll ask you to answer a number of questions and fill out a questionnaire: you can download our qualitative questionnaire here.
We use 2 qualitative methods and 3 quantitative ones. The answers you provide to the questionnaire will influence both the weights we apply to each method as well as the valuation of the qualitative methods.
We do take this into account, and this information will be displayed in the report, but it will not impact our quantitative analysis.
While you are definitely part of the process and the answers to our questions will greatly influence the outcome of the valuation, we will value the company independently and you have no say on the final outcome.
We use different valuation techniques in order to assess different companies at different development stages, but also in order to maximise accuracy. All methods are showcased in our report in order to communicate the different values that different methods yield.
This process heavily relies on the truthfulness of the information you provide us. We strongly discourage sending us incomplete, misleading or false information, as this will result in an unreliable valuation (and will probably backfire in your negotiations).
Any valuation indicates the fair value of a company (or any other asset) as the price that would be received to sell it in an orderly transaction between market participants. This is therefore a general indication and doesn’t take into account specific interests of the parties that will be actually involved in the transaction.
In other words: take it as starting point. The real value of your company will be determined when you will shake hands with the investors.
Short answer: no…
Longer answer: This valuation report doesn’t replace Due Diligence. Any investor willing to invest, or banker willing to lend to a company, should make their own assessment, and be responsible for their own decisions. At the same time this pre-money valuation report is tailored to early stage companies seeking investments. If you are a fund manager and want to value the companies in your portfolio reach out to us for a dedicated quote.
Throughout the years, we have developed a methodology that is particularly effective for early-stage valuations.
While our techniques cover the whole lifecycle of a company, from pre-seed to IPO, there are only a handful of independent companies that specialise in early-stage valuations.