Startany.com. Remote Acceleration Program.
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The Founder’s Guide to Early-Stage Valuation
Presented by Stephen R. Poland, co-founder 1x1 Media.
For many early-stage entrepreneurs assigning a valuation to your startup is one of the more intimidating tasks encountered during the fundraising quest. Based on the popular Founders’ Pocket Guide: Startup Valuation, this webinar provides a quick reference to all of the key topics around early-stage startup valuation and provides step-by- step examples for several valuation methods.
This webinar helps startup founders learn:
What a startup valuation is and when you need to start worrying about it.
Key terms and definitions associated with valuation, such as pre-money, post-money, and dilution.
How investors view the valuation task and what their expectations are for early-stage companies.
How the valuation fits with your target raise amount and resulting founder equity ownership.
How to do the simple math for calculating valuation percentages.
How to estimate your company valuation using several accepted methods.
Stephen R. Poland
Stephen R. Poland has worked with hundreds of startups and entrepreneurs, mentoring them on startup mechanics, funding plans, pitch decks, financial models, and due diligence documentation for the angel funding process.
Steve brings more than 20 years' experience in startups and entrepreneurship to his career. Leveraging leadership roles with the Walt Disney Company, MacMillan Publishing, and Bertelsmann, Steve co-founded startups in the digital music and on-demand media manufacturing sectors, as well an early days anti-virus product.
Along with being co-founder of 1x1 Media, Steve works as a venture growth advisor in Western North Carolina.
4. Today’s Topics
• When You Need to Establish a Valuation
• The Valuation Equation
• Valuation and Raise Amount
• Calculating Investor Ownership %
• Talking About Your Valuation to Investors
• Valuation Methods: How to determine your
valuation
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5. About Me…
• Co-Founder of 4 Startups
• Current Company – 1x1 Media
• Corporate Roles – Disney, MacMillan, Bertelsmann
• Advisor to Angel Investment Groups
• Author of 7 Books on Startup Funding
• Focus on helping startups become Investor-Ready
• Live in North Carolina, USA
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8. Why You Need a Valuation
• When you sell equity in your startup to an outside
investor such as an angel group or venture capital firm
the investor trades cash for a percentage ownership of
the startup corporation.
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• To determine the percentage of
equity the investor’s cash buys
him/her the total value (or
valuation) of the startup needs to
be agreed on before the investment
occurs.
How big is the Pie before I put my money in?
9. The Many Questions in the Investor
• Market Size. How big is the market the startup is going
after?
• Size of the Company. What are the revenue projections
over the next three to five years?
• Intellectual Property (IP). Does the startup have
significant IP or other high competitive barrier
advantages?
• Founders and Team. How experienced is the founding
team? Have they worked on a startup before, or is this
their first go?
• Product/Service or Technology. Is it revolutionary and
disruptive, or merely evolutionary?
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10. The Many Questions of the Investor
• Traction. Do you have customers or users? At what rate can
you add new ones?
• Amount Already Invested. How much money has already
been invested, and how much time in terms of development,
research, or innovation?
• Stage of the Startup. What stage of development is the
startup at: idea/business plan, product developed and
tested, or other?
• Competition. What is the competition like in the sector of
the startup?
• Need for Addition Investment. Does the startup need a
significant amount of additional cash to reach its goals?
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11. The First Rule of Startup Valuation
Your company is worth whatever you
and the investor agree it’s worth.
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19. The Valuation Equation
Pre-money valuation: How much your startup is worth
before an investment… (negotiated amount)
Investment amount: The investment…
Post-money Valuation: How much the startup is worth
after the investment…
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20. HOW TO TALK ABOUT YOUR
VALUATION WITH INVESTORS
IMPLIED VALUATION
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21. How to Talk About Your Valuation
1. State your raise amount and equity
expectation
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22. How to Talk About Your Valuation
2. Calculate the Implied Post-Money Valuation.
by dividing the raise amount by the equity
ownership percentage:
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23. How to Talk About Your Valuation
3. Calculate the Pre-Money Valuation. Subtract the
raise amount from the post-money valuation giving
the pre-money valuation
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24. HOW TO TALK ABOUT YOUR
VALUATION WITH INVESTORS
IMPLIED FOUNDER DILUTION
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25. How to Talk About Your Valuation
1. Express your raise amount and pre-money
valuation.
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26. How to Talk About Your Valuation
2. Calculate the post-money valuation. Simply add
the raise amount to the stated pre-money valuation,
resulting in the post-money valuation
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27. How to Talk About Your Valuation
3. Calculate the implied dilution percentage. Divide
the raise amount by the post-money valuation,
giving the founder dilution percentage
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33. Valuation Factors
• Market Size. How big is the market the startup is
going after?
• Revenue Potential. What are the revenue
projections over the next three to five years?
• Intellectual Property (IP). Does the startup have
significant IP or other high competitive barrier
advantages?
• Founders and Team. How experienced is the
founding team? Have they worked on a startup
before, or is this their first go?
• Product/Service or Technology. Is it revolutionary
and disruptive, or merely evolutionary? 33
34. More Valuation Factors
• Traction. Do you have customers or users? At what rate
can you add new ones?
• Amount Already Invested. How much money has
already been invested, and how much time in terms of
development, research, or innovation?
• Stage of the Startup. What stage of development is the
startup at: idea/business plan, product developed and
tested, or other?
• Competition. What is the competition like in the sector
of the startup?
• Need for Addition Investment. Does the startup need a
significant amount of additional cash to reach its goals?
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36. Market Comparison Method
“You are like startup X and it was just
valued at $1.5 million pre-money, so your
startup must also be in that same pre-
money range.”
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45. Risk Reduction Method
Assigns dollar values to the accomplishments
and validations of the startup in four categories
of risk mitigation:
1. Technology: Does your product work
as planned?
2. Market: Do customers care about
your product or service?
3. Team: Is your team experienced in
the segment you are targeting?
4. Financial: Do you have the funding
needed to implement your plans?
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48. Resources
• How-To Guides for Startup Founders
1x1media.com
• Startup Valuation: The App
https://goo.gl/QxdRXf
• The Ultimate Angel Funding Checklist:
http://goo.gl/DHydWe
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Editor's Notes
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13* It’s possible for
Valuation Low or Not Necessary. At the idea stage, the valuation of the startup is expectedly low.
Because typically few if any tasks have been executed to move the startup forward, no real need to actually put a valuation on the company exists.
Personal Funding. Funding at the idea stage typically comes from the entrepreneur, with sources
including personal savings, credit cards, or other opportunities such as pitch competitions.
Friends and family money, government research funding, and occasionally independent angel investors can also fund the early steps at the idea stage.
Valuation Still Low, but Growing. At the startup stage, the valuation of the startup is still low, but efforts toward building the product and proving it with customers are well underway. These accomplishments help increase the valuation of the startup
Pivots are Common. At the startup stage it is common for founders to change directions in terms of the product, its features, or even the customer being targeted—these changes are called “pivots” in startup lingo, and are common at the startup stage. Investors want to see how potential customers like the prototype, beta, or test version of your innovation. Seasoned investors know that founders have a high likelihood of needing to pivot during the early stages of the startup.
Customer Validation Drives the Traction Stage. The validation that people want and are willing to pay for your product is the Holy Grail for investors. The closer you get to true paying customers, the less risk the angel perceives in the venture.
Angels Start To Play and Valuation Grows. At the traction stage, angel investors can talk to your paying customers, get a first hand view of the market segments you serve, and begin to assess the investment risks and potential rewards.
Investors in growth stage startups look at historical metrics of your company. Months, if not years, of actual financial data are available, and investors want to know:
How efficiently have you used the capital you’ve received?
How well have you controlled expenses?
Are you at or close to a break-even level of sales/revenue?
Are there major infrastructure costs needed to serve an ever larger number of customers
Use a section header for each of the topics, so there is a clear transition to the audience.
The Pre-money valuation is what gets negotiated with investors.
When they ask “what’s your valuation”, they are talking about the Pre-money valuation.
Use a section header for each of the topics, so there is a clear transition to the audience.
The Founder Dilution % is also how much equity the investor owns after the investment deal is complete.
Use a section header for each of the topics, so there is a clear transition to the audience.
What will the audience be able to do after this training is complete? Briefly describe each objective and how the audience will benefit from this presentation.
Use a section header for each of the topics, so there is a clear transition to the audience.
Use a section header for each of the topics, so there is a clear transition to the audience.
What will the audience be able to do after this training is complete? Briefly describe each objective and how the audience will benefit from this presentation.
Can have a detailed conversation with investors about each line item.
Shows the work you have accomplished.
