Tech startups operate under great uncertainty, and this makes their financial valuation difficult. I reviewed the literature and interviewed 26 venture capitalists about their methods. This presentation introduces a variety of valuation approaches, along with their advantages and drawbacks. The slide deck was developed for the Norwegian School of Entrepreneurship.

1. startup valuation
GRUNDERSKOLEN 2018
RIANNE VOGELS
#grunderskolen
@rianne_vogels

2. Role, awards and nominations
for medtech company Volusense
◦ CEO FROM TECH PROTOTYPE STAGE
◦ NORDIC STARTUP COMPETITION WINNER
◦ AWARD FOR DESIGN EXCELLENCE
◦ INDEX: DESIGN TO IMPROVE LIFE AWARD
Expert roles
◦ JURY MEMBER STARTUP PITCH
COMPETITIONS
◦ BOARD DIRECTOR ROLES
◦ GUEST LECTURER
RIANNE VOGELS
Education
◦ CHARTERED FINANCIAL ANALYST
◦ MSC IN INNOVATION MANAGEMENT
◦ MSC IN INTERNATIONAL MANAGEMENT
◦ MSC IN MEDICAL SCIENCE
◦ ENGLISH, NORWEGIAN, DUTCH
Roles at VC group Sarsia
◦ INVESTMENT DIRECTOR / PARTNER
◦ CFO
– MANAGEMENT FOR HIRE & STARTUP ADVICE

3. RIANNE VOGELS
volusense
CEO FROM TECH PROTOTYPE STAGE

4. in theory
RIANNE VOGELS
WHAT’S A STARTUP WORTH?

5. IN THEORY
3 fundamentals determine the value of a firm.
Any valuation exercise should be based on these.
cash flows
growth
risk

6. DISCOUNTED CASH FLOW
(NET PRESENT VALUE)
REAL OPTION
PRICING

7. DISCOUNTED CASH FLOW MODEL
The value of the firm is the sum of the present values
of all net cash flows
◦ Estimate net cash flows over time,
up until a constant growth level
◦ The business value at that future
time is calculated as a perpetuity
◦ Determine the right discount rate
◦ Calculate the present values of all
future cash flows, and add them up
A
B
C
D
PV ( A )
PV ( B )
PV ( C )
PV ( D )
+
PV ( perpetuity )

8. DISCOUNTED CASH FLOW MODEL
The value of the firm is the sum of the present values
of all net cash flows
◦ Estimate net cash flows over time,
up until a constant growth level
◦ The business value at that future
time is calculated as a perpetuity
◦ Determine the right discount rate
◦ Calculate the present values of all
future cash flows, and add them up
A
B
C
D
PV ( A )
PV ( B )
PV ( C )
PV ( D )
+
PV ( perpetuity )

9. THE FUTURE VALUE OF THE CONTINUING BUSINESS
Estimated cash flow in year P1
( discount rate - perpetual growth rate )
P1
FV (perpetuity) =
FV
Add this Future Value to the cash flow of the last year of the specific forecast period

10. DISCOUNTED CASH FLOW MODEL
The value of the firm is the sum of the present values
of all net cash flows
◦ Estimate net cash flows over time,
up until a constant growth level
◦ The business value at that future
time is calculated as a perpetuity
◦ Determine the right discount rate
◦ Calculate the present values of all
future cash flows, and add them up
A
B
C
D
FV
PV ( A )
PV ( B )
PV ( C )
PV ( D + FVperpetuity )
SUM

11. CALCULATE THE PRESENT VALUES
cash flow in year X
(1 + discount rate) ^ (nr of years)
PV (X) =A
B
C
D
FV
PV ( A )
PV ( B )
PV ( C )
+
PV ( D + FVperpetuity )
SUM = company value

12. DISCOUNTED CASH FLOW MODEL
The value of the firm is the sum of the present values
of all net cash flows
◦ Estimate net cash flows over time,
up until a constant growth level
◦ The business value at that future
time is calculated as a perpetuity
◦ Determine the right discount rate
◦ Calculate the present values of all
future cash flows, and add them up
A
B
C
D
FV
PV ( A )
PV ( B )
PV ( C )
PV ( D + FVperpetuity )
SUM

13. ◦ The discount rate is a risk indicator
◦ Theoretically, a good way to quantify
business risk is to look at the weighted
average cost of capital (WACC)
▫ What would debt funding cost? (after tax)
▫ What would equity funding cost?
▫ Discount rate =
weighted average cost of the funding mix
THE DISCOUNT RATE REFLECTS THE RISKINESS OF THE CASH FLOWS
A
B
C
D
FV
PV ( A )
PV ( B )
PV ( C )
PV ( D + FVperpetuity )

14. ◦ An issue with WACC: the cost of equity is
calculated based on the company’s
valuation. Circular logic!
◦ Practices when selecting discount rates vary.
◦ Discount rates strongly impact calculated
company values.
◦ This entire calculation model is sensitive to
small changes in assumptions.
◦ So that’s not great…
THE DISCOUNT RATE REFLECTS THE RISKINESS OF THE CASH FLOWS
A
B
C
D
FV
PV ( A )
PV ( B )
PV ( C )
PV ( D + FVperpetuity )

15. IN THEORY
3 fundamentals determine the value of a firm.
Any valuation exercise should be based on these.
cash flows
growth
risk
Let’s cheat a little

16. HOW ELSE CAN WE PUT A PRICE TAG ON “ THE REST ”
Investors and
investment bankers
use other methods

17. ALTERNATIVE 1 : PRICE-TO-EARNINGS APPROACH
EBIT or EBITDA
x
valuation multiple
Multiples methods
lean on the premise
that other companies
are fairly valued.
Got bubbles?

18. BEFORE WE COMPARE FIRMS WE MAY NEED TO MAKE THEM COMPARABLE
EBIT = OPERATING PROFIT ( Earnings Before Interest and Tax )
An issue with EBIT: Accountants write off investments in ways that differ between companies.
If you ignore these write-offs (add them back), profitability comparisons may make more sense.
EBITDA = EARNINGS BEFORE INTEREST AND TAX, DEPRECIATION AND AMORTISATION
Tim Bennett Explains: What is EBITDA?

19. PRICE-TO-EARNINGS APPROACH ( CONTINUED )
EBIT or EBITDA
x
valuation multiple
SIMILAR
COMPANY
VALUE
TO EBIT
VALUE TO
EBITDA
A X,X X,X
B X,X X,X
C X,X X,X
D X,X X,X
E X,X X,X
Select comparable
companies and/or
look at industry ratios

20. Advertising 8.35 13.15
Aerospace/Defense 13.96 17.67
Air Transport 6.56 12.14
Apparel 10.97 17.90
Auto & Truck 10.62 30.82
Auto Parts 7.59 10.69
PRICE-TO-EARNINGS APPROACH ( CONTINUED )
RELEVANT
INDUSTRY
VALUE
TO EBIT
VALUE TO
EBITDA
EBIT or EBITDA
x
valuation multiple
Select comparable
companies and/or
look at industry ratios

21. PRICE-TO-EARNINGS APPROACH ( CONTINUED )
EBIT or EBITDA
x
valuation multiple
Usually, these ratios are
based on Enterprise Value :
Market capitalization plus
debt, minority interest and
preferred shares, minus total
cash and cash equivalents.

22. ALTERNATIVE 2 : SALES MULTIPLE
annual revenue
x
valuation multiple
You might hear: She said
they were acquired at
four times revenue.
That’s huge/nothing!

23. ALTERNATIVE 3 : MARKET-TO-BOOK RATIO
book value
x
valuation multiple
Book value is the
accounting value of
the firm: its assets
minus its liabilities

24. ALTERNATIVE 4 : LIQUIDATION VALUE
proceeds from selling
all business assets, after
paying off liabilities
When Susy retires,
her successful
photography studio
is worth - not much

25. ALTERNATIVE 5 : REPLACEMENT COST
the costs to replace
the company’s assets
Buy your business?
I might as well start
my own.

26. ONCE MORE FOR THE KIDS IN THE BACK
Summary of the discounted cash flow model
◦ Calculate net cash flows over a
detailed forecast period
◦ Calculate the company’s value at a
time where growth is stable, or the
business is sold or shut down
◦ Sum up the present value of all
future cash flows. Use appropriate
discount rates
SUM

27. STILL CONFUSED ABOUT THE DISCOUNTED CASH FLOW MODEL ?
Try a better teacher than me
How to value a company using discounted
cash flow (DCF)
- MoneyWeek Investment Tutorials

28. DISCOUNTED CASH FLOW
(NET PRESENT VALUE)
REAL OPTION
PRICING

29. REAL OPTION VALUATION
Real option pricing makes the value of
managerial flexibility explicit in firm valuation
◦ Create a base-case scenario (Discounted Cash Flow)
◦ Expand to an event tree with different scenarios
◦ Identify decision points and how they impact cash flows
◦ Calculate DCF values for the entire decision tree,
weighted for assigned probabilities

30. REAL OPTION VALUATION ( CONTINUED )
Real option pricing makes the value of
managerial flexibility explicit in firm valuation
◦ This model recognizes the value of being able to
navigate a variety of situations
◦ The higher the stakes, and the uncertainty, and
the ability to respond, the higher the option value
◦ Real option based valuation will always produce
a higher value than DCF
◦ - because only sensible decisions are included

31. “
THE INPUTS TO OPTION PRICING MODELS CAN
BE EASILY MANIPULATED TO BACK UP
WHATEVER THE CONCLUSION MIGHT BE
HOWEVER

32. in practice
RIANNE VOGELS
WHAT’S A STARTUP WORTH?

33. Example of a biotech success

34. I interviewed 26 venture capitalists about
their valuation methods (biotech, 2003)
RIANNE VOGELS

35. REAL-WORLD VALUATION : DCF AND REAL OPTIONS
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER FREQUENTLY
OCCASIONALLY
NEVER

36. REAL-WORLD VALUATION : MULTIPLES
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER
◦ Same as multiples methods shown before.
◦ Usually EBIT/EBITDA/revenue based.
◦ Used for valuations at the current time, or
as a future value.
◦ The future value can be plugged into other
valuation methods.

37. REAL-WORLD VALUATION : COMPARABLE DEALS / COMPANIES
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER
◦ Identify recent acquisition prices or stock
market valuations relevant to the company.
◦ A cruder indication of what the market pays
than multiples.
◦ However, investors will consider other
aspects like the relative competitive outlook,
investment requirements, team quality,
patent strength, timelines, other risks, etc.
◦ You may hear: This is not a VC case. I can’t
see how I could make 10x on my investment.

38. REAL-WORLD VALUATION : THE VENTURE CAPITAL METHOD
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER
◦ The VC estimates a time when a company
will ‘exit’ its portfolio, and the market value at
that time. Usually comparable
deals/companies/multiples are used.
◦ That exit price is discounted at the VC’s
required rate of return (discount rate),
typically 30%, to calculate a present value.
◦ “Post-money” is the value with an investment
in place. “Pre-money” is the value without it.
◦ You may hear: Here’s the cap table. At 50 mill
post-money, you will be diluted to 18%.

39. REAL-WORLD VALUATION : DRUG DEVELOPMENT PHASE APPROACH
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER
◦ The future value is estimated via
comparable valuations/deals/multiples,
or by estimating drug product profitability.
◦ The risk of failure and costs are high
throughout the drug development
phases, e.g. 50% for phase III trials.
◦ Phase-specific discount rates are used.
These are based on collective industry
experience.

40. REAL-WORLD VALUATION : HISTORICAL COST
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER
◦ This valuation method simply reflects the
costs incurred.
◦ Depreciation or impairment are taken into
account, if appropriate.
◦ A 40% share in a company would be valued at
the costs incurred to acquire that share.
◦ VCs normally value a portfolio company
based on the latest share transaction, in line
with valuation guidelines for VC companies.

41. REAL-WORLD VALUATION : GUT FEELING
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER ◦ To determine the value of a firm, you need to
understand the company, its technologies and
to assess the management team.
◦ Soft factors are hard to make explicit, let
alone include in an excel sheet. This is where
gut feeling comes in: investors adjust firm
valuations with their sense of realism.
◦ “There is a lot of rationality behind gut feeling.
It makes you weigh your due diligence in the
valuation. The problem is just that it is difficult
to explain.”

42. REAL-WORLD VALUATION : GUT FEELING
ALWAYS
FREQUENTLY
OCCASIONALLY
NEVER ◦ “It’s not an exact science. It’s very individual,
you talk to each other and come up with a
value you can agree on. We don’t try to push it
into models. Those are just a tool to have
some opinion.”
◦ “Maybe we don’t know better, but gut feeling
has worked for us. And we have 18 years of
experience.”
◦ “Gut feeling is not scientific, it’s no
measurement. It mirrors how you feel and is
very subjective. Most approaches are, though.”

43. REAL-WORLD VALUATION BY EUROPEAN VENTURE CAPITALISTS
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %
GUT FEELING COMPARABLE
DEALS /
COMPANIES
DRUG
DEVELOPMENT
PHASE
VC METHOD DCF MULTIPLES HISTORICAL
COST
REAL OPTIONS
NEVER
ALWAYS

44. FINAL NOTES
◦ Bottom-up financial modelling is useful. You will learn about value
drivers, risk factors, funding needs.
◦ Comparison-based valuations are informative also, and investors
are keen to consider these.
◦ Seeking funding at a high value can be a trap. It reduces the
potential for value appreciation. That means it may be harder to
secure necessary funding every step along the way.
◦ Negotiation power is a strong factor. Your startup is worth what
someone is willing to pay for it.

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