Startup valuation

VALUATION & STORYTELLING
In other terms, when numbers meet narrative and vice versa

1) Basics on valuation
2) Story&Numbers
3) How to build up your valuation case
4) The Uber case
Workshop Break-Down
September 2016 –Equidam BV
Overview
Goal
Offer a mental framework to negotiate your own valuation

Demystifying Valuation
The business valuation process is ultimately an agreement between two parties,
buyer and seller, where the object of transfer is a business or part of it.
What matters in negotiations is
TRANSPARENCY
because nobody can predict the future

Equity % = Investment / Valuation
or
Valuation = Investment / Equity %
or
Investment = Valuation * Equity %
Understand what’s the sensitive variable for your counterpart
You need a good argument for at least 2 of these terms (the 3rd is a derivative, DUH!)

Ranges of acceptance
Most investors have a range of Equity % in mind based on your stage
Your job is to negotiate within these ranges or prove them wrong!
Angel
5% - 20%
Investors
angels, incubators,
co-founders..
Seed
10% - 20%
Investors
angels, early-stage
VCs
Series A
15% - 35%
Investors
Super angels,
VCs, CVCs
Series B
10% - 25%
Investors
VCs, PEs, CVCs,
Series C
5% - 15%
Investors
PEs, CVCs,
Hedge Funds
(sometimes)

Valuation is
- an instrument to support your claim
- a disciplined process to measure and quantify the future
(based on a set of assumptions)
Valuation is NOT:
- a purpose on its own: numbers are just numbers
- a science – i.e. a perfect and undisputable picture of the future

Numbers or story?
The current valuation landscape is divided into two categories of people
Numbers people
believe that valuation should be about numbers
and that narratives/stories are distractions that
bring in irrationalities into investing.
e.g. most valuation practitioners
Narratives people
believe that valuation and investing is really
about great stories and that it is impossible to try
to estimate numbers, when you face uncertainty.
In both cases, things are changing

How to build your valuation case
Valuation is a mix of narrative and data
crunching
The Narrative
The story: make people see the
vision, the potential, and convert it
into numbers.
The Numbers
The assumptions: make them look
realistic and back them up with
market data and/or your story

Find a common ground
“if you believe the story attached to it, you believe the valuation”
Investors are ultimately buying into the potential of your firm: if they are
not doing any math then they are lying

A valuation state-of-mind: INVESTMENT VALUATION
Credits: Aswath Damodaran

How to tell a story
Develop a vision, a feeling of mission, a credible plan with milestones
and communicate that with a sense of urgency.
Problem-Solution
Clear?
Inevitable? Right timing? Right people?
Winning factors:
- experience / track-record / network
- charisma / leadership / assertiveness
- enthusiasm / Passion / Drive / HUNGER

Test your story
Choose a story that is possible, plausible and probable.
Test it and be receptive to feedback.
Story
People understand 1 to 2 layers of
complexity. If it takes more than that to
understand your story it’s too complex.
# inevitable
Feedback
Try different audiences and take their
feedback with a pinch of salt: not
EVERYBODY can understand it, but the
more the better.

Identify value drivers
Convert the story to value drivers: in other terms, attach numbers to reinforce
your narrative and make it concrete
Top-down Approach
Outside  inside
Focus on the big picture (e.g. market size) and break it
down in terms of conversion rates and other
assumptions to estimate the company’s expected
performance.
Bottom-up Approach
Inside  outside
Focus on the company and it’s drivers (productivity,
price, hiring etc.) and make assumptions on their future
evolution and derive the company’s expected
performance.
Both need to be back by evidence that the company can reach those goals. The choice of either of the two depends
on the type of company and the data available. The top-down is preferable for young, high-growth companies.

Down to valuation
Connect your drivers / plans to a valuation model
and keep the feedback loop open.
Estimate Valuation
Use online templates, make your own template or use
online valuation tools (equidam.com).
Challenge Assumptions
Focus on the assumptions of the valuation, not the
valuation per se. If the other party agrees on those,
then that’s the valuation.
If you do steps 1 to 3 right, chances are step 4 and 5 will go pretty smoothly, but get ready for negotiations (patience,
rationality and leadership). Remember that trust remains an important aspect of every investment: without trust it will
take much much longer.

Give a structure to your discussions
Feedback loop: feel attached to a story but don’t make it a dogma. Defend it but
be receptive to criticism
Some suggestions
• Make assumptions and value drivers clear and ask for feedback on them!!  easier to set
common milestones
• When in disagreement, try to pinpoint the main criticism to your assumptions

How about convertible?
“Convertibles are a shortcut to valuation discussions”
This is not true.
Convertibles come in most cases with a cap (maximum valuation at conversion)
The cap  maximum valuation investors are willing to pay for your company TODAY
 They are anyway giving you a valuation !

Valuation of a startup

The Uber Narrative: Damodaran
Narrative September 2014: Uber Addressable Market
Possible
Car ownership market:
Is Uber going to take
over the entire market
of car manufacturing
by eliminating car
ownership?
Plausible
Urban + suburban car
service and rental
market: is Uber going
to address the total
market for road private
transportation market?
Probable
Urban taxi market
worldwide

The probable scenario
Total Market
x
Market share Revenues (sales)
-
Variable costs
-
The global taxi business is
estimated to be worth $100 billion
in 2013, and expected to grow 6%
YoY.
Net sales
Operating Expenses
Despite competition, Uber has a
sustainable advantage, but their
expansion approach is city-by-
city and therefore without global
network effects but only local.
Target market share is 10%
Uber will maintain its 20%
commission on the ride fares
because of its superior
technology and first mover
advantage.
Uber will maintain its current low-
infrastructure cost model. Target
pre-tax operating margin at 40%
(note: in lack of reliable figures look
at financial ratios of the
industry/similar companies, or use
the bottom up approach)

The probable scenario
Operating Income
-
Taxes Profit
-
Reinvestment Cash Flow
Based on the corporate tax rate
of the country (an AVG will do)
Uber has a low capital intensity
model (typical of car companies,
most reinvestment goes into
growth and salaries). Target
reinv. 20% of Sales
Once cash flows have been calculated, one should estimate the cost of
capital and combine it with the probability of failure.
Uber is still a young company heavily investing in the future (thus taking on
more risks). Let’s assume a cost of capital of 12% (which will decrease
overtime to 8%). Also, let’s assume a probability of failure of 10%

Connecting narrative and numbers
September 2014: $5.9 billion (based on current assumptions)

Keeping the feedback loop open
On September 2014 the valuation of Uber was $17bn, based on its recent
investment of $1.2bn. How can numbers explain that?

Keeping the feedback loop open
There are different speculations
Uber is not only cab hailing company
Bill Gurley, in his post in reply to Damodaran, claims that Uber is a car company (it will replace car
ownership), is not only urban but suburban too, and it has global network effects. Based on that, he
claims Uber’s valuation is at least 25X than Damodaran’s (>$50bn)
The investment in Uber is basically debt
Some argue that later stage deals are bear so many special rights to the investors that the shares are
more similar to debt than to real shares (they are basically slightly junior than debt)

Bottom line
Uber experienced such a high offer of funds that the valuation could have been much higher
than $17bn at that point in time (as Bill Gurley admitted). Most investors, however, are not as
visionary and are simply victim of the “herding behavior” (I’m doing because they do it; fear
to miss out; etc.)
As a matter of fact, Uber is growing so fast that everything seems possible. But is it? Time will tell..
My gut feeling: Uber will lose growth to competition and to “lack of novelty” in many non-American
markets

Interesting reads
Damodaran:
http://fivethirtyeight.com/features/uber-isnt-worth-17-billion/
Bill Gurley
http://abovethecrowd.com/2014/07/11/how-to-miss-by-a-mile-an-
alternative-look-at-ubers-potential-market-size/
Closing Remarks

On Uber and its competitors – the car ownership scenario
 http://techcrunch.com/2016/05/24/uber-and-toyota-confirm-strategic-
deal/
 http://techcrunch.com/2016/01/04/lyft-now-worth-5-5-billion-plans-to-
get-into-the-autonomous-car-race-with-general-motors/
 http://techcrunch.com/2016/05/24/vw-invests-300m-in-uber-rival-gett-
in-new-ride-sharing-partnership/
 http://techcrunch.com/2016/05/12/apple-invests-1b-in-didi-chuxing-
chinas-largest-ride-hailing-app/
Closing Remarks

Thanks for your attention
Gianluca Valentini – founder of equidam.com
gv@equidam.com
What is your startup valuation? Sign up for free at
www.equidam.com

Startup valuation

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