1. Valuation of Early Stage Companies
James J. Hill Library, St. Paul, MN
November 11, 2015

2. Page 1
How are Startups Funded?
Source: Inc. Magazine

3. Page 2
Past Startup Success
Source: FundersandFounders.com

4. Page 3
I’ve identified a problem!!!!

5. Page 4
Startup Process

6. Page 5
Source: StartupCommons.org

7. Page 6
The Traditional Valuation Process

8. Page 7
Valuation of Established Companies
• Traditional Valuation Methods
– Asset Approach
– Sum of Asset Values (Cost approach)
– Market Approach
– Metric times a multiple
– Income Approach
– Present Value of Future Benefits (Cash Flow)

9. Page 8
How is a Startup different?
• Established Company
– Revenue and earnings
history
– Established customer base
– Accepted product or
service
– Proven processes
– Stable future growth
• Startup
– No revenue or earnings
history
– Few or no paying
customers
– Testing a new product or
service
– New processes
– High growth expectation

10. Page 9
Valuation of an Early Stage Company . . .
Involves Qualitative Assessment of a Number of Factors
Idea!
Industry
Defined
Market
Opportunity
Founders Advisors
Growth
Potential
Beta/
Proof
Prototype
Developed
Team
Members
Lean & Agile
Est Global
Revenues
Users/
Customers
Strategic
Partners
IP
Protected
$ / Hours
Invested
Sales Plan/
Team
Business
Plan
Competitors
Revenue
Model
Gross
Margins
Near-Term
Expectations

11. Page 10
Drivers of the Valuation
• Stage of the company
• The opportunity serves an attractive market
• High growth potential
• Competition with other funding sources
• Strong team
• Opportunity may demonstrate capital efficiency
• Geographic supply-demand drivers
• Exit potential within the target time frame
• Current economic climate

12. Page 11
Expected Returns
Source: Pepperdine Cost of Capital Research

13. Page 12
VC Portfolio
Original Annual 5 Yr. Return
Investment Return 1 2 3 4 5 Multiple
$100 -50.0% $50 $25 $13 $6 $3 0.0x
$100 -50.0% $50 $25 $13 $6 $3 0.0x
$100 -50.0% $50 $25 $13 $6 $3 0.0x
$100 -50.0% $50 $25 $13 $6 $3 0.0x
$100 -50.0% $50 $25 $13 $6 $3 0.0x
$100 -12.5% $88 $77 $67 $59 $51 0.5x
$100 -12.5% $88 $77 $67 $59 $51 0.5x
$100 15.0% $115 $132 $152 $175 $201 2.0x
$100 100.0% $200 $400 $800 $1,600 $3,200 32.0x
$100 120.0% $220 $484 $1,065 $2,343 $5,154 51.5x
$1,000 $960 $1,294 $2,213 $4,266 $8,673 8.7x
Years

14. Page 13
Venture Capital Portfolio

15. Page 14
Valuation – The Venture Capital Method
Investor’s Rate of Return Based on Risk Taken
- Illiquid Investment (5-7 Years)
- High Failure Rate
- Success is Unpredictable

16. Page 15
Valuation – The Venture Capital Method
Rates of Return = Return Multiples (5 Year Horizon)
20% IRR = 2.5X
40% IRR = 5.4X
60% IRR = 10.5X
100% IRR = 32.0X

17. Page 16
Valuation – The Venture Capital Method

18. Page 17
Valuation – The Venture Capital Method
Post-Money Valuation = Terminal Value ÷ ROI Multiple
Software Company Assumptions
Seeking a $500,000 investment
Revenue Earnings
Year 5 $20 million $3 million
Median Multiple 2.0X 15.0X
Terminal Value = $40 million $45 million
Assume Terminal Value = $42.5 million
Divide by ROI Multiple 20X
Post-Money Valuation = $2,125,000

19. Page 18
Valuation – The Venture Capital Method
Post-Money Valuation $2,125,000
Less Investment 500,000
Pre-Money Valuation $1,625,000

20. Page 19
How Can We Help You?
Bob Mayo
rmayo@northernvaluation.com
612-250-4552
Ed Usalis
eusalis@northernvaluation.com
612-279-8390