5. BUT, SERIOUSLY. DON'T SWEAT IT.
I KNOW WHAT
YOU ARE
SAYING…
OH GOD.
ANYTHING
BUT FINANCE.
6. BUT, SERIOUSLY. DON'T SWEAT IT.
I KNOW WHAT
YOU ARE
SAYING…
OH GOD.
ANYTHING
BUT FINANCE.
FINANCE IS ACTUALLY QUITE SIMPLE
7. BUT, SERIOUSLY. DON'T SWEAT IT.
I KNOW WHAT
YOU ARE
SAYING…
OH GOD.
ANYTHING
BUT FINANCE.
FINANCE IS ACTUALLY QUITE SIMPLE
WHEN YOU FOCUS ON WHAT MATTERS.
14. SO LET'S TALK ABOUT VALUATION
SINCEYOUCAN’T
AVOIDIT
SINCE IT'S NOT ACTUALLY
THAT HARD
15. SO LET'S TALK ABOUT VALUATION
SINCE IT'S NOT ACTUALLY
THAT HARD
AND SINCE IT IS ONE OF
THOSE TOPICS THAT
ABSATIVELY CANNOT BE
DELEGATED TO FINANCE
SINCEYOUCAN’T
AVOIDIT
18. DEFINITION VALUATION IS
THE PROCESS OF
DEFINING WHAT
YOUR START-UP
IS WORTH!
YOU DO THAT IN 3 SIMPLE WAYS
YOU'RE WORTH WHAT YOU
OWN
19. DEFINITION VALUATION IS
THE PROCESS OF
DEFINING WHAT
YOUR START-UP
IS WORTH!
YOU DO THAT IN 3 SIMPLE WAYS
YOU'RE WORTH WHAT YOU
OWN
YOU'RE WORTH WHAT YOU
CAN EARN IN THE FUTURE
20. DEFINITION VALUATION IS
THE PROCESS OF
DEFINING WHAT
YOUR START-UP
IS WORTH!
YOU DO THAT IN 3 SIMPLE WAYS
YOU'RE WORTH WHAT YOU
OWN
YOU'RE WORTH WHAT YOU
CAN EARN IN THE FUTURE
YOU'RE WORTH WHAT THE
MARKET SAYS YOU'RE
WORTH
23. VALUATION BASED ON ACTUAL
ASSETS IS PROBABLY THE SIMPLEST
AND MOST INTUITIVE
24. YOU ARE WORTH EXACTLY HOW MUCH
YOU HAVE IN YOUR POCKET!
* (ADVANCED READER: WHAT IS IN YOUR BALANCE SHEET TODAY?)
25. ACTUALLY, WHAT YOU’RE WORTH
RIGHT NOW CAN BE DIVIDED INTO 2
MAJOR CATEGORIES OF VALUE
26. TANGIBLE ASSETS INTANGIBLE ASSETS
INVENTORY
CASH OR FINANCIALASSETS
BUILDINGS, LAND, VEHICLES,
EQUIPMENT
COMPUTERS, DESKS,
CHAIRS (ANYTHING YOU
CAN HOCK)
ACCOUNTS RECEIVABLE
(WHAT PEOPLE OWE YOU)
AGREEMENTS THAT
COULD BE NOVATED
(FRANCHIZE OR
DISTRIBUTION
AGREEMENTS)
COPYRIGHTS
PATENTS
TRADEMARKS
TRADE SECRETS
BRAND / REPUTATION
UNIQUE KNOWLEDGE
27. SO THE FIRST THING YOU NEED TO DO
IS FIGURE OUT HOW MUCH YOU CAN
SELL ALL THE TANGIBLE & INTANGIBLE
ASSETS FOR
65. FORTUNATELY, AN ARMY OF
MATHEMATICIANS WORKED THEIR
MAGIC AND CAME UP WITH A COUPLE
OF NIFTY FORMULAS
66. INTERNAL RATE OF RETURN (IRR)
AND
NET PRESENT VALUE (NPV)
(ACTUALLY, IT’S REALLY THE SAME FORMULA, JUST SOLVED FORWARDS AND
BACKWARDS)
67. THESE FORMULAS LOOK AT YOUR
FUTURE PROMISED CASH FLOWS, AND
DISCOUNT THEM FOR TODAY
(SOMETIMES WE CALL THIS DISCOUNTED CASH FLOW)
68. IT IS NOT ACTUALLY HARD MATH, BUT IT
ISN’T EASY MATH EITHER
(UNLESS YOU ARE FROM ANYWHERE OUTSIDE OF THE US, IN WHICH CASE, IT IS
EASY)
69. FORTUNATELY, BILL’S BOYS IN THE MS
EXCEL TEAM HAVE TAKEN THAT MATH
AND TRANSFORMED IT INTO A VERY
SIMPLE FORMULA IN EXCEL WHICH 7 OF
9 CHIMPANZEES CAN USE
71. =NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
SO, IN ORDER TO USE MS EXCEL TO
CALCULATE YOUR START-UP’S VALUE,
YOU NEED TO KNOW:
WHAT IS THE DISCOUNT RATE
WHAT ARE THE FUTURE CASH FLOWS
73. YOU JUST GRAB THE PROFIT (NOT
REVENUE) LINE FOR YOUR NEXT 5
YEARS
(YOU GET THAT IN YOUR PRO-FORMA
P&L)
(NOTE FOR ADVANCED USERS: I AM NOT A FAN OF TERMINAL VALUE FOR START-
UPS, SO I WON’T COVER IT HERE. I’M ALSO NOT CONSIDERING DEBT SINCE IT IS A
START-UP. CORPORATE TREASURERS NEED TO READ SOMETHING MORE
ADVANCED THAN THIS DECK, AS I’M SURE YOU REALIZED ALREADY)
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
74. CHOOSING THE DISCOUNT RATE
HOWEVER, IS SLIGHTLY HARDER
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
(SOMETIMES PEOPLE REFER TO DISCOUNT RATE AS WEIGHTED AVERAGE COST OF CAPITAL
OR WACC)
75. THE DISCOUNT RATE IS A NUMBER
FROM 0 TO 1.
THE CLOSER TO 1 YOU GET, THE MORE
YOU DISCOUNT
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
76. SO A DISCOUNT RATE OF .2 (20%) IS
NOT VERY RISKY AT ALL, AND A
DISCOUNT RATE OF .8 (80%) IS SUPER
RISKY.
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
77. THE DISCOUNT RATE IS ACTUALLY
CALCULATED BASED ON MANY
CRITERIA
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
79. RISK
HOW CONFIDENT IS THE INVESTOR
ABOUT THE LIKELIHOOD THE PROFIT
YOU FORECASTED WILL ACTUALLY
MATERIALIZE (REVENUE AND COST
ASSUMPTIONS ACCURATE?)
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
80. OPPORTUNITY COSTS
HOW MUCH MONEY WOULD THE
INVESTOR MAKE IF SHE INVESTED THE
MONEY ELSEWHERE – ESPECIALLY IN
RISK-FREE THINGS LIKE T-BILLS…AND
WHAT ABOUT INFLATION…
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
81. MARKET NORMS
THE DISCOUNT RATE WILL ALSO VARY
FROM MARKET TO MARKET WHERE THE
WISDOM OF CROWDS HAS GENERATED
RULES OF THUMB OVER THE YEARS
(IE: PHARMA RATES ARE DIFFERENT FROM E-COMMERCE
PORTAL RATES)
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
82. HOWEVER, HERE IS MY PERSONAL
INVESTING RULE OF THUMB,
GENERICALLY
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
83. PHASE DISCOUNT RATE
Angel Round .8
Series A .6
Series B .4
Mezzanine .2
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
84. IN OTHER WORDS, IF YOU ARE USING
A DISCOUNT RATE OF 50% AT THE
IDEA STAGE, I’M JUST NOT GOING TO
BITE
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
85. BECAUSE THERE IS JUST SO MUCH
DAMN RISK THAT YOUR FORECASTS
WILL BE WRONG, OR YOU’LL DIE IN
EXECUTION
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
86. AS I NEGOTIATE YOUR DISCOUNT
RATE WITH YOU, I’D ALSO BE
CONSIDERING A MOTLEY OF
FACTORS…
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
87. HISTORY OF STABLE GROWTH AND PROFITS
PRODUCT CYCLE POINT
SIZE MARKET SHARE
INDUSTRY
CUSTOMER BASE -DIVERSIFICATION
GROWTH POTENTIAL-TOPLINE AND BOTTOM LINE
TRENDS
COMPETITIVE POSITIONING
PRODUCT MIX
UNIQUENESS
THE VALUE OF SIMILAR COMPANIES
STRATEGY FOR CONTINUED GROWTH AND
PROFITABILITY
88. SO, BY WAY OF EXAMPLE…IMAGINE A
FRESH START-UP THAT EXPECTS TO
HAVE PROFIT OVER THE NEXT 5
YEARS OF -250,000, 0, 250,000,
2,000,000, & 10,000,000
=NPV (DISCOUNT RATE, CASH FLOW1, CASH FLOW 2,…)
89. USING EXCEL, TODAY’S
VALUE OF THIS FIRM’S
FUTURE, PROMISED PROFIT
IS $623,719.
THAT MEANS, IF I INVESTED
$150K TODAY, I’D GET ~25%
OF THE FIRM
(WHICH MEANS 2.5M RETURN IN
YEAR 5 IF WE DISTRIBUTE THE
YEAR 5 PROFIT AND I GET MY 25%)
90. OK, THAT'S NPV
LET ME QUICKLY MENTION IRR AS
WELL SINCE IRR IS QUITE POPULAR
THESE DAYS
91. AS WE MENTIONED BEFORE,
INTERNAL RATE OF RETURN (IRR) IS
LIKE STANDING THE NPV FORMULA
ON IT'S HEAD AND SHAKING IT UP AND
DOWN
92. THE IRR IS THE DISCOUNT RATE THAT
WOULD MAKE THE NPV ZERO
OR, IN OTHER WORDS, THE IRR IS THE
RATE OF EXPECTED GROWTH
THE HIGHER THE IRR, THE BETTER
THE INVESTMENT
93. AGAIN, BILL'S BOYS CAME TO THE
RESCUE
=IRR (INVESTMENT, CASH FLOW 1, CASH FLOW 2…)
94. IN THIS EXAMPLE, WE ASSUME
THAT WE INVEST 150K IN A START-
UP. THE INVESTMENT LOSES 250K
IN YEAR 1, BREAKS EVEN IN YEAR
2, MAKES 250K IN YEAR 3, 2M IN
YEAR 4 AND EXITS IN YEAR 5 FOR
10M
GIVEN THIS, THE INVESTOR IRR IS
127.5%
IN OTHER WORDS, WE EXPECT THIS
INVESTMENT TO GROW 127.5%.
MUCH BETTER THAN A SAVINGS
ACCOUNT!
97. THAT SAID, WHILE IRR IS GREAT FOR
GIANT MULTI-NATIONAL FIRMS, I
PERSONALLY DON'T LIKE IT FOR
START-UPS
98. TO ME, IRR WORKS BEST WHEN
COMPARING PROJECTS OF EQUAL
RISK OR EQUAL COST & INCOME
REALIZATION
99. IT IS GREAT FOR A BIG FIRM TRYING
TO COMPARE WHETHER TO BUILD A
NEW DATA CENTER OF EXTEND THE
EXISTING ONE
100. BUT IMHO, IT IS NOT SO USEFUL AT
COMPARING WHETHER TO INVEST IN A
BIO-INFORMATICS START-UP OR A B2B
E-COMMERCE PORTAL, 2 PROJECTS
WITH SIGNIFICANTLY DIFFERENT RISK
& SPEND PROFILES
102. IN AN ACQUISITION SITUATION,
RATHER THAN AN INVESTOR
SITUATION, HOPEFULLY THERE IS
SYNERGY VALUE BETWEEN BUYER
AND SELLER
103. WHICH MEANS THAT PART OF THE
VALUE OF THE DEAL IS NOT JUST
YOUR FUTURE REVENUE, BUT ALSO
THE POSITIVE IMPACT ON THE
BUYER’S REVENUE AS A RESULT OF
THE DEAL
104. WHETHER THIS CAN BE ADDED TO
THE BASE VALUATION IS UP TO YOUR
NEGOTIATION SKILLS, BUT IMHO, IT
SHOULD BE FACTORED IN TO BE FAIR
107. SPECIFICALLY, YOUR VALUE SHOULD
BE SIMILAR TO THE VALUE OF
SIMILAR FIRMS, IN SIMILAR
INDUSTRIES, IN SIMILAR LIFE CYCLE
STAGES, AT THIS POINT IN TIME
109. THE MOST COMMON WAY TO
GUESTIMATE MARKET VALUE IS TO
LOOK AT COMPARABLES (SIMILAR-ISH
COMPANIES TO YOURS)
110. AND SINCE NO COMPANY IS JUST LIKE
YOURS, YOU NEED TO TAKE A BUNCH
OF DATA POINTS TO TRIANGULATE
111. THIS IS USUALLY DONE WITH P/E
RATIO
ACTUALLY, YOU CAN SOMETIMES ALSO CONSIDER: PRICE TO BOOK RATIO, EQUITY / SALES,
EQUITY / CASH FLOW, EQUITY / PAT, EQUITY / BOOK VALUE OF SHARE. BUT PE IS FAR
MORE COMMON FOR START-UPS
112. P/E STANDS FOR
PRICE / EARNINGS
(THINK OF PRICE AS SYNONYMOUS WITH VALUATION
FOR THE MOMENT)
113. SO IF A FIRM’S VALUE IS 8 MILLION
AND THEIR EARNINGS WERE 2
MILLION, THE P/E RATIO WOULD BE 4
SINCE
8 / 2 = 4
115. TO GET A VALUE FOR YOU, WE NEED
TO USE THE AVERAGE MULTIPLE
ACROSS ALL THE COMPARABLE
FIRMS WHO HAVE BEEN VALUED.
LET’S ASSUME FOR NOW, THAT THE
AVERAGE MULTIPLE TURNED OUT TO
BE 4
116. WITH THE MULTIPLE AND YOUR
PROFIT THIS YEAR, WE CAN REVERSE
CALCULATE YOUR PRICE (VALUATION)
117. IF THE MULTIPLE IS 4
AND YOUR PROFIT WAS 500K, THEN
YOUR VALUATION IS 2 MILLION
PRICE / EARNINGS = MULTIPLE
PRICE = MULTIPLE X EARNINGS
2M = 4 X 500K
128. THERE ARE 3 WAYS TO VALUE YOUR
FIRM:
1. WHAT YOU OWN (USE ASSETS –
LIABILITIES) – USED FOR LIQUIDATION
2. WHAT YOU’LL EARN IN THE FUTURE (USE
NET PRESENT VALUE) – USED FOR
INVESTMENT
3. WHAT THE MARKET SAYS (USE P/E RATIO) –
USED FOR ACQUISITIONS
129. SHARE THIS DECK
& FOLLOW ME(please-oh-please-oh-please-oh-please)
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131. CREATIVE COMMONS ATTRIBUTIONS
Dr. Evil: http://www.flickr.com/photos/bpage/
Attribution Slide: http://www.flickr.com/photos/21572939@N03/
Please note that all content & opinions
expressed in this deck are my own and don’t
necessarily represent the position of my
current, or any previous, employers