Apologies - I took three months off to write again. I felt a bit stuck, and hey, I started writing something to share my ‘life canvas’, which I am living and sketching every day. It’s my continuous conquest to learn about this life.
How to value a company?
Valuing a company is probably the trickiest piece in VC/early-stage investing work, as it's a blend of art and science. The art of valuing a company depends upon various factors and variables like financial model, company history, entrepreneur profile, market, story, etc.
The most common ones are market multiples, DCF (Discounted Cash Flows), Scorecard, and Berkus. To read more about various VC Valuation Methodologies:
Berkus Method - meant for pre-revenue startups.
The Risk Factor Summation Method - intended for pre-revenue startups
Scorecard Valuation Method - designed for pre-revenue startups
Comparables Transactions Method - used for pre-and post-revenue startups
Book Value Method - particularly irrelevant for startups as it focused on the "tangible" value of the company
Liquidation Value Method - like Book Value, not very relevant for startups
DCF Method - meant for post-revenue startups
First Chicago Method - based on DCF Method - suggested for post-revenue startups.
Venture Capital Method - meant for pre-and post-revenue startups.
How do VCs make money? Trust me, it’s a tricky business, it just looks sexy.
"On average, VCs expect to see an ROI of at least 10x from new ventures. It is because 67% of companies in a VC's portfolio will either lose money or be unprofitable, meaning that the few that do succeed need to carry their weight. An ROI lower than 10x will most likely result in a loss for the portfolio as a whole."
"VCs receive percentages and not fixed numbers in return for their investments. Any further investment by themselves or by others will lower ROI." The over-dilution is a deadly game, especially if entrepreneurs fund-raise multiple rounds - it's not good for early-stage VCs.
"The optimal amount raised is the maximal amount which, in a given period, allows the last dollar raised to be more useful to the company than it is harmful to the entrepreneur." - Pierre Entremont, an early-stage investor at Otium Capital.
"The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined." — Peter Thiel
[Blog] Schrödinger's Valuation Problem
I am continuously looking for first-time fund managers looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.
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