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How can a tech company invest in startups?
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STARTUP INVESTMENT AND VALUATION
In 2004 Peter Thiel invested $500k in Facebook for 10.2% of the company Thiel’s total Facebook cashout by 2012 > $1bn
What is a startup?
Steve Blank: A startup is a temporary organization used to search for a repeatable and scalable business model. Eric Ries: A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty. Paul Graham: A startup is a company designed to grow fast.
When do angels invest in startups?
What are their motivations?
• getting involved with exciting projects
• reuse expertise without the challenges of managing the project
• work with (and sometimes for) amazing people
• branding themselves as experts in certain spaces
• MAKE PROFIT, as they are investors
Could it work for a company?
• invest resources that otherwise would be wasted
• invest resources that otherwise, even if profitable, would lose you money
• use their internal talent and exper9se in ways you can’t as services provider
• get in touch with entrepreneurial people and poten9al partners
• achieve higher ROIs
Issues to consider?
• Where do you find the startups?
• How do you pick the winners? • How much to invest?
• What legal agreements do you need?
• …?
What do you need?
• access to capital
• proprietary dealflow
• good judgment*
What is a deal flow?
How do you…
• find good deals? • evaluate them?
• process them efficiently?
How do you find good deals?
• Angel investors set up syndicates
• Companies?
• Startcelerate comes with a solution
How do you evaluate a startup?
• idea
• team
• product
• traction
• ?
What kind of transaction you enter?
Investment Pre-money Valuation Post-money Valuation
Why does a startup raise a seed round?
How much of the company will you own?
Investment value Startup value
How much equity?
25% is about the norm* Mark Suster - Partner at Upfront Ventures, the largest venture capital firm in Southern California
How do the valuations look?
*AngelList – Europe
What makes a startup valuable?
Startups build value by:
• getting investment
• building a track-record of financial performance
• making an exit
• real value is known only on exit
• no investor = no value
Do you really have to valuate a startup?
• No
• Cap
• Discount
Valuation methods
• financial
• non-financial
Financial methods:
• Discounted Cash Flow
• Multiples method
• Market valuation
• Comparable transactions
Non-financial methods:
• The VC method (First Chicago)
• The Berkus Method
• The Scorecard Method
The VC method
Terminal value ÷ post-money valuation = return on investment (ROI) Post-money valuation = terminal value ÷ anticipated ROI
The Dave Berkus Method
Five drivers:
• Sound Idea (basic value, product risk)
• Prototype (reducing technology risk)
• Quality Management Team (reducing execution risk)
• Strategic relationships (reducing market risk and competitive risk)
• Product Rollout or Sales (reducing financial or production risk)
The Scorecard Method
Step 1: Gather valuations for other pre-revenue companies in your
sector within your geographic region (i.e. AngelList).
Then, calculate the average of those valuations.
Step 2: Valuation Calculation using these comparison factors
• Strength of Entrepreneur and Team
• Size of the Opportunity
• Product/Technology
• Competitive Environment
• Marketing/Sales/Partnerships
• Need for Additional Investment
• Other factors (great early customer feedback)
The Scorecard Method
Q&A Session
Our focus: European startups
• seed stage
• early stage
How can Startcelerate help you?
What we do
• build a large pool of startups
• provide tools for finding interesting startups
• assist the investing company throughout the deal flow
How can Startcelerate help you?
Risks: The inherent risk of failure Startcelerate gives you control Even a failed investment is an opportunity to: get to know talented professionals in different markets perform a product exercise in real world conditions get visibility and network in different environments …so you can leverage investments to develop your brand and existing business.
How can Startcelerate help you?
Opportunity: What do you do with the profits?
Through Startcelerate you can use your resources in a way
that can bring you much more value on the longer terms than
you can get in the usual ways.
How can Startcelerate help you?
Why does this matter?
• you already have something very valuable
• investing in startups opens new doors and opportunities
• you get in touch with talent abroad
• it makes sense to Google
• it made sense to Whatsapp
How can Startcelerate help you?
What does it take?
You have to be able to allocate sufficient resources to develop what a startup needs (minimum 100-200 man-hours/year)
How can Startcelerate help you?
What does Startcelerate provide for you?
• a growing pool of startups
• legal support
• a monitoring tool
• further connections
How can Startcelerate help you?
Hands-on session
Conclusions
Contact
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