VALUATION EXERCISE- BUILDING A CAP TABLE

1

Key Factors Influencing Valuation

Valuation Process • Valuation is not solely quantitative

• Qualitative factors also come into play

• A “contextual factor analysis”, which describes in what context a valuation is taking place, is needed to properly value a company

• Contextual factors include cash flow (current and historical), who’s involved, availability of capital, and the team

– Many other factors

2

Contextual Factors

• Cash flow – historical, present, future – Current cash flow is most important

– Future cash flow is unknown and primarily the result of efforts of the new owner

– Amount of debt the cash flow can service

• Who’s doing the valuation? – If VC, wants to keep value low

– If entrepreneur, wants to push number up

Contextual Factors

• Public or private? – Public companies are valued higher due to

liquidity in the market and better information

– Private companies lack liquidity and provide limited information

• Availability of capital. – The greater capital available, the higher the

valuations

– Supply vs. demand – greater capital chasing, fixed number of opportunities will compete

3

Contextual Factors

• Is it a strategic or financial buyer? – Generally, strategic buyers value companies

higher than financial buyers

– Availability of capital for private equity funds may swing the pendulum

• Speculation – Value based on projected future performance can

drive valuations up

– “Hype vs. Hope”

Contextual Factors • Company stage

– Early stage = lower valuation

– Less risk with later-stage companies

– Best advice, develop product and market traction as long as possible before seeking outside capital

• Auction – Buyers bidding on company drives valuation

– MSFT outbid Google/Yahoo for 1.6% of Facebook @ $240 million

• Valuation $15 billion! 300 X revenue multiple!

4

Contextual Factors

• Economic conditions – Valuations increased 5 consecutive years to 2000

– Coincided with sustained U.S. economic growth

• Reason for selling – Personal or business pressures?

– Settle estate, owner death, etc.

• Tangible/intangible assets – Mfg. companies – tangible assets

– Technology companies – intangibles

Contextual Factors

• Industry – Similar companies in different industries can have

significantly differing valuations

– Internet/e-commerce vs. the field

• Quality of management team – Startup experience valued in early stage

companies

– If existing team is viewed as weak, valuation can be lower

5

Summary

• Valuations of companies, particularly early stage valuations, are highly subjective

• Valuations are both quantitative and qualitative

• Contextual factors play a large role