Can anybody suggest any good resources which can help me evaluate a startup company? I am not able to find any good resources just by google. Actually, I am planning to buy some stake in a startup company which my friend started one and half years ago. Still operating below cost but eventually things will improve,hopefully. I am planing to put capital and buy some stake but at this stage I will not be able to actively involved at operational level. But, eventually I would like to join active management may be after 2-3 years. Though, I will take 1-2 project under my belt which I can oversee on my own along with others. Business model is kind of dotcom but it is heavily services oriented so brick-mortar operation is equally important. So far, it has generate revenue of over $100,000. Any thought would be really appreciated.
You would value it the same way you would value any other company - but based upon a description you may want to look into liquidation value. Estimate the percentage you would expect to collect upon asset sales. Cash and marketeable securities = 100%, A/R will depend on the kind of customers, ditto to inventory (But since this is service oriented then I doubt there is much inventory), PP&E, etc. Net out the liabilities, and voila you’re very own residual equity claim. But on a serious note, discounted cash flow analysis. No need to get creative with valuation methods and create a smokescreen and say to yourself…well maybe since it doesn’t make any $ then I’ll just assign it a multiple to sales, etc. (which have no relation to profitibility or intrinsic value). Relative valuation metrics are not appropriate for start-ups. I-bankers use RV metrics when they realize that the company is a pile of dog cr@p. In this case a DCF is more unstable due to the likelihood of using overly optimistic forecasts. Just use a high required rate of return and be conservative with respect to CF assumptions.
ValueAddict Wrote: ------------------------------------------------------- > You would value it the same way you would value > any other company - but based upon a description > you may want to look into liquidation value. > Estimate the percentage you would expect to > collect upon asset sales. Cash and marketeable > securities = 100%, A/R will depend on the kind of > customers, ditto to inventory (But since this is > service oriented then I doubt there is much > inventory), PP&E, etc. Net out the liabilities, > and voila you’re very own residual equity claim. > > > But on a serious note, discounted cash flow > analysis. No need to get creative with valuation > methods and create a smokescreen and say to > yourself…well maybe since it doesn’t make any $ > then I’ll just assign it a multiple to sales, etc. > (which have no relation to profitibility or > intrinsic value). Relative valuation metrics are > not appropriate for start-ups. I-bankers use RV > metrics when they realize that the company is a > pile of dog cr@p. In this case a DCF is more > unstable due to the likelihood of using overly > optimistic forecasts. Just use a high required > rate of return and be conservative with respect to > CF assumptions. Thanks for your input. As rule of thumb, a business should be worth at least the residual equity. But, I think it is good for inventory based company like retail or where most of the investment are in the form of fixed assets like hotel etc. It is kind of difficult to value services model based on residual equity. I am not sure how much it makes sense to value based on DCF. Because CF projections depends on growth rate and inital growth can be 100-1000% every year which can badly distort the model. But, it is something that can be tried based on appropriate assumptions. Capital Budgeting can be an issue because there are few stand alone projects which are in pipeline and working on it’s profitability would be difficult at this stage. But, we definitely need to consider the initial capital outlay. To some extent it can be a sunk cost. My concern at this stage not to get too much into fancy valuation model. I am looking at how value the Sweat Equity and Capital Equity of the person who took initative to start the venture and face the initial stage hardship. Suppose that person forked out $50,000 of equity so far. Does it make sense to get equal stake if I fork out $50,000. I don’t think so, ideally. So, my question who should he get the premium and what should be the basis. Still the assumption is that company is not profitable and may take a while, may be 1 year at least to be able to operate at cost. And, how should I bargain the kind of value I may bring to the table. Is it justified at this stage to ask premium for my skills and expertise?
Your equity investment should be valued on a DCF (relative value methods are essentially a short cut to this measurement). A DCF analysis is challenging, particularly as you mention, because the future cash flows are highly uncertain. This uncertainty is why you should require a higher rate of return. To improve you DCF analysis, you should probability weight the different scenarios. If you do not expect this venture to generate positive cash flows, then I think you should consider whether your investment applies as a 501c3.
joekinde Wrote: ------------------------------------------------------- > If you do not expect this venture to generate > positive cash flows, then I think you should > consider whether your investment applies as a > 501c3. Haha. Too classic.
Thanks Joekinde! I will try to do DCF analysis and factor in multiple scenarios. Can anybody suggest how many years of multiple growth rate should be considered before considering the perpetuity? May be it wouldn’t be important at this stage when I am planning to buy equity but we are also planning to reach out Angel Investors and they will defintily be looking decent ground work before writing a check. So, I have to be ready. I don’t think these expenses would qualify for 501c3.