- Today, we're gonna talk about what your startup is worth.
Maybe you're raising money, maybe there's an exit,
or maybe you just wanna know
what the heck your startup's worth.
Is it a billion?
Is it nothing?
Who knows?
- This is Raw Startup. (intense music)
- I've seen the full journey from raising a tiny angel round
to raising a mammoth 155 million D round for Vivino.
I've raised $200 million for Vivino alone
and finding the right valuation is always a challenge.
But there are ways and methods to find that valuation.
and that's what I'm gonna show you today.
I'm gonna show you three different methods
for putting a valuation on a startup
for both funding and exit.
Two of them are mostly for startups,
the third one is more for a mature company.
I'll give you very specific methods
that will enable you to set a value on your startup.
I've done many, many rounds of raising money,
and it's crucial to have some tools to set the right value.
The right value being, you know,
a very, very high evaluation.
First, we look at the funding method evaluation.
It could be used all the way
from an angel round to a B or C round.
Secondly, we have the revenue method.
The revenue method could be used for a startup
that has some revenue.
Doesn't have to have a lot of revenue,
but just some revenue.
Finally, it's going to be the P/E method,
which is used more for mature companies.
Good. Let's dig into the funding method.
Basically evaluation that's based on,
how much funding is needed for the startup
and how much equity are you willing to give investors?
This is very much based on theory or even gut feeling
than a specific scientific method.
Some people will say it's more art than science.
However, this is very much what's used for the early stages,
specifically angel, seed and A-rounds.
This method is strictly used for a fundraise.
It can not be used for an exit.
Okay. Let's take it and see how the value's actually found.
Start by asking yourself how big an investment
does the startup need to go to the next level,
usually to be able to run for two years or so.
Let's say that's 1 million, for example,
you need 1 million to get to the next level.
Then the next question is how much are you willing
to give to investor for that?
Usually that number is around 20%, usually not lower than 10
and preferably not higher than 30%.
Now that pretty much determines
how much the startup is worth.
If, for example, it's 1 million for 20%,
the value is 5 million.
Do I need to go through the math?
Okay. Look at this.
1 million divided by 20%, 5 million.
Obviously the startup is looked at as a whole,
but there are no real financial models made.
It is a complete look at the startup.
All the usual things, product, team, traction,
and so on and so forth.
The most important thing though,
might actually be potential.
How much potential is actually in this startup.
People are willing to pay a lot to get into startups
where they see this one has a potential
to become a billion dollar company.
The problem is obviously if the investor says,
no, no, no, this is not worth 5 million.
Then you either have to ask for less money
or give away more equity.
And at that point, the value of the startup
can actually change radically.
Let me show you an example.
Let's say you go down to 750,000 instead of 1 million.
You give away 25% instead of 20%.
Now the startup's actually worth 3 million
instead of 5 million.
Again, this is all theory.
It's all about what you can build with that money.
And where does that leave us
when it comes to valuation of early stage startups?
Let me show you some typical examples.
At an angel round 500,000 to 3 million.
At a seed round 3 million to 15 million.
At an A-round between 20 and 75 million.
At a B-round between 50 million and 250 million.
These numbers change all the time.
When we did a similar video a few years ago,
these numbers were much smaller.
I tell you, valuations are crazy high these days.
For a C round or later different methods are usually used.
So when you do fundraise,
you're most likely to end in one of these buckets.
Then it's just a matter of how much money
do you want to raise and how much
are you willing to give away.
Be aware that this is somewhat of a theoretical value.
You probably cannot sell the company for this kind of money.
It is about faith in the future.
Faith in what the team can do for the future.
If that team falls apart,
the company could be worth nothing.
Next is the revenue model.
Now let's take a look at the second method,
the revenue model.
Basically you use the revenue
to determine the value of a startup.
Usually this would be a company with revenue,
but not profitable.
Well, the revenues are given so that's pretty easy.
To signal this is about the future,
very often the revenue used is the next 12 months
or whatever you estimate the revenue
to be in the next 12 months, also known as NTM.
So how do you get from revenue to valuation?
Well, you need a multiplier.
We use a multiplier that we multiply with the revenue
to get the actual valuation.
The trick is to find the multiplier.
And I promise you this multiplier can vary a lot,
all the way from one up to over a hundred.
I've built this graph in two dimensions
to find the multiplier.
The two dimensions we use for the multiplier,
are growth and recurrence.
I'll get into what recurrence means in a second.
On the Y axis, we have growth.
How fast does the startup grow?
The higher the growth rate, the higher the multiplayer.
I would say the middle here is around
25% growth year over year.
So if you're over 25%, you're over the line,
if you're under 25%, you're under the line.
On the X axis, we have recurrence.
This means that any revenue that is very likely to reoccur
gives a higher multiplier.
So for instance, if you have a SAAS business model,
you know, software as a service based on subscription,
you have a very high recurrence.
It's very likely that the customers
keep buying year after year.
That's a high recurrence,
which gives a high multiplier.
On the other end of the X axis
we have something like a consulting business,
that mostly is one off revenue.
Consulting has a low recurrence
and therefore a low multiplier.
Another extreme product will be a product like Legacy Box.
They convert old photos into digital.
And you think to yourself,
how often do you really need to convert
your old photos into digital?
Maybe only once in your life.
That's a low recurrence business.
Okay. Let's take a look at the four quadrants here.
In the bottom left corner,
you find the lowest multiplier.
This is a company with low growth and little recurrence.
Growth here is less than 25% a year.
This is the worst quadrant and you should expect
a low, one to two times multiplier.
This is some sort of product that's sold one-off,
like the Legacy Box I told you about earlier
that has very limited recurrence.
On the top left, we have high growth and low recurrence.
This could be a consultant company
with a growth of over 25% a year.
Multipliers in this quadrant
is usually between two and five times.
Now let's go to the bottom right
and this is an odd one that doesn't happen much.
Low growth and high level of recurrence.
Things that have a high level of recurrence
usually have a decent growth, so this is rare.
Multiply product between one and 10.
Finally, we have the top right corner,
the land of milk and honey.
This, my friend is a great place to be.
We have good growth and high level of recurrence.
The companies are usually valued very, very high.
Let's take a typical SAAS company,
a software as a service company.
They can easily get a multiplier of 20 here.
Take a company like Vivino.
Good growth, but not subscription.
It turns out when people buy a bottle of wine,
they drink it and then they need a new one.
So pretty good recurrence.
And Vivino will get a 12 to 15 multiplier here.
Now you can see extreme multipliers here.
Most of them are between 10 and 100, in some cases over 100.
If that happens, it's because the growth is crazy
and the recurrence very, very strong.
So over 100, it's rare, but it does happen.
Now you have the multiplier.
All you have to do now is multiply the revenue
with the multiplier and you have the valuation.
Let's say you have a SAAS company with a 50 X multiplier
and 1 million in revenue.
Simple. You have a $50 million valuation.
Not bad.
Boom done. That's how you use the revenue method.
If you have a little bit of revenue in your startup,
try this method just for fun.
Put whatever you get in the comments and I will reply to it.
Finally, we have the third method,
the P/E method, also known as the price earning method.
This is a method commonly used by more mature companies.
It can be used both for private or public companies,
but the company has to be profitable.
This method can not be used if the company isn't profitable.
The method in itself is pretty simple.
You take your earnings, which is your profits
and multiply it with the P/E ratio.
The trick here is to find the P/E ratio,
also known as a multiplier in this case.
Normally the P/E ratio is between 10 and 30
and normally software companies are on 20.
The cool thing here is that you can look up
any listed company and see their P/E ratio for inspiration.
With that, let's take a look at a few examples.
Oracle, currently at 19. I think that makes sense.
Apple is around 28, also makes sense.
Tesla, on the other hand, is at 400. Crazy.
What it means is the investors really believe in the future.
They're saying, it's fine that Tesla
doesn't make any money right now,
but we think they'll make a lot of money in the future.
Amazon is over 50, also very, very high.
But they're known to not be that profitable,
but invest in the future
and the investors are buying into that.
If you're a software company,
a typical value here would be 20.
And all you have to do is multiply your profit
with the 20 multiplier and you have your valuation.
As an example, you make 1 million in profit
and have a multiplier of 20.
Multiply those two, and you have the value of the company
of 20 million. Pretty simple.
Okay. Let's take a look at the full overview here.
You will most likely use the funding method
or maybe the revenue method for an early stage startup.
Try them out and let me know what you think in the comments.
For the funding method,
there's usually little to no revenue,
and you have to use that method.
When it comes to the revenue model,
they're usually very, very high growth, but no profit.
That's when you have to use the revenue model.
Then when it comes to more later stage,
you can use the P/E method
and that requires you're profitable,
but it doesn't require that much growth.
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Thank you very much for watching.
Now stop watching and go build something.
(upbeat music)