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Venture Capital Issues
With more slides on valuation
Weakening value proposition of VC
Biotech: The next bubble?
• Pre-2010 biotech “too
risky” for return potential
– since 2010, Nasdaq
Biotech Index has
outperformed other
investment sectors by
over 100%
• Strong IPOs in 2010-2012
• High M&A activity for
biotech firms
• JOBS Act has greased the
Angel investor valuation techniques for
seed stage companies
Market multiple
Discounted cash flow
Valuation by stage
• Calculate how much it would cost to build
another company just like it from scratch – the
idea is that a smart investor wouldn't pay more
than it would cost to duplicate.
• The cost-to-duplicate a software business, for
instance, might be figured as the total cost of
programming time that is gone into designing its
• Problem: Doesn’t reflect future earnings potential
of company and ROI
Market multiple
• Values the company against recent acquisitions of similar
companies in the market.
• Example: mobile application software firms are selling for
5x sales. Knowing what real investors are willing to pay for
mobile software, you could use a five-times multiple as the
basis for valuing your mobile apps venture, while adjusting
the multiple up or down to factor for different
characteristics (Note: if your mobile software company, say,
were at an earlier stage of development than other
comparable businesses, it would probably fetch a lower
multiple than five, given that investors are taking on more
• Problem: Difficult to find comparables
Discounted cash flow
• For most startups – especially those that have yet to
start generating earnings – the bulk of the value rests
on future potential.
• DCF involves forecasting how much cash flow the
company will produce in the future and using an
expected ROI to calculate how much that cash flow is
worth. Startups get higher discount rate to account for
high risk company fail to generate sustainable cash
• Problem: depends on the analyst's ability to forecast
future market conditions and make good assumptions
about long term growth rates
Valuation by stage
• “Rule of thumb" values are typically set by the
investors, depending on the venture's stage of
commercial development.
• The further the company has progressed
along the development pathway, the lower
the company's risk and the higher its value.
Valuation by stage
• Many private equity firms will utilize an approach
whereby they provide additional funding when
the firm reaches a given milestone.
• For example, the initial round of financing may be
targeted toward providing wages for employees
to develop a product. Once the product is proved
to be successful, a subsequent round of funding is
provided to mass produce and market the
Valuation by stage examples
Estimated Company Value
Stage of Development
$250,000 - $500,000
Has an exciting business idea or business
$500,000 - $1 million
Has a strong management team in place to
execute on the plan
$1 million – $2 million
Has a final product or technology
$2 million – $5 million
Has strategic alliances or partners, or signs
of a customer base
$5 million and up
Has clear signs of revenue growth and
obvious pathway to profitability