Determining Valuation Multiples

Fred Wilson

Last week on MBA Mondays, I talked about valuing an internet marketplace business. In that post, I talked about using 1x gross marketplace transactions and 20x EBITDA as multiples to determine value. In the comments, I was asked about multiples for other sectors. That's a good question so I figured I'd show how to calculate multiples for various sectors. 

 



Filed Under:
Collection: Funding
Category: Valuations & Price

Pricing A Follow-On Venture Investment

Fred Wilson   

Let's assume we have a portfolio company. I will call it fit.sy. It is a marketplace for fitness experiences. We invested in it last year as it was

getting ready to launch. A year later the business is scaling nicely and needs more expansion capital. The founders don't really want to go out and do a fundraising process. So they have asked the existing investors to make them an offer for an internal round. They believe they need $3mm of expansion capital to get them to cash flow breakeven. So now the VC firm (us) needs to figure out what is a fair price.



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Collection: Funding
Category: Valuations & Price

Best Practices for Raising a VC Round

 Chris Dixon

Come up with what minimum valuation you’d be happy with but never share that number with any investor.  If the number is too low, you’ve set a low ceiling. If your number is too high, you scare people off. Just like on eBay, you only get to your desired price by starting lower and getting a competitive process going. When people ask about price, simply tell them your last round post-money valuation and talk about the progress you’ve made since then.

 



Filed Under:
Collection: Funding
Category: Valuations & Price

The Importance of Investor Signaling in Venture Pricing

Chris Dixon

Suppose there is a pre-profitable company that is raising venture financing. Simple, classical economic models would predict that although there might be multiple VCs interested in investing, at the end of the financing process the valuation will rise to the clearing price where the demand for the company’s stock equals the supply (amount being issued). Actual venture financings work nothing like this simple model would predict.  In practice, the equilibrium states for venture financings are: 1) significantly oversubscribed at too low a valuation, or 2) significantly undersubscribed at too high a valuation.

 



Filed Under:
Collection: Funding
Category: Valuations & Price

Valuation and Option Pool

Fred Wilson

One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, "it's just another way to lower the price". I'll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I'll explain.

 



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Collection: Funding
Category: Valuations & Price

Angel Funding Advice

Mark Suster

If you do plan to raise VC you want to be sure of 2 things in your angel round: 1. Your angels are happy when you do the VC round because it is a “step up” in valuation if possible. 2. You don’t make it harder to raise a VC round because  your angel round was priced too high.

 



Filed Under:
Collection: Funding
Category: Valuations & Price

The Dreaded Question of Valuation

Mark Suster

Whenever I sit on panels and discuss the topic of fund raising the topic of how to handle the discussion of valuation (e.g. how much you’re worth) always comes up. I have very fixed views on this topic although I’ve learned through these discussions that not everybody agrees with me.  Having sat on both sides of the table on many occasions – I’m pretty sure I’m right about this one.

 



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Collection: Funding
Category: Valuations & Price

How Do We Set the Valuation for a Seed Round?

Babak Nivi

A reader asks: “My question is how do we value a company with no sales? I understand it’s an arbitrary valuation but is there anything we can possibly base it on? Is there a “default” valuation for companies in a seed round?” We’ll answer this question with some questions (and answers) of our own.

 



Filed Under:
Collection: Funding
Category: Valuations & Price

Term Sheet: Price

Brad Feld

Obviously the first term any entrepreneur is going to look at is the price. The pre-money and post-money terms are pretty easy to understand. The pre-money valuation is what the investor is valuing the company today, before investment, while the post-money valuation is simply the pre-money valuation plus the contemplated aggregate investment amount. There are two items to note within the valuation context: stock option pools and warrants.

 



Filed Under:
Collection: Funding
Category: Valuations & Price