Valuation continued

The focus here is on the valuation of seed stage and early stage venture firms. In traditional environments, the standard methods used are Discounted cash flow, comparable transaction multiples and trading multiples based on a firm factor.

And now the VC environment. Out of the ten firms invested in, 4 will loose their shirt, 2 will break even+/-, 3 will gain in the range of 2-5x and 1 will be the blockbuster 8-10x. (A report talks of VCs aiming for 10x and P/E firms aiming for 3-5x due to a lower risk profile). Due to this inherent variability in revenues, DCF cannot be the recommended approach even with the consideration of multiple scenarios. What then?

One of the approaches - The Cost Basis Valuation - is deciding the cost involved in developing the venture.

The Final Valuation approach entails determining the valuation at the end of, say, 5 years. Then determine the capital to be invested for a 10x return. You have the pre-money valuation and you determine the post money valuation and invest accordingly.

Interesting read - the original article. it even had quotes from an ivvestor putting the average IPO in the US markets at $180 million and an average M&A valuation at $120 million, 90% of the exit.

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