How To Valuate Venture Capital Financing

Each company has its own value. Value evaluation is the judgment of a capital market participant to a company's value in a specific stage.

The valuation of non-listed company, especially start-ups, is a unique and challenging job. Its processes and methods are usually combined with science and flexibility.

In the capital operation of Equity Financing or Merger Acquisition (MA), investors should be interested in the company's business, scale, development trend and financial status. On the other hand, they should also recognize the company's valuation of the shares to be sold.

This is the same as the reason we buy things in the market, we are satisfied with the quality and function of the products, and we can accept the price.

There are some quantitative methods for valuation of company valuation methods, but some qualitative factors should be taken into consideration in the process of operation. Traditional financial analysis only provides valuation reference and determines the possible scope of company valuation.

According to the market and company situation, the following valuation methods are widely applied: 1, comparable to the company law, first choose the listed companies that are comparable to or comparable to the non-listed company industry, calculate the main financial ratios based on the share price and financial data of similar companies, and use these ratios as market price multipliers to infer the value of Target Corp, such as P/E (price earnings ratio, price / profit), P/S method (price / Sales).

In the domestic venture capital (VC) market, P/E is a common valuation method.

Generally speaking, there are two kinds of price earnings ratio of listed companies: TrailingP/E, which is the profit of the current market value / company's last financial year (or the profit of the first 12 months).

The forecast price earnings ratio (ForwardP/E) is the current market value / profit of the company in the current financial year (or the profit in the next 12 months).

Investors are the future of investing in a company, which is the current price of the company's future business ability. Therefore, they use the P/E method to estimate the value of the company: the value of the company is forecast earnings ratio * the profit of the company in the next 12 months. The profit of the company in the next 12 months can be estimated by the financial forecast of the company. Then the biggest problem of valuation is how to determine the forecast price earnings ratio.

Generally speaking, the forecast price earnings ratio is a discount of historical price earnings ratio. For example, the average historical earnings of an industry in NASDAQ is 40, and the forecast price earnings ratio is about 30. For the same industry and the same size non-listed company, the reference price earnings ratio needs to be discounted again. About 15-20, for the same industry and smaller start-ups, the reference price earnings ratio should be reduced again by 7-10.

This is also the current mainstream foreign investment in VC, which is roughly P/E times the valuation of enterprises.

For example, if a company forecasts a profit of $1 million in the next year after financing, the company's valuation is roughly $700-1000. If the investor invested $2 million, the company's shares would be about 20%-35%.

P/E is meaningless for companies with income but no profit. For example, many start-up companies can not achieve positive profit forecasts for many years, so the P/S method can be used for valuation, roughly the same as that of P/E.

2, comparable paction law selects companies that are invested and acquired in the same period as the start-up company and in the appropriate period before the valuation. Based on the pricing basis of financing or merger and acquisition paction, the company obtains useful financial or non-financial data, and finds out some corresponding multiplier of the cost of investment, thereby assessing the Target Corp.

For example, A company has just got financing, B company is the same as A company in business field, and its business scale (such as revenue) is twice as large as that of A company. Then the investors' valuation of B company should be about twice that of A company.

For example, when Focus Media is acquiring the framework media and gathering media separately, on the one hand, it is based on the market parameters of different segments. On the other hand, the valuation of the framework can also serve as the basis for valuing the crowd.

Compared with the paction law, it does not analyze the market value, but only the average premium level of the similar companies' financing and acquisition price, and then calculates the value of Target Corp with this premium level.

3, cash flow discount is a more mature valuation method. Through the future free cash flow and capital cost of Forecast Ltd, the company's future free cash flow is discounted, and the company value is the present value of future cash flow.

The formula is as follows: CFn:, annual forecast free cash flow, r: discount rate or capital cost) is the most effective way to forecast risk, because the forecast cash flow of start-up companies is very uncertain, and its discount rate is much higher than the discount rate of mature companies.

The capital cost of start-ups seeking seed capital may be between 50%-100%, the cost of capital for early start-up companies is 40%-60%, and the cost of capital for late start-up companies is 30%-50%.

In contrast, companies with more mature records have a capital cost of 10%-25%.

This method is applicable to more mature and late Private Held Company or listed companies, such as Carlyle's acquisition of Xugong Group.

The 4 asset law is the assumption that a prudent investor will not pay more than the same cost as the Target Corp.

CNOOC, for example, bid for Unocal, valuing the company based on its oil reserves.

This method gives the most realistic data, usually based on the funds spent on the development of the company.

Its disadvantage lies in assuming that value is equivalent to the funds used, and investors do not consider all intangible values related to company operation.

In addition, the asset law does not take into account the value of future economic returns.

Therefore, asset law results in the lowest valuation of the company.

The mystery of venture capital valuation is 1, and the return requirement is in the field of venture capital. It seems that they are very profound and mysterious about the valuation of the company, but ironically, their valuation methods are sometimes very simple.

The investment valuation of venture capital valuation is 10 times that of the early investment project VC, and the requirement of expansion period / late investment is 3-5 times.

Why is it 10 times that it looks a little windy? The standard venture capital portfolio is as follows: (10 investment projects): VC, 4 failures, 2, flat or slightly profit and loss - 3 3 times 2-5 times earnings, 1 8-10 times returns, but even though the company hopes that all investment companies can become the next Microsoft and next Google, the reality is so cruel.

VC requires 10 times the number of successful companies to make up for other failed investments.

The return on investment is related to the investment stage.

The VC of early investment companies usually pursue more than 10 times of returns, while the VC of the mid and late investment companies usually pursue 3-5 times returns.

VC assumes that after 4 years of investing in an early company, the company will be listed or acquired by US $100 million, and there will be no subsequent financing.

Using the 10 times return principle, VC's post-moneyvaluation is $10 million.

If the company's current financing amount is $2 million and reserves a $1 million option, the VC's pre investment valuation (pre-moneyvaluation) is $7 million.

The experience of VC is about $1 million to $20 million, usually in the range of $3 million to $10 million.

Usually, the first round of financing for start-ups is US $500 thousand to $10 million.

The final valuation of the company is determined by the expected return of investors and the competition between investors.

For example, a Target Corp is sought after by many investors. Some investors may be willing to lower their investment return expectations and get this investment opportunity at a higher price.

The 2 option is to invest in a pre investment valuation of the invested company. Usually, he asks for the shares: the shares of the investors are estimated to be $5 million after investment, and the investor's investment is 1 million dollars, and the investor's share is 20%. The valuation of the company's investment should be $4 million in theory.

However, investors usually require the company to take about 10% of the shares as an option, and the corresponding value is about 500 thousand dollars. Then the actual valuation before investment has changed to 3 million 500 thousand dollars: 3 million 500 thousand, the actual valuation +$50 million options +100 million, cash investment =500 million after investment valuation, the corresponding surplus of the remaining shares of entrepreneurs is only 70% (=80%-10%).

In the pre valuation, investors can get three benefits: first, the option only dilute the original shareholders.

If the option pool is in post investment valuation, it will dilute the common stock and preferred shareholders in proportion.

For example, the 10% option is provided in the post investment valuation, then the investor's share becomes 18%, and the entrepreneur's share becomes 72%: 20% (or 80%) x (1-10%) =18% (72%).

Second, the pool of options is a bigger share of the pre investment valuation than expected.

It looks smaller than reality because it applies the ratio of post investment valuation to pre investment valuation.

In the above example, the option is 10% of the post investment valuation, but the 25%: 500 thousand option, which occupies the pre investment valuation, is /400 million. The pre investment valuation is =12.5% third. If you sell the company before the next round of financing, all options that are not issued and not granted will be cancelled.

This reverse dilution benefits all shareholders, even though the original shareholders bought them at the beginning.

For example, 5% of the options are not granted, these options will be allocated to shareholders according to the share ratio, so investors should be able to get 1%, and the original shareholders get 4%.

The shareholding structure of the company turns into: 100%=, the original shareholder 84%+ investor 21%+ team 5%, in other words, some of the entrepreneurs' pre investment value has entered the pocket of investors.

The venture capital industry calls for options to come out before investment, so the only thing entrepreneurs can do is to identify a smaller pool of options according to the company's future talent introduction and incentive plan.

3, gambling on the terms and conditions of a lot of investors to the company to use the P/E multiplier method, currently in the first round of domestic financing, investment valuation roughly 8-10 times, this multiple of different industries and different stages of development of the company is not the same.

The investment valuation (P) =P/E multiples of next year's forecast profit (E) will be estimated to be $10 million when the value of investment is estimated to be $1 million. If the profit is estimated to be $1 million, the estimated profit will be $1 million.

If the investment is 2 million, the share of the investor is 20%.

If investors and entrepreneurs can reach agreement on P/E multiple, the biggest negotiation point of valuation is profit forecast.

If there is a big gap between the investor's judgement and the entrepreneur's financial forecast (of course, the investor thinks that the entrepreneur can't make a profit forecast), there may be a gambling clause (RatchetTerms) in the investment agreement, and the company's valuation will be adjusted. According to the actual practice, Li run will recalculate the company's value and share ratio: after the investment valuation (P) =P/E multiplied by the next year's actual profit (E), if the actual profit is only 500 thousand dollars, the value of the investment will be only 5 million dollars. Correspondingly, the share that the investor should allocate should be 40%, and the entrepreneur needs to take out 20% of the shares to compensate the investors.

2 million /500 million =40%, of course, this gambling situation is relatively thorough, some investors will be relatively "friendly" to some, to a bottom insured company valuation.

For example, if the investor asks to adjust the valuation according to the formula, but the commitment value is not less than 8 million, if the company's actual profit is only 500 thousand dollars, the company's valuation is not 5 million dollars, but 8 million dollars, the investor should get the shares 25%: /800 =25% 2 million.

The conclusion is that the valuation of the company is the result of consultation between investors and entrepreneurs. There is no fair value in terms of opinions and intelligence. The valuation of a company is affected by many factors, especially for start-ups, so valuations should also consider the value added services of investors and other non price provisions in investment agreements. The most important point is that time and market do not wait for people, and do not miss investment and investment opportunities because of the divergence of valuation between the two sides.