The presentation from Exit Strategy NYC at tonight’s New York Tech Meetup made me think about alternative ways to raise seed capital. When you’re raising money for your paradigm-shifting, world-changing startup, it can take a long time to build your product and simultaneously convince people with money that your team+product+company is worth funding. You want to meet the right investor, find the right “fit” etc etc etc etc. Months go by, and chip away at the time you’d normally spend building your product and - right - changing the world.
Enter Jonathan and Ashley Wegener. They took a real pain-point (have YOU ever gotten out at the wrong end of the platform in Union Square? Vom.) spent two months riding subway cars and making sweet Adobe Illustrator files and built a very cool iphone app that I have already shelled out $1.99 to download. Is Exit Strategy venture-backable? Nope. But I figure they’ll probably make around $100-$250K from selling this app to New Yorkers and tourists alike. I bet the whole process was about 3-4 months start to finish.
Now, they could spend the cash on boats and dinners and houses, or double-down and use the cash to build their “big vision”. They’ll probably make enough money from ExitStrategy to get through that painful product-development period without starving, they have already proven that they can execute, AND they have built a product that will make a lot of people’s lives just a little bit easier.
Sounds like win/win/win to me.
Now go buy the app.
Stephen Marcus had an interesting piece on the New Atlantic Ventures blog (disclosure: I am currently a summer intern at NAV) about seed financing. After drilling down into institutional seed financing between January 2006 and June 2009 by region (New England, NYC, San Francisco, and DC - the four regions with the most VC money floating around) his data showed that while seed financing - which he defines as less than $1m - is down an insane 80.2% in Silicon Valley in the first six months of 2009 versus the same period in 2008, it’s up in both DC and NYC. See the graph for a better picture - it seems that the Valley and New England have put more capital toward larger rounds and have cut back on seed-stage deals.
Why the shift toward larger rounds? Safety. If a company is getting a $5m+ round of VC financing, chances are they are fairly established and therefore less of a risk (or rather, a different *type* of risk) for the investor. I see it as a knee-jerk reaction to the economic crisis - VCs were more inclined to put money toward more “proven” investments.
As a new admirer of the NYC startup scene, I’m happy to see New York (and DC as well) embracing seed financing - it only adds to the argument that Silicon Alley is booming once again.
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(Image Credit: Stephen Marcus)
Company valuations.
Now that I’ve been staring at pro-formas for weeks and have officially re-kindled my love affair with my TI-83, I am sort of in love. What’s great about MIT is they don’t spoon-feed material - we got a packet of financial statements and just had go at it. Mk, on to the good stuff.
Apparently there are 20+ ways to do valuations, but they all fall into five general buckets.
For the uninitiated, here is my attempt at a breakdown:
1. Earnings Multiples (PE, EBIT, EBIAT): Methods that employ an industry-based multiple to the earnings of a firm. If a firm has no income (ahem, Twitter), its valuation using this method would be effectively zero. The most popular earnings multiples valuation uses a company’s price:earnings (PE) ratio — if you multiply the PE ratio and the company’s net income it will give you a general idea of the value of the business.
2. Asset Multiples (Liquidation Value as Percentage of BV, Replacement Values): This is when you liquidate the assets of the company, pay off your liabilities, and see how much is left.
3. Discounted Cash Flow (DCF): You use future free cash flow predictions, then discount them back to adjust for the time value of money. The most popular method of discounting uses the weighted average cost of capital - or “WACC”. There are a lot of WACC jokes in business school, and aren’t they just so hilarious? (You wonder why the MBA has taken such a reputational hit lately).
4. Comparables: Exactly what it sounds like. Use the valuation of similar (ahem “comparable”) companies to arrive at a valuation. Simple comparables worksheet: here.
5. Contingent Claims: This type of valuation involves derivatives (options). And that’s all I’m going to say about that.
So how are early-stage tech companies valued? If you have little to no revenue, earnings multiples and dcfs are sort of useless, and trying to ascribe value to site traffic and “intangible assets” is an onerous process.
This paper written by Cogent Valuation lays out what they call the “Early-Stage Technology Company Valuation Paradigm” - it’s a fairly straightforward explanation of their valuation process for these types of companies (though I sort of loathe excessive use of the word “paradigm” especially in reference to already hard-to-grasp topics like valuation).
This is a new topic for me, but I’m hoping by the end of my time at school I can produce the following post: “HotorNot: An Analysis of Valuation Methods for Early-Stage Technology Companies”. Stay tuned…
