BlueBook - A Startup Valuation Story

A STARTUP VALUATION STORY

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Tell the story behind the numbers

STARTUP VALUATION: ROUND A FINANCING Tell the story behind the numbers

Year 5 Sales Profit Margin Net Profit In Year PE(multiple) Required Rate of Return Terminal value on Exit Startup Valuation Initial Investment Equity Stake Current Outstanding Shares Total Outstanding Shares VC Owns # Shares Share Price Pre-Money Valuation Post-Money Valuation

2,500,000 15% 375,000 5 20 50% 7,500,000 987,654 500,000 50.63% 100,000 202,532 102,532 4.88 487,654 987,654

The co-founders of Citydine, a dining app startup have forecasted annual sales of £2.5 million in 5 years. Comparable public companies in their industry are valued at 20x price-earnings ratio and earn profit margins of 15%. Expected annual profit at Citydine in Year 5 is predicted to be £375,000 (£2.5 million x 15%). Citydine Exit Value = PE Ratio x Year 5 Profits 20 x £375,000 = £ 7.5 million Citydine valuation today: Citydine Exit Value / (1 + Investors’ Rate of Return)^No. Years Startup Valuation Today = £7.5 million / (1+ 50%)^5 = £987,654 Citydine has attracted significant interest from angel investors. These investors have a required 50% rate of return for ventures with this risk profile. The co-founders sought £500,000 investment from angels. As such, the angels would own (£500,000 / £987,654) = 50.63% equity. As Citydine’s valuation (post-money) was £987,654, the pre-money valuation was £987,654 – £500,000 = £487,654 The co-founders had initially incorporated Citydine with 100,000 shares before the financing round. Following the investment round, the total number of shares in the business increased to 100,000 / 50.63% = 202,532 of which the angels owned 102,532 (202,532 – 100,000). With a valuation of £987,654 and 202,532 shares, the price per Citydine share until the next round of investment was £4.88.

STARTUP VALUATION: ROUND B FINANCING Tell the story behind the numbers

Overview

Net Income at Exit Year Term PE(multiple) Shares Outstanding Before Investment

375,000 5 20 100,000

Company Value at Exit Shares Outstanding After Final Round Terminal Share Price

7,500,000 1,898,134 3.95

Investment Amount Investment Year Required Return Future Value Required Ownership Outstanding Shares (Pre) Outstanding Shares (Post) Investor Owns No. Shares Share Price Pre-Money Valuation Post-Money Valuation

Investor Round A 500,000 0 50% 3,796,875 50.63% 100,000 202,532 102,532 4.88 487,654 987,654

The co-founders anticipated they will need three rounds of financing (rounds A, B and C) over the next five years until they exit the company. At the start of the first year, the co-founders secured £500,000 investment from angels who expected to earn 50% return each year. The future value of this investment in five years time would be 500,000 x 1.50^5 = £3,796,895. In Year 5, both the co-founders, angels and venture capitalists expected to exit the business through a sale to an acquiring company. As before, after the first financing round the angel investors held 50.63% of equity at a price per share of £4.88. 102,532 new shares were issued to these investors. At the end of the second year, Citydine raised £750,000 from venture capital investors (VCs). Because the investors took a stake in the business at a more mature stage, their required return on investment was 40%, lower compared to the angels. The future value of this investment after five years would be expected to grow to £750,000 x (1+40%)^3 = £2,058,000. As such, the VCs would own 27.4% of the total shares (£2,058,000 / £7,500,000). For their investment, the company had to increase its number of shares to (202,532 / (1-27.4%) = 279,123.

STARTUP VALUATION: ROUND C FINANCING Tell the story behind the numbers

Investor Round B

Investor Round C

750,000

1,000,000

Investment Year

2

4

Required Return

40%

25%

2,058,000

1,250,000

Required Ownership

27.44%

16.67%

Outstanding Shares (Pre)

202,532

279,123

Outstanding Shares (Post)

279,123

334,948

Investor Owns No. Shares

76,591

55,825

9.79

17.91

Pre-Money Valuation

1,983,236

5,000,000

Post-Money Valuation

2,733,236

6,000,000

Investment Amount

Future Value

Share Price

As new stock is issued to later-round investors, the early-round investors would expect to suffer ‘dilution’ - a loss of ownership due to the issuing of additional shares. After this financing round, the co-founders held 100,000 shares (35.8%), angels owned 102,532 (36.7%), and the VCs received 76,591 shares. Citydine’s valuation after this stage increased from £987,654 to (375,000 x 20) / (1 + 40%)^3 = £2,733,236. The price per share after this round also increased to £9.79 (£2,733,236 / 279,123). In Year 4, Citydine started earning positive cash flows and attracted a further £1 million VC investment. As the company was further established, investors at this stage could only command an expected return of 25%. As such the future value of their investment on exit was £1 million x (1+25%)^1 = £1,250,000. After this investment, the VC claimed 16.7% (£1,250,000 / £7,500,000) ownership. With this additional investment, Citydine had to increase its number of shares available to 334,948 (279,123 / 1 - 16.7%). Of which the new VC investors received 55,825 shares. The company valuation increased from £2,733,236 to £6 million (£375,000 x 20) / (1+25%)^1).

STARTUP VALUATION: THE DILUTION STORY Tell the story behind the numbers

VALUATION ROUNDS £988K Angels 50.6%

ROUND A - ANGELS: £500K

£2.7M Angels

Founders

36.7%

35.8%

VC 1

ROUND B - VC 1: £750K

27.4%

£6.0M Angels 30.6%

29.9%

VC 1

VC 2

22.9%

16.7%

ROUND C - VC 2: £1M

£7.5M Angels 4.6x

EXIT

Founders

VC 1

VC 2

2.3x

1.3x

Founders 49.4%

For Round A investors, from their original £500,000 investment, they claimed 50.6% of Citydine. Following Round B investment, their stakeholding was diluted to 36.7%, and to 30.6% after Round C. Round A shareholders’ wealth on exit was £2,295,844 (30.6% x £7.5 million), or 4.6x return on investment. For Round B investors, their £750,000 investment gave them 27.4% of the company. Following Round C, their stakeholding was diluted to 16.7%. Round B shareholders’ wealth on exit was £1,715,000 (16.7% x £7.5 million), or 2.3x return on investment. For Round C investors, in return for £1 million investment, they took 16.7% of Citydine and there was no further dilution. Round C investors’ wealth on exit was £1,250,000 (16.7% x £7.5 million), or 1.3x return on investment. The founders were diluted in each round from 49.4% after angel investment in Round A, to 35.8% after the first set of venture capitalists, and finally down to 29.9% after Round C. After 5 years, they generated wealth of £2.24 million on exit.