Saturday, November 5, 2011

Early Stage Valuation Pricing and Forecasting

How much do I get for $50,000 investment?

At Pre-Startup time the valuation for a directly experienced CEO and a thorough Business Plan is often set at $500,000; so, raising $50,000 then would sell 10%. If the Team is Complete then the Valuation is often $1 million.  Is a strong proprietary service or product is credible then Valuation tends to move to:

  • a discount on Valuation in Year 3 or Year 5.
The Valuation to Revenue Ratio is often the Key. Here is how you generate a Credible Forecast.

A credible Forecast and a Valuation Rationale should be presented and updated in reports to Investors.

Your Forecasts hang on 2 big issues: A Revenue Formula and Sales & Marketing Costs.  Forecast Monthly and update the Forecast at mid-month.

Examples for Revenue Formula and Cost: 
  • You expect the average sales person to generate $0.5 million initially growing over a 2 year period to $1.0 million each.
  • 45% to 55%, even 70% very early, as the Cost of Marketing for Advertising and Social Media Marketing is often appropriate for a high margin business.
Valuation, in early stage companies, uses the Valuation to Revenue Ratio. Identify Valuation to Revenue for publically traded comparable companies, like 4 times annual revenue. 

As a private company, use 50% of the Valuation to Revenue Ratio as a rough guide. A Rationale you might add is that your growth rate for the 1st 5 years is way above growth at Comparables.

A Valuation Example: In our 36th month, revenue for the month at $600,000 is a Run Rate of $7.2 million annually. Using 2 times revenue, that puts our valuation at $14.2 million. 

Rapid growth can be forecast well and controlled if you re-visit the forecast 2 times per month and if you insist on Measurement and Repeatability.

For more about a measurable and repeatable Revenue Generation Formula, please see my:

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