What would Gordon Gekko think of your startup?

A startup, like any other asset, is worth as much as anyone is willing and able to pay for it.

That being said, let’s analyze the criteria that are often taken into account in M&A or investments:

· Economic factors: every startup must have progressive goals:

1. Generating revenues

2. Generating gross margin: sales minus cost of goods sold/services provided

3. Generating contribution margin: gross margin minus acquisition costs

4. Generating Ebitda

5. Generating net income

6. Generating cash flow for the business

7. Generating return for the shareholders

· Financial factors: is the acquisition of a company able to provide new sources of funds? Usually, M&A operations tend to be financed, from financial institutions to IPOs. Sometimes, a company on its own may have limited financial capabilities and a strategic acquisition may unblock substantial amounts of funds.

· Synergies: any upside or downside for the shareholders of the acquiring company. They can have many forms and I will focus on the positive ones since they are the ones that motivate investors to pay a premium:

1. Operational: optimization of logistics, restructuring of personnel, concentration of offices, etc.

2. Commercial: companies always have comparative advantages. Imagine a company with a great commercial network that wants to acquire another company that has a product portfolio that is complimentary to that of the first one. An acquisition would make sense, as long as cannibalization is minimized, if the first company could generate more value from the portfolio of the second one with their own existing clients. It would also allow to better segment the market or eliminate competitors.

3. Lobbying: the increase in the total size is sometimes wanted since it offers access to a “higher league” level. You may reach key people that before were out of your reach.

4. Brand: sometimes, companies with deep pockets want to get a PR push.

5. Tax shield: companies that have accrued losses over the years will have tax benefits in case they are able to turn the red into black. That is very attractive as long as there are no corpses in the closet which are usually spotted after a proper due diligence.

6. Other: “oh, I really wanted that corner shop” or “I always wanted to own a football club” or “I’ve heard real state is a sound investment since prices never drop” or “I have a friend who has invested in a blue collar job app”…

When we talk about startups, we will focus only in valuations made to raise money. These are some methods used, which may be used alone, combined or compared:

· Discounted Cash Flow (DCF): is the logical one. It evaluates a business like a flow of money in and out, adjusted to the present value by the discount rate.

Example: you plan on opening a doughnut place. At first, you need to make an investment of 1 million Euros. You start operations from day one and generate a positive cashflow of 200.000€. A cashflow is the net sum of all payments, incoming or outgoing. Remember that an expense is not the same as a payment. An expense is an economic thing while a payment is a financial thing.

When we talk about payments, we talk about finance. Considering one of the axioms of finance, which states that a Dollar today is worth more than a Dollar tomorrow (unless there is deflation), the 200.000€ will be worth less today, exactly 170k if you discounted at 15% (the discount rate is the interest rate you expect the investment to produce, and it is inversely correlated to the risk involved in the operation). You may add as many years as you want, but it is advisable to have a perpetuity value calculation instead of year 6 and so forth. A perpetuity is calculated dividing the previous yearly cash flow by the discount rate. And so forth.

At the end, you will add the net present value of all future cashflows and that will be the startup valuation. If this figure based on your predictions is higher than the 1 million it costs, the investment will make sense for that investment at that discount rate. In the other hand, if the investor does not agree with an assumption from the business plan, he/she will have a different valuation in mind. Here’s where the negotiation begins.

DCF — Present values of future cash flows

· Multiples: a company that already has some revenues can be valued multiplying a metric. That multiplier changes with the sector of activity, the growth rate, the total available market and specifically the risk perceived by the investor.

— MRR: in companies with recurring revenue, specially the ones with a subscription model, are evaluated based on the Monthly Recurring Revenue. In SaaS, that multiple can be around 100.

— ARR: same as above, but with Annual Recurring Revenue, which results from multiplying last months MRR by 12. In SaaS, that multiple can be from 8 to 12. However, I am only stating what some VC’s admit publicly, there have been operations far above these multiples.

— Sales: some companies, specially those with more stagnant figures, can be valued at 5 times sales. However, this is a vanity metric since a company is not made to sell, but to make profits. The rest are NGOs.

— EBITDA: is the net result from operations so it is pretty close to a cash flow if everything was paid at the moment the invoice was issued. That includes sales, COGS (Cost of Goods Sold), acquisitions expenses and fix costs, but exclude amortizations, activation of fixed assets such a development, interests and taxes. The EBITDA multiple is inversely correlated with the amount of CAPEX investment needed each year. It is only possible to apply on companies that already have a positive EBITDA, of course. The general multiple rarely steps out of the 5–15 range, having the average at about 7–8. I insist, it all depends on many other factors, I would personally never make an investment based on an EBITDA multiple outside of the stock market.

— Formula: there is another complimentary metric, also more suitable for companies with recurring revenues. I also do not encourage anyone to use it since a company is always something more that a formula, but before entering a negotiation, you must know all possibilities to be able to discuss them properly. Value = (MRR * Gross Margin %) / Churn % . There are multiple ways of defining the churn, one way should be the average percentage of active users you lose in a month. The lower the churn, the higher the value.

· Balance sheet: the purpose of accounting is to have financial statements that reflect the real value of a company. In a balance sheet there are assets on one side, everything the company owns (cash, receivables, inventories or fixed assets) and on the other side there are the liabilities, which is everything a company owes (payables, loans…) and the Equity, which is basically the difference. The Equity is the value that’s left for the shareholder. So the theoretical value of a company is the subtraction between what the company owns and what the company owes. However, in startups, this is a joke. The real value is never reflected because an increase in equity can only come from a direct investment or a higher profit. Profits and startups are an oxymoron, both because they tend to invest in the long term and because the recognition of earnings, and therefore the increase in Equity, goes hand in hand with Friday the 13th main character’s, Jason Taxes.

· Esoteric methods: sometimes, some celebrities raise money over a power point. I’ve heard some investors saying that the valuation is roughly 1M€ per founder, as long as they are rockstars. This type of situations may happen when an entrepreneur has a good track record or when, for any reason, there’s an oversupply of investors for a specific project. Should Elon Musk in the flesh approach you and ask for your money for a new venture he would lead, would you demand a business plan and a couple weeks to think it over?

You may as well throw some cards before using some methods

All that being said, remember that a valuation is always a subjective amount that is on someone’s head and that depends of other factors not mentioned above. Make sure you pitch well and give the valuation you are asking at a moment that is convenient for you. At the end of the day, the valuation you will get will depend a great deal in the show you put on and the trust you generate in the investor. So make sure you practice and learn with lots of investors and that you control the momentum.

Also bare in mind that the hardest ticket to get is the first one. No one wants to be the first. If you can secure a reputable first investor, others will follow with less questions asked.

What is your preferred method? Did I miss something important? Do you disagree in some of the statements? Feel free to discuss it. You are also welcome to suggest new topics we can cover.

Thank you and godspeed skipper!

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E.

Essential Podcasts for Entrepreneurs & Tech Lovers

Podcasts are a great way to discover new subjects and new people. Whether you are a tech lover or an entrepreneur, bellow you will discover podcasts for entrepreneurs you should – without a doubt – listen to. 

Itnig Podcast with César Migueláñez, Bernat Farrero and Carlos Pierre
Itnig Podcast with César Migueláñez, Bernat Farrero and Carlos Pierre

« Masters of Scale » 

with Reid Hoffman

The host: Reid Hoffman decides to turn to the corporate world instead of pursuing a university carrier. He worked for Apple, Fujitsu for then starting his own business: SocialNet and left it in 2000 to join Confinity. Confinity gives life to Paypal after fusionning. Finally, in 2003, Hoffman co-founds LinkedIn. He is Master of Scale’s host. 

About: The podcast welcomes some of the greatest entrepreneurs. You will discover throughout the talk how they managed to take their companies from 0 to a lot of zeros. You can listen to Masters of Scale’s special guests like Mark Zuckerberg (Facebook), Selina Tobaccowalla (Evite), Brian Chesky (Airbnb) or Nancy Lublin (Crisis Text Line). Must-hear: one of the top tech podcasts for entrepreneurs.

Listen to the podcast: On their website, Apple Podcasts, Spotify and Youtube

The Team: Reid Hoffman, June Cohen, Deron Triff and Jai Punjabi

« Rocket » 

with Christina Warren, Simone de Rochefort and Brianna Wu

The hosts: Christina Warren started as a Freelance Writer. Then, she worked at Mashable as a Senior Tech Analyst and Tech Correspondent and ended the journey at Microsoft as a Senior Cloud Developer Advocate. About Simone de Rochefort, she is  Senior Video Producer and co-host of The Polygon Show. Brianna Wu founded her first startup at the age of 19, Giant Spacekat. She was Head of Development at the time. She is now running for US Congress. 

About: In this podcast, you will discover three passionate women and their “geek conversation” as they like to call it.  No guest speakers, but you will be able to listen to a panel of tech subjects from Apple to Comics, you will not be disappointed. 

Listen to the podcast: On their website, Apple Podcasts, Overcast, Pocket Casts, Spotify and Castro

« This week in Startups »

with Jason Calacanis

The host: Jason Calacanis starts as an internet industry journalist in New-York. In 2003, he co-founded Weblogs, Inc and then a few years later he joined Sequoia Capital, launched the web directory Mahalo. He also founded ThisWeekIn.com. Furthermore, he created This Week in Startups podcast and a startup named Inside.com. Finally, he was part of the creation of the Sydney Launch Festival. 

About: Either you are looking to start your own company, or you are a successful entrepreneur, or you just love technology, this podcast will give you a peek to the entrepreneurship world. You will hear stories of all kinds! On his website, you will also find his events and some research on transportation, healthcare and more. This is one is part of the tech podcasts for entrepreneurs not to be missed.

Listen to the podcast: Apple Podcasts, Youtube, SoundCloud and RSS Feed

You can also subscribe to their newsletter in order to receive episodes directly. 

The Team: Jason Calacanis, Jacqui Deegan, and Tony Agapiou

« Recode / Decode » 

with Kara Swisher

The host: Kara Swisher is an American journalist specialized in the technology industry. She first started to work for an alternative newspaper in Washington for then working for the Washington Post. She wrote articles for the Wall Street Journal and New York Times and wrote her own books. Finally, in 2014, she created Recode, a website dedicated to the latest technology news. In 2015, she initiates Recode Decode. 

About: The weekly podcast welcomes tech experts and great entrepreneurs. They review how they got there, what’s on their mind about the current industry and what they would improve or create. Her recent guests were Elon Musk (Tesla CEO), former Secretary of State Hillary Clinton and Mark Zuckerberg. 

Listen to the podcast: Apple Podcasts, Google Podcasts, Spotify, Stitcher, and TuneIn

« K Fund PodKast »

with Jaime Novoa

The host: Jaime Novoa’s background is quite diverse. He is a writer and an investor, but he also worked in data analysis and social media analysis. In 2014, he founded Novobrief, a newsletter for startups. Then, in 2016, he becomes an investor at K Fund and he founds, in 2019, Dealflow, a weekly tech newsletter. 

About: The podcast discusses startups, entrepreneurs and Venture Capital. You will discover enterprises and their story. From data science, unicorns or digital platforms, you sure will find more than one interesting podcast. 

Listen to the podcast: On their website and Soundcloud

« Clockwise »

with Dan Moren and Mikah Sargent

The hosts: Dan Moren is an active author and writer as well as podcaster. He was a Senior Editor at Macworld. Today, he hosts two podcast shows: Clockwise and The Rebound. As for Mikah Sargent, he started as a Website Designer and Developer for then switching as a Senior Editor at Newsy. He now hosts few podcasts such as Clockwise on Replay FM or on TWiT.tv. 

About: The weekly podcast discusses technology and welcomes each time 2 special guests. For 30 minutes, they address 4 topics where all four speakers get to elaborate on the matter, highlight the issues and expose their thoughts. 

Listen to the podcast: On their website, Apple Podcasts, Overcast, Pocket Casts, Spotify and Castro

« Itnig Podcast»

with Bernat Farrero

The host: Bernat Farrero starts his career as a Developer. In 2009, he founded Itnig, a startup ecosystem that organizes entrepreneurship events. They also have a coworking for startups, a podcast and a fund for early-stage projects. Furthermore, he is a Founder of Factorial, Quipu and Camaloon. He is also a Board Member of Playfullbet, GymForLess and Parkimeter. Finally, he hosts Itnig’s weekly Podcast. 

About: The podcast welcomes every week a new guest. If you wish to learn from successful entrepreneurs, you are on the right platform. The discussions turn around Technology and its industry. You will come across guests like Carlos Pierre (Badi), Vincent Rosso (BlaBlaCar) or Oscar Pierre (Glovo).

Listen to the podcast: Youtube, Spotify, Apple Podcasts, Ivoox, and Google Podcasts

You can subscribe to their newsletter if you want to receive the podcast’s link every Monday. 

Whether you are at an early stage of your project, an investor or you are just curious, these podcasts for entrepreneurs give you the opportunity to be updated on tech and business news. Also, you get to learn from successful international entrepreneurs, which can definitely be very useful for your business.