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Afif Khoury Managing Member, Scatter Ventures LLC CEO, SOCI Inc. CA Bar Patent Bar UCSD Grad

How to Value a Start-Up… for Venture Capital. Afif Khoury Managing Member, Scatter Ventures LLC CEO, SOCI Inc. CA Bar Patent Bar UCSD Grad 10+ yrs Venture Capital, Corporate Governance Law afif@scatterventures.com. Multiple Methods. The Scorecard Method The Venture Capital Method

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Afif Khoury Managing Member, Scatter Ventures LLC CEO, SOCI Inc. CA Bar Patent Bar UCSD Grad

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  1. How to Value a Start-Up… for Venture Capital Afif Khoury Managing Member, Scatter Ventures LLC CEO, SOCI Inc. CA Bar Patent Bar UCSD Grad 10+ yrs Venture Capital, Corporate Governance Law afif@scatterventures.com

  2. Multiple Methods The Scorecard Method The Venture Capital Method The Dave Berkus Method The Risk Factor Summation Method The Golden Rule

  3. Subjectiveness • The rules can be subjective • Even more “standard” formulas may yield dramatically different results. • Strength of the Team • Size of the Opportunity • Product/Technology • Competitive Environment • Marketing/Sales Channels/Partnerships • Need for Additional Investment • Regulatory Climate • Trends • By the time you are through answering these questions…

  4. The Scorecard Method • Determine the Avg Pre Money valuations: Look at companies in the region and business sector of target co. Assume $2N • Compare Target to your perception of similar deals :

  5. The Scorecard Method 3. Make the Valuation Calculation 4. Multiply the sum by the Avg: $2M*1.075 = $2.15

  6. The Venture Capital Method LEXICON • Pre-Money: Value assigned before the investment • Post-Money: • Pre-Money + Investment • Terminal Value / Anticipated ROI • Terminal Value: Anticipated Selling Price • Anticipated Selling Price: • Industry specific multiple of revenues (2x Expected Revenues) • Expected Revenues in yr of sale (eg, $20M), which allows you to estimate earnings in the yr of sale from industry specific stats (eg, 15%, $3M earnings), which allows you to use industry specific P/E ratios to determine Terminal Value (eg, 15x)… $45M • Anticipated ROI: 27% IRR in 6 yrs (“Wiltbank Stud”)… • so need a 20x or more on 1 of 10 (assuming other 9 pay back capital)

  7. The Venture Capital Method What is the Pre-Money Valuation? Post Money = Terminal Value / Anticipated ROI $45M/20x… $2.125M Pre Money = Post Money - Investment If investment is $500K, Pre Money is $1.625M

  8. The Venture Capital Method What If Subsequent Investment Will Be Needed? Another layer of complexity and subjectiveness Pre Money x Anticipated Dilution New money dilutes 50%, then Pre Money is ~ $800K

  9. The Dave Berkus Method Dave Berkus is a founding member of the Tech Coast Angels in Southern California Missing some characteristics: competitive environment, IP, size of opportunity, etc. Doesn’t allow for pre-money higher than $2.5M

  10. The Risk Factor Summation Method Ohio TechAngels: The higher the # of risk factors, the higher the overall risk • Management • Stage of the business • Legislation/Political risk • Manufacturing risk • Sales and marketing risk • Funding/capital raising risk Each risk (above) is assessed, as follow: +2   very positive for growing the company and executing a wonderful exit +1   positive 0   neutral -1   negative for growing the company and executing a wonderful exit  -2   very negative Add $250K for every +1, and subtract $250K for every -1 • Competition risk • Technology risk • Litigation risk • International risk • Reputation risk • Potential lucrative exit

  11. The Golden Rule He who has the gold, makes the rules There is a market standard There is an expectation on ownership Breaking the mold is hard… create competition!

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