In one of my recent interviews, the MD asked me "how would you do the valuation and modeling of a company/start-up where there are no reports, study, comparables or transactions? - it's a new space/area identified altogether. The entrepreneur will say many things, but being a banker, how would you approach to value the company? Assume the start-up has zero revenue"
How and where do we start? I mean no historicals, no comparables/transactions, no research reports, no size of the addressable market, ...
If I had to guess, forecast revenue and other data yourself, then DCF..? No idea though
We can forecast revenue by considering other peers in the same market and can perform valuation by DCF or you can take P/S ratio in comparable technique
There are no comparables or transactions to rely on
real options valuation?!
How to estimate market value of new company that has yet to make profit? (Originally Posted: 05/16/2012)
Hi all, needed some help with this issue. How would you estimate the value of a new company that has yet to post a profit? It also does not pay a dividend, unable to calculate P/E ratio. Only known information is Sales, Negative Profit, and Negative book value. Also how would you use information of other companies in the same industry to come up with a market value for this company?
i was thinking Price-to-sales (P/S) or Price-to-book-value (P/BV) however common stocks outstanding is not known and market price is not known.
The easiest approach would be to simply identify companies in the same industry and determine at what multiple they trade relative to revenue. For example, assume you are able to identify 3 companies that are similar enough and they trade at an average of .8 * sales. Multiply your LFY (last fiscal year) or TMM (trailing twelve months) revenue for your company by .8.
Groupon model, bitch. Its worth a couple billion give or take a couple billion.
Hey, GRPN made a profit this quarter!
.
That reminds me of a paper from Prof. Damodaran I once read: "The Dark Side of Valuation: Firms with No Earnings, No History and No Comparables" http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297075
What industry? It all depends
Startup valuation/modeling (Originally Posted: 01/20/2015)
I don't really have any experience in modeling startups and am wondering if there is anything in a DCF (NPV and IRR calc) that is required to be done to account for negative cash flows the first few years?
For example, say I have modeled out the cash flows and have the appropriate discount rate and the valuation came out to be $10mn. However, the first 2 years of the model forecast negative cash flows, assume ($1mn), that will require additional cash to be put into the business at the acquisition date. How should I be modeling that $1mn when I calculate an NPV or IRR?
I was thinking it would have no impact on an NPV calc, but in an IRR I would need to account for the $1mn somehow. With an NPV of $10mn would I adjust my purchase price down to $9mn and assume the $1mn is invested into the business? What other ways are there to account for this scenario?
Thanks,
Negative cashflows are completely normal in a DCF, there's no difference with a positive cash flow (just deduct it instead of adding, common sense). As for the IRR - check out the MIRR if your cashflows alternate from positive to negative, otherwise if all negative cashflows occur consecutively at the beginning of the project, standard IRR formula works just fine.
Startup Valuation (Originally Posted: 05/04/2013)
Guys, please help:
I am looking for literature (books/articles) on startup valuation.
It would be great If someone could share relevant sources or a breif summary of his/her own experience.
Thanks!
http://people.stern.nyu.edu/adamodar/pdfiles/papers/younggrowth.pdf
Great stuff, thaks!
Modeling Tech Startups (Originally Posted: 07/28/2015)
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Driving off client / users and sales people is fairly common for tech start ups unless they have a specific metric like some kind of unique "volume".
No clue why you think a bunch of MDs are on WSO to answer your modelling questions though.
Lol, I don't expect a lot, but you do see some here and there.
Believe it was Mark Cuban who commented that a top down approach for VC/start-up is bullshit because there's no tangible numbers to work with. The idea of even capturing a 0.1% marketshare could lead to "X" relies heavily on the assumption that your product has the competitive advantage, key success factors, resources etc to make "X" happen, which is nothing more than guessing on a whim.
I agree with you that "sales quote" is a pretty BS metric(which is why VC isn't on the top of my list), but when you're working with a startup, growth rates with clients/users or clients/sales person are the most suitable for this case.
Thanks for the input. Yeah, I hate doing sales builds for tech companies because it seems any method of projecting sales is just as much BS as the next. At least with manufacturing companies, you have a cap on your production capabilities unless you spend more on capex, but still the number is finite
Best answer to this technical question? (Originally Posted: 02/25/2015)
How would you value a company with no related precedent transactions, isn't public, no comparable companies, etc?
Assuming that the company is cash flow positive you would use a DCF. You can almost always find comparable companies (given the subjective nature) so even if the company is not profitable you can use a multiple of revenue based on an industry or peer median/average. Alternatively, you could run a TAM analysis and try to determine what % of the market share the company may account for. Valuation is as much art as it is science so you can basically value anything.
If it isn't public, I'm assuming OP means that you don't have the financials for the company i.e. you can't use a DCF either.
I have no idea.
Shorthand answers:
DCF (although there are limits to DCF and you could end up just doing a GGM-heavy valuation, which may as well be a multiples valuation)
Look at the EBITDA margins, historic and expected trends in revenue, EBITDA and capex, then look for companies with a similar profile, then apply the valuation multiples those "trajectory comps" trade at
Check out this discussion from years past. The first link is to some of Damodaran's lecture notes on the topic. They are very good and should get you started with it.
http://www.wallstreetoasis.com/forums/how-to-value-a-private-company
*** Edited with the correct link.
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