PE Background need help with VC/ Angel stage Valuation

Still getting a feel for the site but I wanted to ask the group for some advice on how to approach a situation/scenario that I recently was challenge with.

My background is more in PE growth stage valuations but have been tasked with a VC or almost at angel investor stage valuation (ie a few months of actual P&L..& 1-2 year projections)… they have supplied 3-6 or so years out but that’s in the area of crystal ball reading if you ask me.

What makes this difficult (in my mind) is that this company being valued is a subsidiary of a larger “parent company”. The subsidiary is looking for equity investment but looking through their financials, they keep all the employment expense at the top with parent company and only really allocate direct marketing expense down to the subsidiary. Subsidiary has no depreciable assets. Negative earnings (3 years out, still negative even though they don’t allocate G&A expenses to the sub).

Question 1- Suggestions on how to approach the valuation? Both parent and subsidiary are privately held.

Question2- How will the allocation of expenses be handled in the future once the parent company isnt 100% owner? I would imagine that its taking money from left pocket and putting it in the right (when 100 owned) …. But that changes when equity shares are sold out..

Any guidance will be appreciated.

 
Best Response
  1. i worked in sellside banking before and also worked with the angel guys for a bit ...so here's my own method, take it with a grain of salt

a) employee expense doesn't really matter for a start up (it does, but not as much) since i am assuming most of them took it on for the share of the company. If you really want to, you can look into their corp structure and "project out" an approximate expense, but honestly this shouldn't matter for a sub 50 people company.

b) i would look at what they do and look at the precedent comps, it's the best thing you can do. Google to see what other guys have gotten in their valuation in a "similar" industry

  1. i dont thnk the parent company would like to pay for the expense if they are not 100% owned, so chances are upon dilution, they will just pay for their shares of expnese (assuming they didnt do an outright sale) and have this subsidiary to act on its own.

However, if it's a pretty large company, i can't imagine that company only sell a minority of the shares unless that start-up technology is very valuable to the larger company. But if it's the case, it should keep 100% of it...

 

You should attempt to include the employment costs as that is the biggest cost in a startup. Ask for an org chart of all employees involved in the sub. Ask what percent of the time they spend on the sub vs the parent. This can give you an approximate employment cost (factor in benefit costs). You will have to make an assumption on how many part timers equal a full time employee. If you are looking at this as a standalone, you need to look at it as being operated as a standalone. you should really consider if this is truly a separate entity or if the parent should just do a growth round.

I believe that the current market for seed stage/angel rounds of common equity is in the neighborhood of 15% for $500k. Others can feel free to correct that number, but it's what I've heard.

 

revenue is very very tough to project. For all we known, it can go to 0 or go to 1 billion in 3 years

I would look more detail into what the company does, and what kind of valuable "assets" they have

i.e. a mobile advertising company might have very good technical expertise and they can get a list of customers over time; facebook is valuable because of the user base; social gaming is valuable for the amount of time and unique users that players spend on them

If you have details into the company, you can build out the contracted revenue, or simply use the growth of subscriber / other metrics to think about the future growth

let me know if this helps.

(again, revenue for startups, especially for internet companies, does not really matter at all. i.e. look at instgram)

 

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