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TitleBlueBook - A Startup Valuation Story
TagsVenture Capital Tech Start Ups Angel Investor Investing Valuation (Finance)
File Size638.6 KB
Total Pages5
Document Text Contents
Page 1

A STARTUP VALUATION
STORY

Tell the story behind the numberswww.bluebook.io

Page 2

STARTUP VALUATION: ROUND A FINANCING
Tell the story behind the numbers

The co-founders of Citydine, a dining app startup have forecasted
annual sales of £2.5 million in 5 years. Comparable public companies
in their industry are valued at 20x price-earnings ratio and earn profit
margins of 15%. Expected annual profit at Citydine in Year 5 is
predicted to be £375,000 (£2.5 million x 15%).

Citydine Exit Value = PE Ratio x Year 5 Profits
20 x £375,000 = £ 7.5 million

Citydine valuation today: Citydine Exit Value / (1 + Investors’ Rate
of Return)^No. Years

Startup Valuation Today = £7.5 million / (1+ 50%)^5 = £987,654

Citydine has attracted significant interest from angel investors. These
investors have a required 50% rate of return for ventures with this risk
profile. The co-founders sought £500,000 investment from angels. As
such, the angels would own (£500,000 / £987,654) = 50.63% equity.

As Citydine’s valuation (post-money) was £987,654, the pre-money
valuation was £987,654 – £500,000 = £487,654

The co-founders had initially incorporated Citydine with 100,000
shares before the financing round. Following the investment round,
the total number of shares in the business increased to 100,000 /
50.63% = 202,532 of which the angels owned 102,532 (202,532 –
100,000). With a valuation of £987,654 and 202,532 shares, the price
per Citydine share until the next round of investment was £4.88.

Year 5 Sales 2,500,000
Profit Margin 15%
Net Profit 375,000
In Year 5
PE(multiple) 20
Required Rate of Return 50%
Terminal value on Exit
Startup Valuation

7,500,000
987,654

Initial Investment 500,000

Equity Stake 50.63%

Current Outstanding Shares 100,000
Total Outstanding Shares 202,532
VC Owns # Shares 102,532
Share Price 4.88

Pre-Money Valuation 487,654
Post-Money Valuation 987,654

Page 3

STARTUP VALUATION: ROUND B FINANCING
Tell the story behind the numbers

The co-founders anticipated they will need three rounds of financing
(rounds A, B and C) over the next five years until they exit the
company. At the start of the first year, the co-founders secured
£500,000 investment from angels who expected to earn 50% return
each year. The future value of this investment in five years time
would be 500,000 x 1.50^5 = £3,796,895.

In Year 5, both the co-founders, angels and venture capitalists
expected to exit the business through a sale to an acquiring
company.

As before, after the first financing round the angel investors held
50.63% of equity at a price per share of £4.88. 102,532 new shares
were issued to these investors.

At the end of the second year, Citydine raised £750,000 from
venture capital investors (VCs). Because the investors took a stake in
the business at a more mature stage, their required return on
investment was 40%, lower compared to the angels. The future value
of this investment after five years would be expected to grow to
£750,000 x (1+40%)^3 = £2,058,000. As such, the VCs would own
27.4% of the total shares (£2,058,000 / £7,500,000). For their
investment, the company had to increase its number of shares to
(202,532 / (1-27.4%) = 279,123.

Overview
Net Income at Exit Year 375,000
Term 5
PE(multiple) 20
Shares Outstanding Before Investment 100,000

Company Value at Exit 7,500,000
Shares Outstanding After Final Round 1,898,134
Terminal Share Price 3.95

Investor
Round A

Investment Amount 500,000
Investment Year 0
Required Return 50%
Future Value 3,796,875
Required Ownership 50.63%
Outstanding Shares (Pre) 100,000
Outstanding Shares (Post) 202,532
Investor Owns No. Shares 102,532
Share Price 4.88
Pre-Money Valuation 487,654
Post-Money Valuation 987,654

Page 4

STARTUP VALUATION: ROUND C FINANCING
Tell the story behind the numbers

As new stock is issued to later-round investors, the early-round
investors would expect to suffer ‘dilution’ - a loss of ownership
due to the issuing of additional shares. After this financing
round, the co-founders held 100,000 shares (35.8%), angels
owned 102,532 (36.7%), and the VCs received 76,591 shares.

Citydine’s valuation after this stage increased from £987,654 to
(375,000 x 20) / (1 + 40%)^3 = £2,733,236. The price per share
after this round also increased to £9.79 (£2,733,236 / 279,123).

In Year 4, Citydine started earning positive cash flows and
attracted a further £1 million VC investment. As the company
was further established, investors at this stage could only
command an expected return of 25%. As such the future value
of their investment on exit was £1 million x (1+25%)^1 =
£1,250,000. After this investment, the VC claimed 16.7%
(£1,250,000 / £7,500,000) ownership.

With this additional investment, Citydine had to increase its
number of shares available to 334,948 (279,123 / 1 - 16.7%). Of
which the new VC investors received 55,825 shares. The
company valuation increased from £2,733,236 to £6 million
(£375,000 x 20) / (1+25%)^1).

Investment Amount

Investment Year

Required Return

Future Value

Required Ownership

Outstanding Shares (Pre)

Outstanding Shares (Post)

Investor Owns No. Shares

Share Price

Pre-Money Valuation

Post-Money Valuation

Investor Investor
Round B Round C

750,000 1,000,000

2 4

40% 25%

2,058,000 1,250,000

27.44% 16.67%

202,532 279,123

279,123 334,948

76,591 55,825

9.79 17.91

1,983,236 5,000,000

2,733,236 6,000,000

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