In the absence of a clear guide, many founders and their boards will chart a steady and linear progression in value, supported by revenue or profit growth, starting at the implied valuation of the initial investment and heading towards a target valuation with valuation reference points to validate this approach.
In determining the target value it is worth remembering that business values for scaling growing businesses are typically derived by considering three different methodologies as follows:
- Transaction comparables, which analyse the multiples of profit and revenue of similar businesses that have been recently acquired. A variation of this might be to consider recent pre-money investment values, for example based on MRR.
- Trading comparables, which analyse the multiple of profit and revenue of similar businesses that have publicly traded shares.
- Discounted free cash flows, which estimate the present value of future cash flows, often complemented with scenario analysis.
These approaches will normally give a range (often quite large) and in addition discounts or ‘alpha values’ may be applied that reduce the derived value to take into account higher risk. These discounts have the effect of reducing a valuation by significant sums, so very easily the more subjective discount applied may have a greater bearing on estimates of value based on the transaction and trading comparables, leading to a fundamental question about how to value fundraising.
Introducing new investors, for example at Series A or later rounds will lead to a thorough reassessment of value and it can therefore be worth recalling that valuations are based on the willingness of a buyer and a seller to agree on price. From the fundraiser’s perspective, value is likely to be driven by three key considerations, namely:
- Having many a good number of credible bidders and alternative options, if possible;
- A well managed deal process, including avoiding due diligence pitfalls and a thorough understanding of the offers and the bidders.
- Excellent communication of value creation drivers. These financial, non-financial and qualitative value drivers will vary by industry and are often the key to resisting a discount being applied. When seeking investment in your business, focusing on the value creation drivers is normally critical to achieving an attractive outcome and they will also help drive performance. The value drivers will vary depending on the stage of the business, so investors will expect an evolution of value drivers at each stage. For example, business angels are likely to place less reliance on governance than Series A investors and series C and D investors are more likely to place more emphasis on commercial due diligence.
For example, we have helped clients develop; sales strategies and reporting that shows how revenue is being built; quantify and articulate the market opportunity; the transaction comparables and exit opportunities for investors; tech value by an effective framework of intellectual property rights; as well as applying our experience to support scaling businesses in advisory, executive and non-executive roles.
HOW WE CAN HELP: We support clients with an integrated, flexible and structured approach, applying both commercial experience and professional expertise. Our recent transactions have included exits, acquisitions and fundraising, with journeys from seed via private equity to assisting publicly listed companies. If you want to know more about how we can help you, get in touch for a free and confidential consultation on hello@linkstoneadvisory.com
How do you drive value when fundraising?