BizPlace Valuation Model
The goal of our team is to present an innovative newcos valuation model (The BizPlace model) that is solid from a theoretical perspective (therefore less affected by the arbitrariness of assumptions or theoretical bias when applied), as well as being able to correctly represent a fair company valuation when applied to real investment cases in different sectors and in different growth stages, while taking into account the different perspectives of entrepreneur and investor.
The BizPlace model aims to determine a “fair valuation” that mediates between two naturally conflicting positions: on the one hand, that of the entrepreneur and the characteristics of their business and on the other hand, the one of the investor with their own prerogatives and performance targets.
The first step is the identification of the business growth drivers, i.e. the elements characterizing the company’s scalability.
The second step is the determination of the metrics that influence these drivers, for example the CPA and the CPC. The latter can be the result of market tests carried out by the company, historical averages observed in the months of activity or researches and studies on competitors. These metrics are then used to make a projection of the financial results of the company in 5 or 7 years depending on which is its most likely exit horizon (5 years in the case of M&A; 7 years in the case of IPO).
The prospective results determined by this projection (in particular revenues and EBITDA), expression of a “best case scenario“, are then used to determine the “forecasted Terminal Value” of the company through the study of sector multiples and a selection of comparable companies (filtered by belonging to the business of the start-up, growth rate of revenues and market size).
The next steps are to discount the value thus determined for certain factors such as: the illiquidity of the company, the impact of a hypothetical loss of a key team member on the business, distance from the average margins of the sector, and convert this value from “Enterprise Value” to “Equity Value” (Equity Value = Enterprise Value + Cash and Marketable Securities – Outstanding Debts).
Finally, in order to correctly represent the prospective value of the company analyzed, this value must be transformed from a “forecasted” to an “expected” value, weighing it on the expected probability of venture capital investors to obtain the amount invested according to the geographical areas in which they operate rather than the sectors in which they invest (based on a study of the European Investment Fund, “Prencipe 2017” on a sample of more than 2700
international start-ups financed by operators in the VC sector).
The output is the expected prospective value of the project analyzed, which will then be adjusted by a dilution factor (or “divergence”), which makes it possible to determine the expected percentage of equity due to the investor following future investment rounds, and discounted at the present time at the company’s total cost of equity (Tot. Ke = Risk free rate + Total Beta levered * Equity Risk Premium) appropriately calculated to include the specific risk of the company and not only the systemic market risk.
The value thus determined represents the company’s post-money valuation. The pre-money is simply the difference between the post-money valuation and the investment request (e.g. postmoney valuation = € 2.5 million; funding need = € 500K; pre-money valuation = € 2.0 million).