fundraising, valuationI am in the process of opening up a company (one that is limited by shares) and I’m trying to get familiar with a lot of terms.
What does it mean when companies and startups decide to raise money and in this case of AirBnB how does one interpret such statements and how can I value my company if investors decide to buy some shares from my company?
First part: what does it mean
These two pieces of information determine the total amount of money that has been (or will be added) to the company (your ‘x’ value) and the ‘y’ represents the value attributed to the company at the time ‘x’ was raised. With ‘y’ you can tell the fraction of the property of the company that was (or will be) given to the investors in exchange for them investing ‘x’ in the company.
The common name for your ‘y’ is pre-money valuation. Pre-money because it was the valuation given to the company immediately before the money influx.
As a real example, if a company raises US$100,000 at a 1 million pre-money valuation, it means that the company will receive 100,000 in its bank accounts and the investors that transfer the money will receive 10% (100,000/1,000,000) of the ownership of the company in exchange. So post-money or right after the investment, the company will be valued at US$1,100,000, the pre-money valuation plus what was invested in that round.
Valuation changes following the life cycle and stage of the company, and will, if all works out as expected, raise with every new investment round. First rounds (like acceleration, angel, seed) will have substantially lower valuations than later rounds (VC round A, round B, round C, round D, round E). You can usually determine the current stage or phase of the startup from its valuation.
Second part: how to determine valuation
Now for your second question, how do you determine your company’s valuation, that’s a real hard one.
No conventional valuation method fits the Startup ecosystem. I have spent a great deal of effort reading and examining the best works in asset valuations (the bible written by Damodaran for example) and they just don’t fit a Startup. That happens because of the uncertainty and high risk, so no real planning and cash flow projection will ever be correct. Or even close to being correct.
So the Startup ecosystem developed its own methods. And unfortunately it is very hard to give you a specific answer, because they all depend a lot on what is your company businesses, and where in the world it is located.
Some of the names you can search to help you are “Dave Berkus method”, “Venture Capital Method”, “Score Card Method” and “Risk Factors Method”.
I had little time to search for previous answers to this second part of the question on startups.stackexchage, but you can probably find more about it already here. If not, please formulate another question because it will be a long answer and it deserves to be in a question of its own, for future reference.
Technically, it’s a capital raise: new shares are emitted and purchased at a certain valuation. For instance, if you’ve raised $200k at $1M valuation, and have 1M shares in total, it means you’ve issued 200k new shares, i.e. 1/6 of the new total, and sold them to investors for a total of $200k.
Entire books are written on how to value a company. The key point to understand, though, is that a business is worth whatever a buyer is willing to pay for it. It doesn’t matter if you think it’s worth $10M or $1Bn according to some accounting hocus pocus: if no one is pulling out a check book as you say the price, it’s not worth that much. (Conversely, if you see many checkbooks, it might be worth more.)
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