Startup Valuation - How Are Startups Worth Billions?

[@EatDrinkWot]

Interesting way to value a tech startup. I guess there are diff ways but your assumptions are realistic and on the point.

[@tsinghuajustin]

Heard from an ED at venture capital who foucses on A-C series that they rarely use DCF to value the startup. Almost no and this makes sense as the uncertainty of early stage of a company is so huge and we will make too many assumptions on its projected operation. However, I still don't know how VC values the startup. Maybe more using price/MAU. Basically, they just choose the prospect fields and bet on few top players.

[@financialmodeling]

Yes, that's true, but the purpose of this video was to illustrate how the theoretically correct way of valuing companies (the DCF) also applies to startups. And VCs may not use a DCF directly, but they still use it indirectly because a company with a much bigger total addressable market will also have much higher revenue potentially. Timing and margins are always a question, but VCs think, informally, along the lines of a DCF even if they use other metrics to value startups.

[@pearlbabbar7981]

very good tutorial. like your hands on explaining technique

[@financialmodeling]

Thanks for watching!

[@Fayste69]

Great video, thank you for the work. I am in the middle of job interviews and your resources help a lot!

[@financialmodeling]

Thanks, glad to hear it!

[@brado147]

Excellent video, as always. Which is the most commonly used valuation method for tech startups?

[@financialmodeling]

Depends on the stage, but "creative multiples" (such as EV / Unique Users) are the most common if the company has users but no revenue yet.

[@vladtil]

Good video, however don't forget about liquidation preferences of investors and that investment made at certain valuation doesn't mean that the whole company worth it's valuation.

[@financialmodeling]

Yes, sure, but we wanted to address this question in 10-15 minutes rather than 1-2 hours.

[@alphahat1]

Is there a 1-2 hour version or videos that cover it in the BIWS course?

[@financialmodeling]

No.

[@BungArdi12345]

noted

[@BrunoKoeglerCo]

Thanks for sharing, seldom seen the "unicorns, decacorns and maybe soon hectocorn" valuation method :)

[@financialmodeling]

We try!

[@TheSponsorPodcast]

Thank you for clarifying so much!

[@financialmodeling]

Thanks for watching!

[@siddheshpatankar9498]

great video. but didnt understand the reasoning behind 49% terminal growth rate?

[@financialmodeling]

It doesn't really make sense, but it's the only way to get the super-high implied valuation multiples in this case. It would make more sense to extend these projections out another 10-20 years and assume slowing growth rates over time. Take a look at the Uber or Snap valuations in this channel for better examples.

[@user-wr4yl7tx3w]

how do you project realistic revenue projections? that part seems particularly hard.

[@financialmodeling]

There's no single, universal method to do it. You normally base it on Units Sold * Average Selling Price or Market Size * Market Share, or a mix of both, but the assumptions vary for different industries and company sizes. It is highly speculative for startups, which is why you always build in multiple different scenarios.

[@whodaresknow]

It's really helpful. thanks for sharing that!

[@financialmodeling]

Thanks for watching!

[@samnik12345]

love this video thank you so much

[@financialmodeling]

Thanks for watching!

[@mazen82y]

i loved the video ..simple and direct to the point

[@financialmodeling]

Thanks for watching!

[@sarimzahid3481]

By this logic, a 100x EBITDA multiple implies a 49% growth rate in perpetuity... meaning that eventually, your business would overtake the entire economy? That seems highly unreasonable. Perhaps a better way is to predict your growth projections accurately till the start-up matures/stabilizes, then use a GDP/Industry growth rate. Although guessing how long high growth will last, and when steady-state will be attained is the inherent difficulty in valuing start-ups.

[@financialmodeling]

Yes, a 100x EBITDA multiple is insane if it is applied to a mature business. It only makes sense in a temporary context, i.e., if the company is currently growing extremely quickly but will not be forever.

[@DL-ho3gx]

These videos are absolutely amazing. Thank you!!

[@financialmodeling]

Thanks for watching!

[@duckpsych]

do we get this material in the BIWS courses?

[@financialmodeling]

It varies by topic. This specific lesson is not part of the courses, but we do have unreleased VC/startup material that we make available upon request (that is more in-depth than anything here). Other videos in this channel tend to be samples from the courses or condensed and simplified version.

[@ibrahimgamer5177]

Can I get this excel file please? Thanks!

[@financialmodeling]

Click "Show More." Scroll down to "Resources." Click the links.

[@carakeshmishra]

Cool as expected! Many thanks. could you create video on real option analysis from private equity investment perspective please..

[@financialmodeling]

Thanks for the suggestion, but probably not as it's outside our area of expertise.

[@viacheslavsavateev6522]

Hi Bryan, I didn't get how did you derive the Implied Terminal FCF Growth Rate. I see what you are doing but can't get the logic.

[@financialmodeling]

Please see: breakingintowallstreet.com/biws/how-to-calculate-terminal-value/

[@akankshasinha6347]

Very informative video, Thank you for sharing! Is there a way I can access the worksheet? Thanks

[@financialmodeling]

Click "Show More" and scroll down. Click the links at the bottom.

[@sorcererstone3303]

I don't understand this video. At 2:50, it said this hypothetical startup has no revenue. Then it goes on and create a hypothetical revenue projection & conversion rate & paid revenue from Yr1 to Yr8. Then at 3:58, it explained how DCF will be calculated base on these projections... Then it talked about the #s from a matured Steel company. I have no issue with #s for Steel company. From googling and talking to investors, DCF is meaningless for startups. Definitely not applicable for pre-revenue startups. Most startups fail and for those who success, they blew through all initial financial forecasts (i.e. all initial forecast are unreliable and unpredictable). So why DCF? Also at 6:40, discount rate peg at 50%. For startups (with revenue), risk is extremely high. Typical discount rates for fundable startups (at Angel round) that I saw hover around 70% or higher to cover the risk. So why the rate here is so low here? Is there a methodology to calculate this rate? Or use published values from existing companies in the same field? Are you talking about Seed? Angel? Series A? discount rate here?

[@financialmodeling]

Yes, of course a DCF is meaningless for most startups. The point of this lesson is to show how the extremely high valuations for startups might FIT INTO the existing framework for valuing normal, mature companies: a DCF. So why do we use a DCF? Not because we'd actually use it in real life, but instead to show how it MIGHT apply for startups, and why it's ultimately pointless - because the discount rate is so high and the projections are so speculative. So the implausibility of the assumptions here proves the point you're trying to make. As for your other points, you're nit-picking small details that don't relate to the core purpose of this tutorial: to explain why, even if you *can* use a DCF, you probably shouldn't use one to value a startup. The discount rate might be 50% or it might be 70% or 90% depending on how far along the company is. The real point is that with discount rates *that high* the DCF produces nonsensical results, so there's no point in using it.

[@sorcererstone3303]

Thanks for responding. I didn't mean to be nitpicking about the discount rate. I thought it is just too low. I asked because I want to know how VC picked the discount rate (I hate to hear people saying just pick the rate out of the hat type of response - voodoo science & questionable "by experience" approach). Valuation is ultra important for startups trying to raise investment. Hence I ran into this post.

[@yoelherman5344]

Thanks a lot for the helpful video. Quick question: How do you come up with the relevant "Discount Rate" for the Valuation? is it suppose to be the company's "WACC"? and if so, how do you know what is the relevant cost of equity for a start-up company?

[@financialmodeling]

It is based on the VC firm's (or other investors') internal targets and the overall IRRs they are going for... if they know that X% of startups will fail and they need to earn an IRR of Y%, they can approximate the discount rate as Z%.

[@financialmodeling]

It would be based on the VC firm's or other investor's targeted returns in this case. You wouldn't use WACC for a startup because of the lack of historical data and comparables.

[@choomington]

Nice video, I have a question about modeling in general and then how it relates to startups. How do you balance building in more precise/robust inputs and assumptions vs choosing a discount rate? Is it simply an issue of time? That is, for example, in this model you could have tried to add in more/better inputs to get a more accurate picture and then used a lower discount rate or a range of discount rates for each period/year depending on your uncertainty etc. Is there a rule for when it makes sense to do one or the other?

[@financialmodeling]

That is a really broad question, but it mostly comes down to time and availability of information. In most cases, however, the Discount Rate is the wrong thing to focus on because it's inherently subjective and no one can agree on how to calculate it. So your time is best spent thinking about cash flows in more detail and spending less time on the Discount Rate (as long as you look at it over a wide range of values).

[@konstantinkoziar8457]

Thx a lot for this video!

[@financialmodeling]

Thanks for watching!

[@OlawaleSLasisi]

Great video! What would you estimate for a startup that has the potential of out-performing Uber & other Ride-Sharing companies?

[@financialmodeling]

What is your question? The estimate for the company's market size? Maybe look at the total amount of taxi or transportation revenue worldwide and make it some small percentage of that.

[@tommywei4165]

are you guys having more videos on startups and venture capital?

[@financialmodeling]

We hope to create more in the future.

[@oliverb6313]

Mergers & Inquisitions / Breaking Into Wall Street Insightful video Brian. I'm quite confused by the discount rate though. I get why it has to be high, cos it's a startup so there's tons of risk. But isn't one way of thinking of the discount rate as what you think you could generate if you were to deploy your capital elsewhere in an project with similar risk? If that's true, wouldn't expecting a return of 50% from another startup be very very aggressive? Given that plenty of startups fail, wouldn't a potential investor be pragmatic and assume a much much lower return than 50%?

[@financialmodeling]

You could, but the point is that the risk/potential return of a startup is much higher than that of an established company. Many early-stage VCs do actually target 50%+ annualized returns (whether or not they achieve them is a different story) because so many startups fail, but the ones that succeed could be huge.

[@Fousch]

Hi, Great video. If I calculate the value of a start up using this method is it pre money or a post money valuation?

[@financialmodeling]

Pre-money if you have not factored in the effects of the capital raise on the company's projections.

[@xkoningx]

Does diversification affect the discount rates for startups? Could a VC which is invested in 20 startups use a lower discount rate than a VC which is invested in 5? Considering the very high rate of failure for startups I'd imagine it would take a lot of different investments to be somewhat diversified, so what does a typical startup VC portfolio look like? Do they typically invest across different sectors or focus on e.g only tech or medical companies

[@financialmodeling]

Yes, diversification may affect the discount rates a bit, but the risk is still very high. Don't over-think this concept: The main point is that the Discount Rate for early-stage startups needs to be extremely high. Maybe it's 50%, maybe it's 70%, we don't really know - but no matter what it is, such a high Discount Rate means that the implied value is heavily dependent on speculative future performance.

[@Ryan-md5gm]

Hey, love the video--a question I had was could we potentially use comparable companies to value a startup? Or data is simply too limited for us to find any meaningful comparison.

[@financialmodeling]

Potentially, yes, but you might have to use non-financial metrics, such as $ per Users or $ per Monthly Active Users or something like that.

[@samimasannat]

Great work !

[@financialmodeling]

Thanks for watching!

[@zanerich9460]

Great video

[@liv-tribe-hustle7678]

2:36 he said no company will get that...dont think he knows about magicleap and their AR glass😂😅

[@hairulrizalismail7366]

Can it be used against traditional export based company which aims to hit the global market?

[@financialmodeling]

I don't understand your question. You can use a DCF to value any company, but it is less appropriate for early-stage companies.

[@hairulrizalismail7366]

+Mergers & Inquisitions tq for your reply bro.. Just recently I have a tough time convincing this type of valuation as the vc insist on discounted PE multiple on maintainable earnings

[@ak7586]

Hey Man (name?) , is there a way to get the spreadsheets for free somewhere? Thanks. A.

[@financialmodeling]

Click "Show More." Scroll to the bottom. Click the links.

[@sherlockliu7631]

how do VC guys like Peter Thiel value these tech startups?

[@financialmodeling]

Depends on the stage the company is at... at the early stages there is very little logic, but it starts to resemble normal valuation as the company grows.

[@cn0412]

How do you crunch the number and come up with 50% WACC?

[@financialmodeling]

It's an estimate based on the extremely high risk/reward that early-stage VCs face. You can't calculate it mathematically at that stage.

[@vivekanand1]

Shouldn't 100 Debt be subtracted from Implied Enterprise Value to give 822 as Implied Equity Value?

[@financialmodeling]

No. The company has no Debt, only Cash. Therefore, Net Debt is negative $100 million. Subtracting negative $100 million means adding positive $100 million.

[@dbsk06]

Thanks! How is the 100x exit ebitda derived?

[@financialmodeling]

It's just for illustrative purposes, to show *what it would take* for a startup to be worth this much. Although some startups, and even bigger tech companies, do trade at multiples that high (see: Amazon, Atlassian), so it's based partially on real multiples for high-growth, public software and tech companies.

[@dbsk06]

Thanks! In general how are entry and exit multiples in a deal (like LBO) determined? Is it based on existing/historical multiples? Should entry and exit multiples be the same ?

[@financialmodeling]

Entry multiples are based on current market prices and premiums and what a buyer would have to offer to acquire 100% of a seller. Exit multiples depend on the company's financial profile upon exit, what the market is like then, and what similar companies are trading at. There is a ton of guesswork since you are predicting the future, so you need to look at a very wide range of outcomes.

[@dbsk06]

Mergers & Inquisitions / Breaking Into Wall Street in an LBO case study I had for a private company I had to determine the entry and exit multiple for the LBO. How would I go about that?

[@financialmodeling]

Look at comparable public companies and use a multiple in the range that the comps are trading at.

[@el-hadikadouf289]

Great stuff. Though I wonder if you have a ‘for dummies’ version

[@financialmodeling]

Thanks. Unfortunately, there's only so much you can simplify these concepts. There's a reason why financial modeling/budgeting professionals earn high incomes (hourly rates are often $200+). And this is already a pretty simple model.

[@irfansidik9919]

greattt !!

[@financialmodeling]

Thanks for watching!

[@SaaralAmitan]

Is there a way we can download the excel file somewhere?

[@financialmodeling]

Click "Show More". Scroll to the bottom. Click the links.

[@ngominh7987]

5 years later and now we have companies like Rivian and Lucid making 0 revenue and being valued at ~100 Billion

[@financialmodeling]

Hey, why not? Making money is for suckers. The most valuable companies all lose massive amounts of cash forever.

[@macgurkha1973]

Should be more accurate to call these speculative valuation or conditional valuation. I think many of these startups or even operating companies have never shown any profitability.

[@financialmodeling]

Yes, that's true. They are highly speculative, which is why the Discount Rate here is extremely high and why, on average, most startups end up being worth $0.

[@tonybasa7491]

Do you have an email where I can reach you "?

[@financialmodeling]

breakingintowallstreet.com/biws/contact/

[@nikhilgulati1751]

Do you really think the investors who pump in $100 mn at $ 1 bn valuations, do they really value companies on DCF? They just give money and ask for 10% to 20%. Boom, you got a valuation of $1 BN to $500 mn

[@financialmodeling]

No. The point of this video is that there is at least *some* justification for these valuations, even though it's still highly speculative. Obviously, no early-stage VC invests based on the output of a DCF. But people who kept begging for coverage of "startup valuation" do not really like it when we say, "It's a farce! You might as well pick a number out of a hat or go to Vegas and play slots to value a startup."

[@nikhilgoyal007]

I just hate the calculation of discounting $53B TV as $1B on 50% discount. It makes no intuitive, logical or mathematical sense. better to have an ebitda of fcf multiple 4 - 5 years out depending on the assumed growth trajectory at that point which is how they come with the valuation number only to back calculate and prove it with dcf . sorry for the language, i liked your video but this calc ...

[@financialmodeling]

Multiples represents companies' Cash Flow, Cash Flow Growth Rates, and Discount Rates. If you have a multiple and 2 / 3 of those other variables, you can solve for the last one. So your argument doesn't make much sense - picking a multiple is the same as picking a Long-Term Growth Rate, given that you have the other numbers. And there is just as much guesswork involved. You apply an incredibly high Discount Rate in that scenario to reflect the fact that there's a good chance of the company failing long before Year 10. You could argue that the Discount Rate should be lower by Year 10 as the company matures, and maybe it should be. But Discount Rates need to be quite high for startups, especially early-stage ones.