# BlueBook - A Startup Valuation Story

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## STORY

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### STARTUP VALUATION: ROUND A FINANCING

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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.

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### STARTUP VALUATION: ROUND B FINANCING

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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

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### STARTUP VALUATION: ROUND C FINANCING

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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.

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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### STARTUP VALUATION: THE DILUTION STORY

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For Round A investors, from their original £500,000 investment, they claimed 50.6% of Citydine. Following Round B investment, their

stakeholding was diluted to 36.7%, and to 30.6% after Round C. Round A shareholders’ wealth on exit was £2,295,844 (30.6% x £7.5 million), or 4.6x return on investment.

For Round B investors, their £750,000 investment gave them 27.4% of the company. Following Round C, their stakeholding was diluted to

16.7%. Round B shareholders’ wealth on exit was £1,715,000 (16.7% x £7.5 million), or 2.3x return on investment.

For Round C investors, in return for £1 million investment, they took

16.7% of Citydine and there was no further dilution. Round C investors’ wealth on exit was £1,250,000 (16.7% x £7.5 million), or 1.3x return on

investment.

The founders were diluted in each round from 49.4% after angel investment in Round A, to 35.8% after the first set of venture

capitalists, and finally down to 29.9% after Round C. After 5 years, they generated wealth of £2.24 million on exit.

£988K

### VALUATION ROUNDS

Angels Founders Angels Founders VC 1 Angels Founders VC 1 VC 2 Angels VC 1 VC 2 50.6% 36.7% 49.4% 35.8% 27.4% 30.6% 29.9% 22.9% 16.7% 4.6x 2.3x 1.3x

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## References

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