Confessions of a VC 3: How to value your first girlfriend

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First of all, thank Karl, he introduced me to the Marxist theory of the three important part of the British political economy, but also referred me to the great Adam Smith. I am willing to share with all the founders the most profound leap of understanding in my student's way: Adam Smith's "Invisible hand".

All transactions in the world, be they cheap, cost-effective, expensive, profitable, even fooled, all by Adam Smith This "invisible hand" in the unconsciously contributed to: some people are willing to buy at this price, some people are willing to sell this price, is the buyer of the seller is willing, which have what "valuation" of the truth and method?!

It is often asked how early startups should be valued. You can call the price ah, someone voted you, the final deal, VC out how much money you received how much money, this is "valuation." If you call the price of the sky, the result is no one to vote for you, then your company can be said that there is no market price, worthless.

Early start-up companies do not have any accurate "valuation" method, you and VC go to bargain to see do it.

Dizzy! What's the matter with me today, talking a little bit of nonsense ...

So, to put it another way, let's limit the logical assumptions of the discussion to the point where we're going again:

1. Everything has a starting point

2. Money is added in the process of time (the financial turmoil is neglected)

3. We eat a mouthful of food, climbing stairs is a section of the climb up

4. The size of the company is equal to the company's ability to generate revenue (including profits)

5. Sellers always want to sell at the highest price

6. Buyer (theoretically) always wants to buy at the lowest price (excluding luxury brands)

7. In Beijing Silk Street or Shanghai Xiangyang Road market bargaining way is not a gentleman.

8. Adam Smith's "Invisible hand" is the key trading determinant

Early startups are the starting point for a great cause, it can be an idea in white, or it could be a young team with a grinding fist, or a group of brothers who have amassed their savings to rent a hut to tighten their belts day and night ...

Entrepreneurs you fire eyebrows need to change, even if you are lucky to go out to hit a fat VC, he asked how much money you need, you eagerly begged: "Quick give me 200,000." No, right, wrong mouth, it's 2 million. No no no, wrong again, give me 20 million. "VC easy to smile and strange to turn around the eyes:" Money, of course, no problem drops ... But you have to tell me, how much does it cost to buy your company's shares? How much is your company worth? If this is the first time in your life to find VC money, I guess at this time you, it must be like the first time you heard a girl said to you, "I love You" that way, you will suddenly blush, overwhelmed.

Entrepreneurs, if at this moment you have nothing, only one idea, please forgive me, I really do not know how to help you find the answer, you may be too great, I if I put you to the sale, I can not afford the responsibility of historical sinners infamy. However, if I were to answer this question, I would not even be able to confuse 200,000 and 20 million. (to emphasize that what I am saying here does not mean that any VC represents myself)--I will accurately calculate my essential funds for the next 6-12 months, no more than a few points, and then said to him: "If you can give me 6-12 months of operating funds, I can give you 1/3 of the company shares, This is my bottom line, absolutely will not exceed; If you can keep my life for the rest of the day, then you and I must be the legal half. ”

Investment is not science but art. Entrepreneurship is not science, it is art.

It is hard to determine a formula for early startups, especially those that have not yet formed and have no cash flow. Whether the entrepreneur or VC, can be optimistic about the future development potential, mutual bargaining company's valuation and pricing, should be objective, rational, enough, do not heels, inch ... If not favoured, then simply let Adam Smith "invisible hand" to justly it.

Of course, if the start-up company is not a blank sheet, have a certain income or profit, or have a product and relatively accurate financial forecasts, so we have some more can be used as a basis for negotiations, such as whether we can consider the "annual profit" as a multiple of the base of valuation? Does the premium of a listed company not often come out in multiples of the company's profitability? The low 2, 3 times times all have, the high dozens of times times, can even on a hundredfold. Of course, the premium rate on the private-equity market is always much lower than in the stockmarket.

In any case, for the change in the founders should bear in mind that the final "valuation", that is, the price of the transaction must be confirmed by the buyer, rather than you insist on shouting, shouting again high, loud and useless. In the VC market, there are few opportunities for sellers, perhaps sellers will never come again. The most important task for an entrepreneur is to try to fix the "first Institutional Investor" (remember: Institutional investors, VC, not your uncle or former boss) to confirm your company's valuation. Because, institutional investors, that is, professional investors, usually do not inexplicably to bid the price of the bargain, they will be based on analysis and judgement of your company to "valuation", which is based on, including but not limited to:

(A) What is your company's current and future profitability?

(B) See if there are any similar companies that have been invested by VC, and what are the estimated ranges of those companies?

(C) Calculate how long it will take for your company to make the next round of financing if the plan is to be developed.

The money, at least a few times add value?

You see that? Valuation "is definitely not groundless, Pat head can be fixed." We might as well analyze, (A) your profitability is the absolute truth, a profitable company is Bruce Lee is the basis of your profit on the two sides bargaining a multiple is a very simple thing; (B) It is dangerous to compare valuations with similar companies, because once you find your competitor in the market, Most VC will put their own out of the head and shrink back, people do not say VC only vote boss, second? If you old, the chance is very small, even if there is VC willing to cast old, your valuation must not be higher than the eldest; (C) VC In fact the most calculated, not your "valuation", That's what you're most concerned about. VC Heart has their own account, that is the next round of investors come in, or in the investment exit, they are now put into the money is not likely to add value, if so, in the end can increase several times?

Hey man, in fact, for you, with this round of VC money, the next round of VC what are you worried about? When the next round of VC in the time your company should be already have profitability, then in fact, should be, of course, almost sure that your company's "valuation" doubled a few times is not a problem, right? is that right? Say it???

The curtain opened, Danish Wang Zihammeret in the morning mist to come to the stage, he followed the ghost, indecisive, on the face of the deep sigh: "To be," and "be-that is the question ..." (is the death, but the vast expanse ...) Ah, let's play it again, Shakespeare's eternal. "To be," and not to Be-that is the question ... "Every single one of us is rehearsing in Shakespeare's theater every day ..." to be, "or" This is the question ... "I would like to wait until the year and the month, will have the next Yahoo, the next Google on the show, gorgeous bloom?"

Stop the brakes, and pull away ...

All I want to say is that how many entrepreneurs, when the first VC appeared in front of them, they in the chaos of a hunch, they seem to have set foot on Bill Gates to the world's richest man's road, this is a once-in-a-lifetime opportunity, must firmly grasp, heels, inch, to maximize the benefits ...... Thus, from here on the early start-up companies "valuation" This is always tangled topic.

The trouble with early start-up companies ' valuations ', to be fair, is most likely the problem for entrepreneurs.

One of the problems: Many entrepreneurs mistake the "possibility" of the future as all the basis of "valuation", they enlarge their dreams infinitely, they are so disappointed in the distant vision that they forget how to take the first step ... In fact, "valuation" is not a profound learning, but one of your "decision." I suggest that you must first eat the first meal, then to worry about whether there is a second meal to eat; you have to go over the first mountain, to the top of the hill and see how high the next mountain will be.

The second problem: entrepreneurial difficulties, financing more difficult, many entrepreneurs in order to concentrate on entrepreneurship, always want to eat a breath of food, the development of their own business needs all the money, a fix, a step in place. There's plenty of money. The flames in the stove can be burned slowly, and you can lie on the high pile of money and sleep peacefully. It is because you want the money to be ruthless, so your company's shares are bound to dilute fast, when the flames in your stove are going to go out, you wake up to raise money, the finger of the board to find your shares in the company if another round of dilution will be very few, so you and the company of a wage earners are also similar, Originally thought that from the slave to the general has been successful, the fate of the strange, in the end he turned himself from the general into a slave, alas!

Entrepreneurship, this is the most meaningful period in the development process of every great company, is also a company's value growth of the fastest stage, but the start-up period of the company Plate Small Foundation thin, the brothers must be patient, resist temptation, refuse greed, to try to take less VC money, or can be a period of time to take it so little, Take a little more, not a breath of violence to eat a step in place, dream once and for all ... Beware of a slip into the eternal hate! Because I took too much VC money will you die eee death.

Do you understand? Financing is like we usually eat to buy rice, you know their own entrepreneurial hard appetite, to eat a pound of rice every day, predicting that they should live at least 70 years, a lifetime to consume the rice is equal to 1 x 365 x 70 = 25550 (kg). But you will not take these 70 years to eat the rice one-time purchase, but will go out every two weeks to buy once, eat and then buy ... You don't worry if you don't buy the 70 rice once, you may starve to death the day you don't have rice.

To be realistic, stop daydreaming and take care of your "first institutional investor". If a start-up company has a first-time institutional Investor's "price", it means that everything has a starting point.

The first time is always the hardest, so you should never forget your first girlfriend!

Love Is Love ... Because of her, you know that there is another half of life, gentle past, together, crying and laughing, playing and scolding, but not because of fate ... Cherish This love affair, don't treat her badly.

Entrepreneurs, don't argue, support you when you're in trouble, the first is willing to take out money to support your investors, do not forget to let them get the highest return, early in the VC, early risk, investment withdrawal time also dragged long, all because of you, so you have to know how to cherish, know how to repay.

......

When you have the first "institutional price", your company will be much easier to refinance.

VC Investment Game is: After I put money, the company will add value, in other words, when the next investor came in, he would certainly pay a higher price to buy shares with my size. For example, I spent 2 million to buy 1/3 shares, the next investor may spend 4 million, or even higher prices to buy 1/3 of the company's shares. Company growth needs to constantly introduce more funds, so there will be a group of VC willing to round the money into your company. Every round of financing, the share price on the corresponding increase, in the process, early in the VC's shareholding continued to add value, and then the VC continued to the company's premium price, the company's value is constantly doubled.

I am sure that after you get the first VC money, as long as the following two, you have a higher "valuation" to get the next VC money can be confident:

(a) You basically do you and the first VC guaranteed performance plans and milestones, the company must have revenue;

(ii) No World War, no financial tsunami, move not turn over all the SP ...

Look at the picture era, or draw a picture to explain it.

Explain: As shown in the figure of the start-up companies in a total of 5 times (A, B, C, D, E), at the outset, the amount of a round of financing is relatively small, and later the amount of financing gradually increased; Again, please note: In each round of financing process, the previous round of investors have a reasonable investment value added part ... The company's overall fund size in the passage of time in a section to improve and increase, at the same time, each financing of the "valuation" and the company's income scale corresponds to the company's value is with the performance development and gradual, it is impossible to be pole.

Use some specific figures to illustrate the possible financing of the venture. Again, the following figures are used for illustrative explanations, and your company's financing must not be applied to these figures and ratios:

For the first time, the Angel's money: 500,000 (Valuation: 1 million, after the money in the company value of 1.5 million)

Six months later to melt the VC money: 1.5 million (valuation: 4 million, the money came in after the company value of 5.5 million)

Nine months later, another round: 3 million (valuation: 10 million, the value of the money in 13 million)

One year later: 8 million (valuation: 30 million, after the money comes in value 38 million)

Another year: 20 million (valuation: 80 million, after the money came in value 100 million)

Another year: Maybe the company will be listed to melt it at least 200 million! (company value Less said also 4-500 million)

Never misunderstand: Corporate finance is to see the specific development needs of each company, not the same need to go through 5 financing, some companies may be two or three rounds of financing is enough, some companies melt five may still see the end, in short, financing because of the industry and different. Early start-up companies financing, must be small to large, step by step, "valuation" also, from low to high, step-by-step, the key is that you can really step the value of the company to do it.

Let's draw a picture of the entrepreneurs who are hungry enough to eat, and what they might look like.

Look at this brother skills, the first financing (a round) unexpectedly pole a breath of his half a lifetime to eat Michen all bought ... I really envy this kind of money hero, but the money hero can become a money hero, God knows.

From the picture, the brother is rich and the atmosphere is long, the business also calculate passable, another round (B) round, almost can catch up with the city. However, some people envy people worry, you know? His brother is now at the moment for his B-round of the brain, can you see the problem?

(a) The amount of funding for a round is far exceeding the corresponding business volume of the company, so in this deal is not VC investment costs too high, that is, entrepreneurs sacrifice too much stock, that is, in a round of "valuation", if not the entrepreneur is stupid, which VC is stupid, anyway, there must be a fool. Huashan a road since ancient times, take the wrong first step, change back is difficult, the so-called a slip into the eternal hate ...

(b) The price of a is so high at the time of investment injection that if the next round of "valuation" is to be doubled according to VC's, how can a B-round investor afford it? Tell you, they are not even interested in picking up a round of VC's plate. Because the VC of B round also has his own heart of a account, he based on his own interests and VC general algorithm to give a price, this price and a round of VC price is also the same, that is, A and B-round has almost no value of value-added space-the case is stiff. The only solution is the entrepreneur and a round of VC concessions, entrepreneurs and a round of VC to make a decision now, do not drag, B-round VC behind is the hand of Adam Smith is pushing, B-round VC can not see their future earning space is absolutely not jump in. If you insist on your own "valuation", adhere to continue blowing bubbles, if not the next round of investors to surrender their hands, the company will not be the money, entrepreneurs and a round of VC both jumped to death, the originator of the stone smashed his own feet, himself to kill himself.

I've seen so many things that are so miserable: siege, the company Jiebukaiguo, in order to attract B-round VC, entrepreneurs and a round of VC had to open their own doors to put down the drawbridge, in a round based on the mid-ming arm, cut a knife, dozen a fold, hand kneel to let B round the VC army into town ... Entrepreneurs and a round of VC to bear the unbearable light, is their first bubble blowing too fast, too big, too heavy, really less than the original blowing a small bubble, then add together, the same is a big bubble.

Entrepreneurs, we come to the PK one: please set the ground to think, if you are VC, you will ask your return on investment at least how many times? 10 times times? 50 times times? 100 times times? Examples and prizes are obvious: Apple's initial investment turned 1700 times times, Google's initial investment turned 3,000 times times. Could you do me a favor and draw a picture of yourself with the reference to the above two pictures and see for yourself what a wonderful blueprint the VC has in hand?

Angel 3,000 times times

Early VC1000 times

The late VC how many times, 10 times times OK?

IPO PE, give them 1 time times enough? (Friendship reminder: They just want to ride your roller coaster, in your stock fire

When the arrow lifts you as a hero of the Earth, and when your temporary performance declines and the stock performance is bad, they will mercilessly throw you out of the clearing ... Have you seen Yang Zhiyuan these days?

At the root of the knot: Early venture capital "valuations" must be built on the premise that the company's size (income) is expanding, from small to large, from low to high. To grow with investors, both protect your interests and take good care of the interests of investors. Please be sure to remember: do not play heartbeat, do not want to be obsessed with addiction, do not compare with others money less money: Koo made a billion for playing Youku, why I can not?

Entrepreneurs, one day you will be millionaires, billionaires, billionaires, and rest assured that you are destined to have that date. When you have a huge amount of wealth, many of you will probably be VC. You might as well start thinking about it now: If you were a VC, what would you think? How would you invest? Understand the investor, when you stand on the VC's point of view "valuation", in fact it is very simple.

This is my point of view, it is likely that you do not agree, it does not matter, let "invisible hand" to decide who is right and who is wrong, who wins.