Hello, the topic in this session is finance
Finance is very important and also difficult to understand
Basically, we are going to talk about the money during the session
Money is crucial for businesses
Money is like blood for human beings
Think about what happens if we don't have blood
or if we lose too much blood
What happens then? We'll die quickly.
Same thing happens in the company
If you don't have money,
regardless of how valuable your products or services are,
you'll fail immediately
That's why, as an entrepreneur,
we need to understand the concept of money very clearly
The first subtitle is "Valuation of Startups"
Are you ready? Okay, let's go together
Look at this table
This table is called capitalization table
We call it a cap table
Cap table is a very important documentation
Why? Because it outlines the shareholders,
which is basically the equity ownership structure
It lists all the shareholders, the number of shares,
and also the changes in ownership portion
For example, you are just a startup H,
and you have two founders and each has 45%, totaling 90%
and Hanyang University got 10%
How many shares do you have?
Your total shares are about 1,000,000 shares
You have 1,000,000 shares
The founders basically have 900,000 shares,
and Hanyang University has 100,000 shares
This is just the initial stage of your company
in terms of the equity ownership structure
So you follow me, right? It's pretty easy
And then you got series A investment and then you got series B investment
Then you got series C investment
As you get the investment,
you can notice that
your founder's equity portion decreased to 73.5%
and decreased to 61.7%
and eventually, your equity became 53.5%
Hanyang University's shares decreased to 5.9%
At the same time, your total shares increased up to 2,133,361 shares
This is a capitalization table
This table shows what happens when you receive the investment
Without any investment, it's pretty simple
You got just 900,000 shares,
and Hanyang University got just 100,000 shares, totaling 100%
But if you receive additional external funding,
your equity portion decreases
At the same time, your total shares increased
From now on, we are going to talk about these issues
We say this equity dilutions
From now on, we're going to talk about
pre-money valuation and post-money valuation concept
Look at the pre-money valuation
Also we have post-money valuation
Pre-money valuation refers to a company's estimated value
before receiving external funding
On the other hand, post-money valuation is a company's estimated value
after receiving outside funding
Why is this important?
Because the pre-money valuation
and post-money valuation allow us to evaluate your equity portion
I will give you very simple examples
Well, think about it
There is a pre-money valuation,
then you got investment,
then we have a post-money valuation
Think about you and your investors
agree that your pre-money value is $800,000
Then investors will put $200,000
Then how much is your post-money valuation?
Of course, it could be $1M
Now you understand the process because it is pretty easy
We can easily calculate your investors' shares and your shares
How much investors shares?
Investors put $200,000 out of $1M
Then how much is it?
He got 20% of the total shares
What about you?
Your share, you got $800,000
because before the investment, your company's value is $800,000
Your company's value is $800,000 out of $1M
Then you got 80% of total share
What if you don't have any investment?
In this case, if you don't have investment, your valuation would be $800,000
Then you get $800,000 in total
So your equity share would be 100%
But you invited your investors, and investors had $200,000
They contributed to the company
Then their share would be 20%, and your share would decrease to 80%
Again, your portion decreased from 100% to 80%
What is it called?
It is called as equity dilution
I want to give you more detail with examples
For example, you put $50,000 to start your own businesses
Starting businesses in terms of finance is about going into the casino
Think about it
You have $50,000 cash on hand.
And then you enter the casino.
You cannot use your cash in a casino
Instead, you should change your cash into chips
Right now, you should change your cash into chips
How many chips should I change for cash?
You change your cash into 10,000 chips
You change your chips, about 10,000 chips
Then each chip has different values
If you choose 10,000 chips,
each chip probably has a base value of $5
So how much are the chips?
You got $50,000-valued chips
How many chips do you have?
You have 10,000 chips right now
If you change your cash into about 10,000 chips,
then the value of each chip would be $50
If you change your cash for 100 chips,
then the base value of each chip would be $500
Now you understand the mechanism, right?
Anyway, inside the casino, you don't use the cash
You use the chips
Right now, your equity portion would be 100%
Later, what's going to happen?
One of the investors approaches you,
and he tells you,
"Wow, you made a great company!"
"I thought your company's value would be $4M"
Then you were surprised
"Oh, my God, $4M company?"
"I just started $50,000 company because I put just $50"
Somebody believed that my company was valued at $4M
Then you said that,
"Well, thank you for recognizing my company"
"Yes, my company's value is $4M"
What just happened?
How many chips do you have now?
10,000 chips, base value of $5
Your chips' base value automatically changed from $5 to how much?
$400
It magically changed from $5 to $400
The number of chips is the same, right?
The number of chips is the same
But the base value of your chips changed from $5 to $400
Why is this happening?
Because somebody else believed that your company's value is $4M
This is what?
This is pre-money valuation
Pre-money valuation
One of the investors evaluated your company's value at $4M.
Then what happened?
These investors really want to join your company
Then how can they join your company?
They asked you how to join your company
And you said that,
"Bring the money, change your cash into chips,
and just put your chips in my house"
That is a pretty simple way to join the company
Then, the investors got $1M in order to join your company
Again, how much is your company's value right now?
Your company is valued at $4M now
Then how much is each chip?
$400 Do you remember that?
So, in order to join your company,
the investors changed their money into chips valued at $400 each
They got $1M, right?
Then, how many chips can they get?
How many chips?
You can easily calculate it
$1M cashes, and you changed it to $400 chip
Then, how many chips can you get?
2,500 chips
Investors changed their money into chips
How many chips? 2,500 chips
So, they got 2,500 chips
So, they want to put this chip into your company
Then, right now, your total chips changed, right?
So, previously, you got just 10,000 chips, 10,000 shares
But the investors put additional 2,500 shares
So, totally, how much?
Total number of shares became 12,500 chips
12,500 shares
Now you understand the mechanism, right?
From now on, we can easily calculate your equity ratio
Previously, the founder had just 100% of the shares
Why? Because you got 10,000 shares out of 10,000
Nothing changed
Although your base value of each chip and each share changed,
the total number of shares is the same
Then, what happened later?
Investors came to you, and they added 2,500 new shares, right?
Do you remember that?
Then, your total shares changed from 10,000 shares to 12,500 shares
So, we need to calculate the founder's share again,
based on the changed total number of shares
Your share is the same as 10,000 shares,
but out of 12,500 shares
So, the total is 12,500 shares, and you got 10,000 shares
Then, how much do you get?
Your portion of the shares would be 80%
Previously, your portion was 100%,
but right now, your portion has decreased to 80%
Then, what about the investor?
Investors didn't have any shares before
So, their share was just 0%,
But they added 2,500 shares now
so, they got a portion
How much?
We can easily calculate that:
2,500 out of 12,500
Then, his portion became 20%
Okay, so, now you understand the mechanism
how to calculate the equity ratio,
and how your equity changes
This change of the equity portion is called equity dilution
Again, equity dilution occurs
when a company issues new shares
especially when you invite new investors,
you should issue new shares
Then, we need to calculate again
Calculate your equity portion again and again
Now, let's move on to the evaluation of the startup
Basically, how to evaluate your values,
how to estimate your value as a startup
But actually, this is not an easy task
because you just started your company,
and then you don't have any revenue,
you don't have any record
Then, how to estimate your value?
So, now we are going to talk about these issues together
But remember, your value,
your value should be based on
the agreement between you and your investors
Do you remember the previous case?
And also, you know,
when you estimate your value of your startup,
then you need to negotiate with your investors
Normally, if you've invited one of the investors,
you give up around 10% to 30% of shares
It means you should give them 10% to 30% as investors
This is kind of a rule of thumb,
but it depends on your situation,
depends on your negotiation
I want to give you kind of very specific
and commonly used methods
about the evaluation of your startup
The first method is benchmark multiple
Benchmark means referring to your peers
or your competitors
Remember, the benchmark multiple
is the kind of metric that investors use
to evaluate your company performance,
and they compare your performance
with your competitors
So, basically, you and your investors
should find out the compatible companies
in the same or similar industry
And then later on, you examine
how much the company is worth
as a multiple of its performance
First thing to do,
you need to find out a compatible company in the market
And then second thing to do,
you need to investigate the performance of these companies
I will show you the examples
Look at this
There are two different types of companies in the market
First company is a paper manufacturer
Second company is a mobile commerce company
Both got $1 miillion profit
But interestingly,
the paper company is valued at
just $5 million in the market
On the other hand,
the mobile commerce company is valued at
$20 million in the market
So, we can easily compare the performance and the valuation
Although they got just the same performance,
as $1 million profit,
but their valuation is different
They were evaluated differently in the market
Mobile commerce company
was valued at $20 million,
which is 20 times bigger than their profit
On the other hand,
the paper company was valued at $5 million,
which is five times bigger than their profit
Although you have the same performance,
you can be valued differently in the market
What about your company?
If your company is a mobile e-commerce company,
and you expect to have $100,000 profit next year,
what could be the worth of your company?
How much could it be?
How much is your profit?
$100,000
Then how can you be valued in the market?
How much?
Well, in my opinion,
it multiplies 20
Because you are a mobile e-commerce company
So, your valuation would be $100,000 profit expected
multiplied by 20 times
Then your value would be $2 million
If your company is very similar to the paper company,
then your value would be changed,
not $2 million
If your company multiplied by 5,
then your company could be $500,000 in the market
So, now you understand how to calculate your valuation, right?
Remember, it is a benchmark multiple
I want to give you another very useful method
This is called Berkus method
He is Berkus
He is a very famous venture capitalist
And Berkus method is named after his name,
David Berkus
He had much experience to estimate the valuation of the startup
He identified and came up with a very simple method
to calculate the valuation of the company
Anyway, it is a well-known and popular method for valuing startup
Basically, the Berkus method identifies five critical factors
Five critical factors that impact a startup's performance
Later, this method just indicates
a value range from 0 to $500,000 for each factor
I will show you the table
Like this
you list five critical factors
which is an idea:
Is it a great idea or not?
Or do you have any working prototype or not?
And do you have any high-quality management team or not?
Or do you have any very specific and great strategy relationship
between your consumers or stakeholders or not?
Or do you have any product rollout or sales occurs or not?
Something like that, right?
Those five factors are critical factors
that impact on your performance of the startup
Later, Berkus method indicates
a range of $0 to $500,000 value for each factor
If you think this company has a really great idea,
its value would be just $500,000
Other than that, you can also evaluate based on quality
I will give you an example
Let's look at the Startup X
Startup X has a decent business idea, but not very exciting
And this is based on the business idea
The second one, Startup X is currently working on the prototype
that has not yet been completed
Let's say it's just 30% done
And Startup X has a very strong management team
It's good on these factors
Startup X has a few signs of consumer base
It does not have good relationship with consumers
or it does have a little bit good relationship
A few signs, right?
A good relationship
StartupX has no clear signs
It's not good
Based on those five factors,
when you evaluate yourself as investors,
you just put a number range from $0 to $500,000
In this case, the idea is kind of 50%
51, just half
Then, it is $0 to $500,000
How much you put?
Yes, $250,000
What about the prototype?
I’d say it’s about 30% done
30% out of $500,000, which is $150,000, right?
Also, this company has a very strong management team
So why not invest?
$500,000 is the maximum
And this company has a few signs
yes, a few signs
Not very great, but still, it's doable
So, this company got $200,000
And then the last one no revenue
Wow, it's bad
It's zero
Zero dollars
So, if you add everything up
the total comes to $1.1 million
So, how much is your company valued at?
Your company can be valued at just $1.1 million
by Berkus method
What do you think?
It's very easy to use, right?
It's very simple and easy to use
So, try practicing the Berkus method
when you evaluate your company
or when you evaluate other companies
Let's move on to another method
the Scorecard method
Scorecard method is also very useful and commonly used method,
but it's a bit more difficult than the Berkus method
Scorecard method was invented by Bill Payne,
a renowned angel investor in America
Here's Bill Payne
When you use Scorecard method,
you need to understand the basic mechanism
The basic mechanism is this:
your company is compared with other companies
other similar funded companies
in similar regions
Do you understand that?
It's a little bit difficult to understand
So, I'll give you very specific steps on how to use it
The first step is,
determine the median of the pre-money valuation
of similar startups in your region
You now understand
the median value of the pre-money valuation,
of other startups
Second, determine the factors
important factors, and their ranges
based on your preference and your evaluation
Factors, ranges
Third, compare your company to others
Basically, stronger, same, or weaker
something like that
I will show you a real example
This is a 2019 valuation
The first step is to determine the median value,
the median pre-money valuation of similar startups
This number will be given by some kind of association
So, in 2019, the Angel Capital Association
provided the median pre-money valuation
of similar startups in America
How much was it?
At that time, the median value of the startup was
$4 million
This $4 million was simply given
Your job is to get this number
from some of the associations
Then later, you remember this number $4 million
So, the average company, basically,
average startups are valued at
kind of $4 million in this year
Then later, you determine the factors
What kind of factors?
Yes the size of opportunity,
strength of team, product＆technology,
partnership/sales, competitive environment,
need for additional investment, or others
Those are very important factors for a startup
So, you list up those factors by yourself
Then later, you assess the range based on your preference
on your evaluation
If you think the size of opportunity is very important,
then, you assess 30% to that factor
Or, if you think it is not important,
then assess 0% something like that
The same applies to the team
If you think the team is very important,
then you assess kind of 25%
So now, we’ve already assessed the range of each factor
We've got several factors
and we've assessed our ranges on each factors
Then later, the third step
is to compare your company to others
For example, take a look at the size of opportunity
We think our opportunity
is similar to our competitors
Then probably it is kind of the same
Or, if we think we pursue the bigger opportunity,
then you would evaluate it as stronger
So, we compare your company to others
For example, size of opportunity I think it’s the same
And what about strength of team?
Our team is stronger than our competitors’
so 125%
What about product and technology?
Our product and technology
are kind of much stronger than our competitors’
so you put 150%
On the other hand, our partnership sales market
is kind of weaker than our competitors'
so you put 80%
Weaker means a lower number,
and same means 100%
and stronger means a bigger number
Then later, what happens?
You can easily calculate each number
Then you get the ratios each ratio
Like this
When we multiply two scores,
we get ratios on each factor
Then we can easily sum up all the numbers,
and how much do we get? 1.13 as a number 1.13
What does that mean?
1.13 means that, based on this evaluation process,
our company can be valued at
1.13 times bigger than our competitors
So how much is the value of our competitors?
Do you remember that?
Okay, in 2019, our competitors' median value
of the pre-money evaluation was $4 million
So your company can be valued 1.13 times
bigger than $4 million
How much is it?
You can easily calculate $4 million
multiply by 1.13
and you can get $4.53 million
$4.53 million is your final valuation,
according to Scorecard Method
Did you understand that?
Can you use this method?
Of course, right?
Let's move on to another method,
which is the Risk Factor Summation Method
Risk Factor Summation Method
was developed by Ohio Tech Angels, as Angel Clubs
There are two stages
The first stage is to assess the average pre-money valuation
of a similar companies in the same region
which is pretty similar
to the Scorecard Method we learned previously
And second, the second step is to present
a list of the possible risks
At this point, you just focus on risks
associated with your startups
I’ll show you how to use it
The first step is pretty similar
to the Scorecard Method
you get the number from several associations
So the median number, median value
of the pre-money valuation of similar companies
was $4 million
This number given, right?
And then later, you present many, many possible risks
many possible risks associated with your startup
In this case, how many risks are there?
1, 2, 3, 4 ... 10, 11, 12 risks
12 risks you identified
Then you should rate the meaning for your company
If you think this risk
stage of business
is a kind of negative risk for you,
it could be very negative
You are in the negative stage,
then you would rate it -2
What about the management risk?
If you evaluate your startup
and think you don't have any management risk,
then this risk factor
is kind of positive for you
So you rate it as +2, something like that
Then, based on your rating
from negative two to positive two
you put different dollars
For example, if you rate negative two,
then you put negative $500,000 on these factors
On the other hand, if you rate positive two,
then you put $500,000 as a value
It looks complicated, but when you use this method
in the real situation, you'll find that it's actually very easy
When you use the Risk Factor Summation Method,
you first identify
and list all the factors 12 factors
Then you evaluate each factor
and apply these factors to your situation
Then, looking at the stage of the businesses,
we don't have to worry about stage of businesses
it's not a risk for us
So it's kind of positive
What about management risk?
Management risk a little bit
A little bit, we are engaged in management risk
It’s not very negative, but a little bit negative
so we rate it as -1
What about legislation risk?
There’s no legislation risk
but not positive, just normal(0)
And what about the technological risk technology risk?
Is there any risk for the technology in your company?
Yeah, it could be very dangerous
Sometimes other companies can sue us in terms of technology,
or we cannot develop the relevant technology
It can be dangerous, it can be risky
So in this case, it's kind of very negative -2
Anyway, you rate each risk about your company,
and you write it down from -2 to +2
Then based on your rating, you put the different dollars
Like this, if you rate +2,
then you put +$500,000
If you rate -2, then you put -$500,000
Then, you add up everything
Then you get the valuation adjustment dollars
How much?
Positive $250,000
What does that mean?
It means your company’s value is greater
how much greater? $250,000 greater
than that of your competitors
Then how much are your competitors valued at?
Your competitors valued at how much?
$4 million, do you remember that?
So basically, you just add up these numbers,
$250,000 to your competitors'
your competitors' median value, which is $4 million
Put them together how much is it?
Yes, $4M + $250,000
So your company can be valued at $4.25M
Can you understand that?
Now you understand it, right?