I was at an investor pitch meeting the other day and was asked about our valuation. How to justify a X multiple of our revenue. Truth is we are just starting to get revenue from some parts of the business, we have booked revenue from one area, but these is so much more potential. At the time I did not have a good answer. I was thinking its not about revenue at this point. This time next year it will be, but today the pipes are just turning on. So now I have given it some thought and would have a better answer.
I thought I would pass on my thoughts and also thank John Ason's web site for being very helpful, professional and clear.
The valuation is probably the most difficult and even emotional aspect for us, the founders of a company. We have invested a lot of money and time already. So, on the one hand, we want the highest possible pre money valuation as proof of the concept, our investment and reward for our hard work. And then on the other hand, we also know a high pre-money valuation can kill any possibility of getting funding. This was running through my mind when I was asked the question in our pitch meeting!
For pre-revenue elements of the company there is no simple way to mathematically derive a present money value, today we only have revenue from parts of our business currently. We are working hard on revenue across all elements and we are close to this point now, this is as at Aug 2019.
So how does an early stage investor arrive at a pre money valuation that works for them?
A suggestion is to first, analyse our revenue projections, we can send these to you. This will provide you, the investor, with some insight into the direction of the business and business model and maybe some fun and tears. I would say we are in a very exciting area, there are very few digital insurers trying to solve for being global with high volume low value policies. Automation of insurance is highly efficient.
Second, is for you to construct your own private revenue projections; you can research our markets and sectors and review our model and likely revenue from similar companies. This can include “ancillary” businesses or using other revenue models. To invest in an insuretech I believe you need to know a bit about the sector. Its highly regulated. If these revenue projections provide you with a 10 bagger (i.e. 10 times the investment) then we should be a candidate for consideration of an investment. We believe we hit this model.
Trying to calculate a value for a start-up is difficult to impossible, so asking about a multiple and me saying we are at a 10 times or 20 times or 40 times revenue multiple at todays revenue is not the right question or answer at this stage. This process attempts to manage the risk of investing along with the goals and wants of the founders. Bringing together a good partnership.
First, we the company, must demonstrate that we have potential of at least a ten bagger. Second, a standard non-emotional formula is applied based on amount of funding obtained to derive the ownership. We can work with investors on this model, I think any startup and investor can.
Thanks for reading - I hope this was helpful - I feel better able to answer this question now at least!
What is a 10 Bagger?
A 10 bagger is a stock or company that increases in value by at least 10 times its purchase price, or by at least 900%. The term 10 bagger was coined by legendary fund manager Peter Lynch in his best-selling book, "One Up on Wall Street."
Any company that appreciates ten-fold from the date an investor initially purchased it can be referred to as a 10 bagger. Although such investments are a rarity on Wall Street, more are found from early stage start-ups and early revenue companies.