The value of your venture: a Shark Tank deconstruction

The easiest way to communicate valuation to a prospective investor. Let's understand the way to communicate value via equity.

∑ Assets

Let’s try to deconstruct the company’s assets.

10 patents around utility and design

Patents represent an intangible non-current asset. They can be amortized over time (i.e., they suffer from a decay in value based on time). Since the company was founded in 2018, let’s assume the patents began in that year. The pitch was made in CY2019-2020, so the patents are, at least, 2 years old.

$5.5 million in sales in year 1; $9 million in sales in the last 12 month period; $14 million in sales expected for year 2

The business has a 162% sales revenue growth in one year - that’s impressive. Then again, it makes you wonder why a company with such blockbuster sales revenue and growth needs a $500,000 of equity capital to continue operations.

Of the $6.7 million raised in the previous capital round, $6.5 million is “in the bank”

“In the bank” could mean many things. Let’s assume it means cash or cash reserves. The founders have used/burned $200,000 thus far. It’s possible that they haven’t had enough time to use the money that they just raised. In other words, they just raised the $6.7 million. If that is the case, one wonders why they must have another round of capital raise so soon. They may not have reached their target raise.

Price is $95 per unit, cost is $40 per unit

An operating profit margin of 138%, which seems to be consistent with his sales revenue growth. The difference from the sales revenue growth (162% versus 138%) might be attributable to an increase in general administrative costs.

∑ Liabilities

Copycats out there for which we are pursuing (potential) legal action

Legal action is an expense and one that can grow quickly over an ill-defined period of time. As an investor, I’d like to know more about the veracity of the suits to gauge how likely litigation can be completed.

1% of revenue (not profits) go to charity

$1.4 million in charity is projected for the upcoming year: for a startup, that commitment is commendable indeed. One could make the argument that a startup venture isn’t in the most healthiest financial position to make such a commitment, especially when the venture lost $1 million last year.

Current equity position

Lose about $1 million dollars

The company just completed a previous round of venture capital funding (previous to the Shark Tank event) and lost $1 million in income. That’s a drop in valuation of $1 million for all the equity holders (i.e., the founders and the existing venture capitalists).

Raised $6.7 million at a $31.7 million valuation in the previous capital raising event

Initially, the founders valued their company at $31.7 million. With that valuation, they raised an additional $6.7 million in capital. Let’s assume all of that happened one year ago. At t = -1, the new valuation was $38.4 million dollars. If all expenses remained the same from t = -1 to t = 0, and sales revenue increased 162%, today’s valuation (at the time of the Shark Tank pitch) would be $100.5 million:

$38.4 * (1+ 1.62)^1 = $100.5

Recall the founders are asking for $500,000 for 1% equity, so they’ve lowered their total valuation from $100.5 million to $50 million. How was valuation lost?

Keep in mind, I’m not here to criticize any venture or the pitch. The above are just some of the things I think about when hearing a venture pitch as an investor. And of course, no one can perform due diligence in the span of an 11 minutes!

I hope this founder does well, including the business and charity work.

Let us know what you think, and if you’ve ever used this product.