february 19-21

Feb 19 Topic: Continue Startup Valuations Slides

Feb 21 Topic: Continuation of valuation techniques with graded in-class activity. If you were not in class on 2/21 you need to view and make a copy of this google doc, respond to the questions, and submit it to 481finance@gmail.com in order to receive 5 points of credit toward your overall grade.

Supplemental readings:

• The 11 risks VCs evaluate (TomTunguz.com, 3/28/13, "2-minute read"). The major risks identified in this reading are market timing, business model, market adoption, market size, execution, technology, capitalization structure, platform, management team, financial, and legal.
• Valuations 101: Scorecard Valuation Method (Angel Investor Bill Payne on blog.gust.com, 10/21/2011). This method compares the target company to typical angel-funded startup ventures and adjusts the average valuation of recently funded companies in the region to establish a pre-money valuation of the target. Such comparisons can only be made for companies at the same stage of development, in this case, for pre-revenue startup ventures.
• Valuations 101: The Risk Factor Summation Method (Angel Investor Bill Payne on blog.gust.com, 11/15/2013), Bill Payne's criteria: management, stage of business, legislation / political risk, manufacturing risk, sales and marketing risk, funding / capital raising risk, competition risk, technology risk, litigation risk, international risk, reputation risk, potential lucrative exit. This approach is interesting because it applies the pre-money valuation of comparables to "your area" and adjusts positively and negatively from the average pre-money valuation of those comparables to arrive at your pre-money valuation.

If you missed class on you need to complete this valuation worksheet and send it to Prof Armstrong (481finance@gmail.com) (5 points of grade). This activity will appear / appears on Blackboard grades as "Startup Valuation 2/14."

Feb 21 Topic: Valuations with options - with solutions for the dilutions!

See also: Spike Diabetes Assistant and How Much Does it Cost to Develop an App? (2018). Why? Because if you're going to pitch an app business you should know what level of development and costs you'll need to invest in to build it. Spike Diabetes Assistant has filled out its core team, has users for both its iOS and Android versions, and customers through its partnerships with McDonald s, Subway, KFC, etc. Spike has also earned legitimacy by participating in and winning business competitions. These small victories add up when you use the risk mitigation method of valuation!

Read:

Antidilution: The Other Way VCs Take More Of Your Startup’s Equity (Crunchbase.com, September 26, 2017)

Complete Quiz 6 by 11:59 pm, Feb 22

Fun Friday: Wall-E takes care of Italy's trash

march 19-21

Mar 19

• How venture capital works (overview on google slides)
• A KISS Venture Capital Primer (Part I) - how it works, why it works, and what it feels like to go through venture funded business growth. (Medium.com, November 15, 2018)
• How to build an investment thesis
• LYFT S1 filing - metrics
• Some of you are looking for additional metrics that help investors gauge the health of a business for your River Pitch and Aldag competitions. I have some resources you might find useful:
• Metrics to run and grow the business: 16 more startup metrics, A16Z.com. "Good metrics aren’t just about raising money from VCs … they’re about running the business in a way where founders can know how — and why — certain things are working (or not), and then address them accordingly. In other words, these metrics aren’t just for pitching but for discussing in subsequent board meetings, quarterly updates, and management meetings. As one reader shared: 'Drive with them, don’t just ‘report’ them”.'"
• Engagement for apps and websites: DAU/MAU Ratio. Geckoboard. “If there’s one number every founder should always know, it’s the company’s growth rate. That’s the measure of a startup. If you don’t know that number, you don’t even know if you’re doing well or badly. The best thing to measure the growth rate of is revenue. The next best, for startups that aren’t charging initially, is active users. That’s a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users.” - Paul Graham, VC and Co-Founder of Y Combinator. The key to calculating DAU/MAU Ratio is defining what ‘active’ is for your product. This could be anything from a purchase (for ecommerce or mobile apps), pages viewed/videos watched/comments (for media/publisher), or product login/usage (for SaaS companies or mobile apps). Once you’ve defined ‘active’ for your product, determine the number of unique active users in a 24-hr period and also the number of unique active users over the past 30 days (usually based a rolling 30 days). With these two metrics, you can divide DAU by MAU to get the ratio percentage.

april 2-4 - Global Entrepreneurship Week

Apr 2

Read for your enlightenment: We Looked at 101 Startup CEO Salaries – Here’s What We Found (Crunchbase.com). Duly noted excerpt: taking a low salary sets "an example for the rest of the company, establishes a culture of cash efficiency/frugality, and shows a founder putting the company ahead of himself/herself.

Founders taking low salaries also show very well when going to raise money. VC would much rather back a scrappy, frugal founder than one that spends gratuitouslyand the CEO salary tells you a lot about the CEO’s mantra."

Final team project

Note: These are your final team project templates and instructions.

Discuss final team project: Spatial Systems. This is the first part of our final team project. We'll watch a demo of the technology and discuss the four-page information you have. Then you'll form into teams. Teams should be at least two in size and not any larger than four... Send me ONE email from each team listing members to 481finance@gmail.com (AND CC YOUR TEAM MEMBERS). We'll continue on Thursday. HERE IS THE SPREADSHEET FOR THE PRO FORMAS. AND here is the spreadsheet template you can use as a starting point for the risk reduction pre-money valuation methodology.

Check out Blue Vision Labs' Crunchbase entry for its Seed Round investment of $14.5M and this article in Venturebeat.com discussing the company and investment.

Oh yes, and here is the cap table template you've used before.

And here is the Armstrong Spatial Cap Table with Seed and Series A investments

NOT Spring 2019's Overview and Instructions for Team Project (google doc)

Apr 4

Work on Team Projects

READ: Some comments and observations from today's in-class teamwork:

• as you work through comparables, step-up method, and risk mitigation pre-money valuation methods, one or two of them might not seem relevant. Remember that at least one of these is really relevant mostly to very early-stage startups. Know which.
• I expect you to identify on Crunchbase at least one comparable company by name and to justify your approach to comparables using that particular firm(s). Here's an example: if a "comparable" company has, say, achieved Series D financing, you can ballpark an estimate of its pre- and post-money valuations and use google to see what kinds of milestones they've achieved. Decide for yourself if your focal company should be worth less, about the same as, or more than the value of the comparable based on progress.
• I expect a certain sense of intellectual curiosity out of you. Another way to close out the semester would be to have a closed-book final exam in which you would be expected to know different valuation methods, cap table entries, and pro forma financials. You have everything you need, plus all of your notes, several class-time hours to work together, and the internet. Perform accordingly.

READ AND LEARN: Due Diligence from Microventure's Venture Capital Education Center

For Recent IPOs, Valuation-Per-Employee Ranges From $80K To $50M, Crunchbase.com, 11/9/18. A company’s valuation commonly has little relation to how many people actually work there.

"Conventional wisdom is to raise about every 18 months, which implies that most startups never have more than two years of cash in the bank." - Source: Crunchbase.com (hence the VC Quick Valuation Method, aka the VC Lazy Valuation Method...)

and also: How much runway should you target between financing rounds? Medium.com, 10/26/17 "

According to CBInsights, running out of cash is the second leading cause of startup failure. Needless to say—it’s an important question to get right. If an entrepreneur tries to answer this question by triangulating from Google results, they’ll find a few sources that tell them the conventional wisdom is anywhere between 12-to-18 months."

Complete Quiz 9 by midnight, April 5.

Meanwhile...

I mentioned some time I had with Doug Humphrey as an MBA student in 2000. Here's a profile of him from the University of Maryland during his time as entrepreneur-in-residence.

april 9-11

Happy second week of the final team project!!! Here are some questions for you to consider as you work through the points:

• at each point where you need to determine a valuation and/or a percentage of ownership ask yourself (a) what is the question being asked that I need to answer? (b) what rules of thumb, if any, apply to this situation and how should I use them? (c) do my numbers seem reasonable based on what I've done in previous valuation and cap table activities in class? (d) finally, do the percentages of ownership at the end of each investment round make sense? Have I satisfied the equity ownership needs for each group on the cap table?

Apr 9:

• Term of the day: Ramen profitable.
• Attendance for 4/2 class is based on team rosters you emailed to me on April 2. Completed attendance roster for 4/4 is here.
• Work on team projects in class... I will take attendance (again) today
• Here are the grading criteria for the final team project

Apr 11: No lecture; I'm presenting a gamification workshop at San Diego State University's California Entrepreneurial Education Conference. The lead-off workshop! Yay!

Cool Tool: This tool from Trevor Blackwell calculates how much funding your startup needs. Assuming expenses are constant and revenues are growing, it shows you when you'll reach profitability (in fractions of years) and how much capital you'll need to burn through before you get there.

Quiz 10: won't be a "quiz," but a less stressful way to book five sure points.

april 16-18

Yep. We're going with the Mobile Munchies scenario for our final team project. Here is a description of their situation, planned milestones, and expected capital needs.

Work on team projects in class - Here is a template for you to use for Mobile Munchies cap tables

Summary statistics of crowdfunding campaigns that got/didn't get follow-up venture capital investments

Stanford d school note: Prototype to test

Making sure here: We are not doing anything with Mobile Munchies for our final project. Sorry for the inadvertent copy-and-paste from last semester.

Bonus read: Evidence mounts that laptops are terrible for students at lectures (TheVerge.com, 11/27/17)

Stitchfix update! From IPO To CEO, Here Are 6 Things To Know About Stitch Fix