bullet point: Early-stage valuation in a nutshell #DHDL

There was a standing ovation, which is rare in the cave. But the young founder was quite right to receive this appreciation, because at just 19 years of age, she demonstrated an entrepreneurial spirit that many much older people could take a leaf out of their book.

Not only did she set up her company, which creates a note-taking app to help with active learning, on her own, she also financed it from scratch by working weekends and tutoring alongside her A-levels. She also incorporated her own values and principles into the management of the company early on by using a freelancer platform to specifically commission Ukrainian developers for programming, influenced by her involvement in the war in Ukraine.

She had already made a deep impression on the lions before it came to the ‘numbers’ part that many founders dreaded – even if she forgot perhaps the most important numbers at the beginning – her dream deal.

This is because the lions are known to calculate the proposed valuation directly from this – a figure that is not normally discussed in investor negotiations outside the cave. This is because many investors first check the general fit and the business model in one or more personal meetings and by exchanging additional documents before they dive into the actual negotiations.

However, since everything has to happen in a much shorter time frame on DHDL, the evaluation is also an important topic much earlier on. In the case of Linda and her company bullet point, the proposed €150,000 for 10% resulted in a company valuation of €1.5 million.

After the founder had responded very confidently to the lions’ questions about her figures and business model, the first lions soon left the discussion, as the founder was also clearly looking for a tech investor for her app business.

Nils Glagau and Carsten Maschmeyer then both initially offered the €150,000 investment, but wanted 15% of the shares in the company in return. This would have reduced the valuation from 1.5 million to just 1 million, whereupon the founder asked for some time to think about it.

When she returned, she reopened the negotiations by explaining in detail how she had arrived at the previously proposed valuation.

Firstly, she referred to her plans to have 5,000 paying customers by the end of the year. As she is planning a subscription model, this means monthly recurring revenue – or MRR for short – of around €25,000 in this case. If you extrapolate this to a full year – i.e. multiply it by 12 months – you arrive at €300,000. She then multiplies this calculated annual turnover by a factor of 5 as a so-called ‘multiple’ and claims that this is all really ‘conservative’.

But is this true, and what can such a calculation be based on? First of all, the multiple is a figure that is subject to strong fluctuations and depends on many factors. For example, start-ups in the food sector often achieve significantly lower multiples than those in the tech sector. More scalable business models also often have an advantage here. Determining a current multiple therefore requires a lot of research, as you need to find out the valuations and associated sales or sales plans for your sector.

In fact, the founder is correct in her assertion that a multiple of 5 is not excessively high for her type of company.

But just as important as the multiple is the number by which it is multiplied. If you watch ‘Die Höhle der Löwen’ more often, you may have noticed that a similar calculation has already appeared a few times – but it was almost always based on the actual turnover achieved and multiplied by the multiple. The bullet point founder, however, uses planned sales – and thus naturally arrives at a much higher valuation. She also takes the year-end value – i.e. the planned turnover from December – and multiplies it by 12 to determine a kind of artificial annual turnover.

Both can certainly be done in this way, but should be argued. Especially in a model with subscriptions and therefore monthly recurring revenues, it can be seen that customers often don’t leave so quickly and a customer who pays once pays for many months. It therefore makes sense to take the last and strongest month of a year as the basis and simply multiply it by 12.

It is also possible to use planned rather than actual sales in early phases, when perhaps no proper payment model has yet been implemented. However, this has nothing to do with conservative calculation. Nevertheless, you should definitely give it a try, especially with a highly scalable model, as an evaluation based on actual sales will often simply be too low.

However, the linchpin of basing the valuation on planned sales is the argumentation as to why the planning will actually materialise. The better and more precisely you can explain this on the basis of the current figures, the better you will be able to enforce the valuation based on them.

In the case of bullet point, this seemed to have worked, as a deal was ultimately struck with Carsten Maschmeyer for the valuation originally envisaged by the founder. Although this did not materialise, she seems to be more than well prepared for future investor negotiations.