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.