Over the last twenty years, technology has dramatically increased workforce productivity across every vertical, with advances in computing, communication, and collaboration empowering knowledge workers to do more with less. This innovation has been driving both the rise of high-growth venture-backed startups, as well as disrupting traditional enterprise workforces that value tech talent and skills above all else.
In 2018, 2,768 Venture Capital financings of $1–5M were funded in the United States, or roughly 7.5 investment-grade deals per day, on top of the thousands screened and passed. Assuming some 90% of seed deals don’t get funded, that leaves firms staring down a funnel of 27,000 deals/year.
So far, we’ve only discussed pricing an investment through the lens of the venture investor. While some might argue that the venture investors’ willingness-to-pay for equity should serve as a signal for the true value of a business, especially given the sheer volume of those doing so, this approach completely ignores the supply-side of the market: the founders.
Safe to say, it doesn’t really work for startups. As I’ve said previously, without significant amounts of capital on hand to fund the business over the long-term, a DCF analysis of a startup is likely to return a valuation of zero.
At Tuhaye, we strive to quantify early-stage risk so that we can utilize it in our pricing methodology. One of our simple measures to evaluate the underlying Risk at an investment is to look at a company’s Equity Leverage at the time of financing.
Since the start of the “unicorn” era, investors, founders, and journalists have all focused on private valuations. Using valuations, markets characterize startups as being either “cheap” or “rich” relative to their size and stage on the relentless slog toward $1 billion.