Today at the 5th Annual MIT Enterprise Forum Entrepreneurship Workshop, Professor Tarek Kattaneh of the Olayan Business School at AUB presented on company valuation. While his talk offers an overview of techniques using price/earnings ratio and discounted terminal value, it was a touch out of place when speaking to startups, who often are not valued using these techniques.
As Wamda CEO Habib Haddad pointed out, "While this approach
works for established companies, it's almost never how valuation is
computed for an early stage. For startups, especially at a
pre-revenue stage, valuation is more often a combination of team,
size of target market, position compared to similar products and
companies and to some extent the exit opportunties."
"Good investors will want to fund the startup with enough cash for them to reach the next milestone (profitability or a new product launch etc...) on a valuation that will not overdilute the founders, because at the end of the day, investors are mostly investing in the team in early stages, and it's only fair for founders to retain enough ownership and stay motivated for the long run," he says. "An investment deal more than any other type of deals need to be executed as a win-win mainly because it's a long term relationship where investors and founders will work together to grow the company and take it to the next stage."
Yet if you'd like to understand this method for valuing later stage companies, here is a summary of Kattaneh's description of this technique.