Question

You want to value an investment into a startup company. The company has the following revenue forecast:

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue 500.000$ 1.850.000$ 5.500.000$ 8.500.000$ 14.000.000$

Each customer of the company spends approximately 1.100$

Its cost structure is as follows: Gross Margin is 85% (this means it has a cost of goods sold of 15% of Revenue) The company’s ”all-in CAC” (Customer Acquisition Cost) is approximately 300$ per customer (this includes marketing cost, sales team, tradeshows, etc.) This is a one-time cost the company spends each time it gets a new customer.

The company has the following outlook for its G&A (General and Administrative cost) and R&D expenses.

Year 1 Year 2 Year 3 Year 4 Year 5

G&A 200.000$ 400.000$ 550.000$ 750.000$ 1.000.000$

R&D 500.000$ 600.000$ 750.000$ 1.000.000$ 1.200.000$

Starting in year 6 the company expects the following perpetual growth with respect to year 5 numbers: Revenue 5% per year G&A 2% per year R&D 1,5% per year Assume all revenues and costs occur at the end of each year.

a) Find the value of the company today if you apply an annual rate of 60% (This seems high, but it is a typical value used for high-risk startup company valuations)

b) What is the share of the company that you would demand to make a 1.000.000$ investment?

c) What is the IRR of the project with the 1.000.000$ investment made at time t=0? (use Excel to solve)

Answer 1

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The cells highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output. Yello

U Z AA AB AC Terminal Long term 132 Year, n Linkage 5 growth Value 5 % 26,727,2732133 (1+AA133 )/(60 % - AA133 ) 133 Revenue 1,850,000 8,500,000 14,000,000 A 500,000 5,500,000 134 Gross Margin B 85% x A 425,000 1,572,500 4,675,000 7,225,000 11,900,000 22,718,182 1,758,621135*(1+AA135)/(60 % - AA135) 135 G&A 1,000,000 2% C 200,000 400,000 550,000 750,000 D B-C 136 EBIT 4,125,000 6,475,000 225,000 1,172,500 10,900,000 20,959,561 137 E-Roundup(A/1100, 0) 138 Nos, of customers 455 1,682 5,000 7,728 12,728 24,298 FDifference of subsequent E 139 Incremental nos. of customers 11,570 455 1,227 3,318 2,728 5,000 140 CAC G 300 x F 136,500 368,100 995,400 818,400 1,500,000 3,471,000 141 1.50 % 142 R&D 500,000 600,000 750,000 1,000,000 1,200,000 2,082,051 H 143 ID G-H 144 Free cash flows (411,500) 204,400 2,379,600 4,656,600 8,200,000 15,406,510 145 60 % 146 Discount rate R 147 PVF (1+R)(-n) 148 PV factor 0.15259 0.62500 0.39063 0.24414 0.09537 149 150 PV of FCF PV Ix PVF 782,013 (257,188) 79,844 580,957 710,541 151 PV of Terminal Value PV of TV 1,469,279 152 (a) Value of the company V Sum of all PV & PV of TV 3,365,446SUM(V150:Z150,Z151) 153 (b) Share of the company - 1000000/V152 29.71 % 154 155 Project cash flows 156 (e) IRR (1,000,000): (257,188) 79,844 580,957 710,541 2,251,292 29.16 % IRR ( U155 2155)