Valuations

Good part of this week was spend on coming up with valuations for Ventures.    Basically I had to take a 5 year window to get a full value.   I did a lot of research on actual draws and found a very useful site that discusses the risk profiles and structure of funding.

In essence, there is 3 draws that one could go after:

  • 1.  Idea and alpha software release
  • 2. Early customer seeing and proof of model
  • 3. Ramp up

The risk profile is highest in step 1 – less in step 2 and much less in step 3.

So, the valuation of the company therefore, is dependet on risk, and as such valuation at step 1, should be less than at step 2.   As time moves on the valuation should be increasing as various milestones are advanced.

With RedStores Ventures we are well close to the end of step 1, and are now just within weeks of getting into step 2.   So, given that, the high risk period of setting up the basic framework, team and proof of concept is done.   #2 is going be significant – and #3, will be just a matter of execution.

So, I am planning to issue some 10,000,000 – at value of $8.50/share, based on DCF.

To keep it simple, at Step 3, the $8.50/share value will give us a valuation of some of close to $100MM.     However, we are now at step 2, where the risk profile is higher than stage 3.  And so, without going to any fancy calculations, I  will basically discount the valuation to account for risk – but only the valuation of shares that are being issues at this time.   For example, I’m looking to sell 1,000,000 shares now – and if we where in the expansion mode, I would seek $8,500,000 for those shares.    But, to account for the risk, I will offer these shares at a discounted rate – and perhaps sell them for say $7,000,000 or even $6,000,000.  The price of sale will not only depend on my goal of absolute money, but rather of how much value an investor will bring to the table.   If someone is just putting money in, the discount will be lower, if they are putting in money and guidance and support, that is then a much better deal and hence worth a larger discount.  

In this way, from my simple engineering mind, I establish the value of the company at a full ramp up speed, and then risk adjust it.

One other thing I’m going to plan on doing – in most cases people dance around the valuations, don’t put things on the paper and allow for the investors to let them know the value.   And that is negotiations, and in a way squeezing as much as possible out of the market.   But that is also a pain, and that is something I’m not going to get drawn into.    IF (if) I’m going to onboard money, it needs to be from those that are supporting of my vision, are in it for the long term and become more of partners than ‘in and out flip guys’.    And for that, I’m just going to name my price, show the value and use that as a filter to help me select the right money.   I dread getting into long DCF discussions, etc., etc.  although I would love nothing more that for people to question our assumptions, look for weaknesses and issues with the business model.   The last 3 are positive and value enhancing – if those are the questions that the potential investors will ask – then that will also tell me they are the right guys.

Other things.  We did a mailing this week for mothers day and a site change.  I have to say I’m not very pleased with the look of the site after the changes nor the quality of the mailing.   I’m concerned that our image will suffer when we start using low quality graphic design, etc.   Actually, I think in this short term a ‘lower cost’ look of the site is not a bad thing given that everyone is looking for bargains, BUT, I would rather look long term, preserve the high end look, and really reap the rewards of a premium offering when the economy pickups in a few years.   So, I will need to put some safeguards in place to ensure that our PearlsOnly image is not degraded and that we maintain the high quality look that we have developed.