September 27th, 2007
Damnit, we were just brainstorming about this same idea a few weeks ago!
Damnit, we were just brainstorming about this same idea a few weeks ago!
With just an idea and no track record to speak of, it is not easy to value a startup at the idea stage.
In early stage company that is still losing money, a common method is to use discount cash flow. Briefly, project how much the company is going to worth 5 years later assuming it is established and stable, then calculate the net presence value with a huge discount.
How big is the discount? 20 to 50 times.
Why so high? Well, if you invest in 100 startup companies, how many do you think will succeed? 1 in 50? 1 in 100? 1 in 1000? The answer is closer to 1 in 1000 but if you are good, say 1 in 50, that means 49 of your 50 startups will die. The one that made it must be able to cover for all your investments including the 49 dead ones. Thus, minimum 50 times returns. Thats just how the investing business works at this stage.*
But even so, using this method won’t work for a brand new startup at the idea stage because there is no track record to do any projections. At best, it is a guess of what might happen - and chances are that what you expect is going to be very different from what you get when you finally get to executing your idea. So even though it looks nice in excel, it is just that - an excel spreadsheet, nothing more.
So we are still back to the problem how to value a startup with no track record. There is no right answer and your guess is as good as mine.
But for me, I place emphasis a lot on the team and their track record. If you are a serial entrepreneur (even if you failed before), you can expect a lot better valuation than a fresh graduate with a passion. Not to downplay the passion, but with no experience the chances you would succeed is smaller than someone else who has done it before.
At the end of the day, investing is like any business. Buying and selling, risk and reward. We want to make money for our investors and ourselves. If the numbers don’t make sense, then we cannot do the deal no matter how much we like you.
I feel quite sad because we have to pass on a few startups because of the unrealistic valuation the founders have**.
* For those who are uncomfortable with this huge discount, you might want to get investors later. The general rule of thumb is that the latter it is, the less returns the investors expect. For example, a pre-IPO round investor might only expect 50-100% return on their money.
** This problem isn’t limited to just startups. There was one particular 20+M deal that we couldn’t close because of just merely 1M gap after 6 months of negotiation.
3 years ago, I learnt a small lesson on the investment principle of Buy and Forget. One of things I learnt from Warren Buffet is to consider every stocks you buy or sell as if it is the last transaction you do in the next 10 years. (Go sailing for 10 years before you return, or something like that).
Of course, I dont have that kind of patient. In fact, I used to twiddle my portfolio every few weeks (if not every day). But then I keep remember this lesson and decided to do a little experiment a year ago. On 19th Nov 2005, I made a few adjustment to my portfolio and I didnt login to my E*Trade account for exactly one year.
Here is how I did:
A friend just pointed me to this article: ICBC’s indicative price range offers discount versus peers
Price range indicates pre-greenshoe deal size of $15.9 billion to $19.1 billion for combined H and A share offering. The offering has the potential to become the world’s largest IPO.
Industrial and Commercial Bank of China has set a price range for its mega-size initial public offering. The range will value the stock at a discount of 10-22% to China Construction Bank - which is widely viewed as the bank’s closest comparable, sources familiar with the offering said yesterday. Based on current market prices it will also offer a discount to Bank of China, albeit a smaller one.
This was brewing for a while while touted as the largest IPO in the world. Now the figure is out, it looks like it may indeed be the largest one.
Read the rest of the article too as it contains very useful stats. If the report is true, the assets are extremely attractive.
Oh yea, I burst out laughing in the Krisflyer lounge when I read this (I got a few werid stares right now *glump*)
At the end of June, the bank had over 150 million personal customers – equal to the entire population of Hong Kong, Taiwan, Singapore, Malaysia and the Philippines combined – and 2.5 million corporate customers. The number of domestic branches totalled more than 18,000.
Oh yea, I am on my way to Beijing right now and perhaps over to Shanghai over the weekend.
I done a due diligence on Iridum for a banker in 2002.
It was already pretty interesting back then. Iridium went backrupted in Aug 1999 and in Nov 2000 was bought out for 25M USD by a group of investor, including Khalid bin Abdula bin Abdulrahman.
In Dec 2000, DoD awarded a 2year 72M USD deal for 20,000 handsets with an option to extend it for 5 years. Supporting DoD alone covers 40% of the OPEX :-)
They only need 60,000 subscribers worldwide to breakeven.
The 66 “birds” (satellites) however have a lifespan designed for 7 years and would expire in 2005. However, the engineers is able to tune it and it is possible to last until 2008 to 2010 and minimual data service could still function until 2015.
The problem for the investors is that when the birds expire, it is going to be expensive excerise to replace them, probably to a tune of 3.5b, altho Boeing mentioned back then they are willing to share the cost.
Anyway, sadly the deal didnt go through. It would be interesting otherwise :-)
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2003 is a pretty good year for me. There was quite a few stocks which is quite badly beaten in the poor market sentiment despite their fundamentals. For example, I picked up Crayfish (email outsourcing company) for 60cent on a dollar just on their cash value alone and made over 100% profit when they annouce they going return the cash and delist the stock.
I also made a right “bet” that technology recovery will start from hardware. Business will started to buy hardware since they probably hold back their spending in the last 3 years in the downturn and now they have to play catch up. My play in CHRT gave me some nice gain although I probably hop off the train a bit too early. It\’s a lesson I shouldn\’t forget.
Overall, I achieved an net gain of 71.81% compared to S&P (26.38%) and NASDAQ (50.01%). Hey, I still bet the market, which is what matters to me. Lets hope I\’ll do equally well in 2004. :-)
Marketocracy is a virtual mutual fund. Members are given 1,000,000 virtual cash to invest in stock market. If you perform well, they might actually hire you to be a fund manager! Interesting…
One problem however, my current portfolio is not compliance with the diversification requirements for mutual fund. (Did I mention I do not believe in diversification?)
I started stock investment seriously in 2001. I resisted buying anything in 1999 and 2000 because I just couldn’t find any stocks to buy using my investment strategy.
The .com bubble burst in 2001 opens some opportunities to invest. I remember I couldn’t sleep for a few days the first time I bought some shares. It was quite a substainable portion of my net worth then and the market is swingly crazyly. Nevertheless, it works out okay and I achieve a net gain of 37.97% compared to S&P (-13.04%) and NASDAQ (-21.05%).
I started speculating stocks after my junior college in 1993. But that is pure speculating (or gambling) and I buy and sell without knowing why. I remember I made a bit of money but I did not keep track of my performance then.
In 1999, I read about the effect of inflations and taxes on wealth accumlation in my study on financial planning. I made up my mind then that I will study stock investments seriously and started reading books on or by Benjamin Graham, Warren Buffet and Philip Fisher etc. The usual suspects.
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