Specialist tools
Around 20% of venture capital investments make no money at all for their backers and a further 30% make very little yet valuation techniques are rarely scientific, why?
'There are no specialist tools when it comes to valuing early stage technology businesses. We tend to rely on old-school techniques, such as gut instinct and talking to experts with specific sector knowledge,' says Overli.
Computational techniques
Occasionally computational techniques are applied but it generally seems to be on a retrospective basis.
'We tend to use computational tools as a back-up. So for instance, Software as a Service (SaaS) businesses tend to be valued on six to 12 times revenue so we may use that to see if we are in the right ballpark when we are considering an investment. But if a company is growing very fast, say quadrupling every year, multiples become less relevant,' explains Overli.
Instinctive pricing
Early stage businesses may not have many figures to base valuations on but Overli suggests that valuations are based on experience and intuition.
'Pricing is largely instinctive. Everyone knows what something is worth. It’s a bit like the housing market. People generally know how much homes will sell for in their area. Sometimes, there are surprises if a business is in a very hip sector, for example but generally the market is quite efficient,' he says.
Step-by-step funding
Seed capital
Tends to attract investment by wealthy individuals through tax-efficient vehicles, such as Enterprise Investment Schemes (EIS).
Series A
This tends to be the stage at which venture capital firms become involved, when revenues have reached more than £1m and business growth is at around 60% or more per year. Valuations range between £5m-£25m.
Series B
By this stage, revenues tend to have reached more than £10m with the business growth at 40%. Valuations range from £70m-£200m.
Series C
At this point companies are making over £30m a year and growth is around 30% annually. Valuations are up to £500m.
'Our preferred entry point is at A Round or B Round. These both offer good investment potential for us because there is not that much venture capital money around at the moment so pricing is fair but not toppy.'
'Seed capital is quite fashionable these days because people have seen some big success stories like WhatsApp and think they might make a lot of money. At the other end of the scale, the C Round tends to be dominated by large US venture capital firms. We might participate if we are already in a deal from earlier on but we won’t go in at that stage,' says Overli.
Early stage deals
Some investors worry that, if they participate in a deal at an early stage, they will become excessively diluted later on.
'If you pick good deals, valuations will rise and it is up to you if you want to pay up to maintain your stake or own proportionately less of a rapidly growing business. Either way, as long as the business is doing well, you make money,' he says.
European investment opportunities
Although Dawn Capital is a pan-European firm, certain countries tend to be a more fruitful source of deals.
'The UK is best and always has been. About half of all transactions done in this space are done in the UK and that’s where most of the venture money is in Europe. We also do a fair bit in the Nordics too though. Their infrastructure is pretty good and they have had some big success stories,' says Overli.
On securing the right valuation Overli has this advice.
- Prepare a very good description of your business.
- Don’t spend lots of time working out discounted cash flows and such like.
- Don’t spend hours trying to value your business yourself: the market will do it for you.
Joanne Hart
Joanne Hart is a freelance journalist and Investments Editor at the Mail on Sunday where she writes the Midas column for Financial Mail.
Valuation Group May 2014
