Dan Martell - August 12, 2019


How Much is Your Startup Worth？


Episode Stats

Length

12 minutes

Words per Minute

187.22284

Word Count

2,322

Sentence Count

152


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, Dan Martell talks about the importance of valuing your startup and why you need a 49A valuation when raising funding. He also talks about why founders should be valuing their company based on the fair market value (FMV) rather than a subjective value.

Transcript

Transcript generated with Whisper (turbo).
00:00:00.000 Hey there.
00:00:00.500 I'm Dan Martell, serial entrepreneur, investor,
00:00:02.340 and creator of SaaS Academy.
00:00:03.600 And in this video, I'm going to share with you
00:00:05.960 some factors that you need to consider when valuing.
00:00:09.720 That's why I'm holding this stuff, because what's more
00:00:12.360 valuable?
00:00:13.120 It's subjective.
00:00:14.760 Your startup.
00:00:16.140 Trust me, I'm just going to pass this over to JDog here.
00:00:19.320 And be sure to stay at the end, because I'm
00:00:21.900 going to talk about the key factors.
00:00:24.240 I'm going to talk a little bit about the legal.
00:00:26.160 And I'm also going to share with you my fundraising
00:00:28.240 a pro strategy, which talks about the three phases
00:00:31.100 of fundraising and how to close your round if that is the phase
00:00:34.180 you're in in seven weeks.
00:00:36.040 I've helped people raise over a couple hundred million
00:00:38.320 dollars using that framework.
00:00:40.240 But let's get into the valuation aspect of our session today.
00:00:45.020 So about 10 years ago, I started a company called Flowtown.
00:01:00.780 And we decided to go raise some money.
00:01:03.020 And somebody asked, what's the valuation?
00:01:05.120 And this is the way we decided.
00:01:06.980 We said seven on seven.
00:01:08.860 Why?
00:01:09.280 $700,000 on $7 million pre-money.
00:01:12.780 Because we heard that mint.com at the time
00:01:15.840 did $600,000 on $6 million.
00:01:18.860 The city of San Francisco, where I lived at the time
00:01:21.160 with my co-founder, Ethan, was called the 7x7 city,
00:01:24.080 because it's 7 miles by 7 miles.
00:01:26.800 And we just liked the sound of it.
00:01:29.020 So literally, we started talking to investors.
00:01:31.040 And they're like, oh, cool.
00:01:31.780 Yeah, no, sounds really interesting.
00:01:33.200 So Flowtown was a social marketing application
00:01:35.200 for small businesses to leverage email and social media data
00:01:39.560 and build campaigns.
00:01:40.520 And they were like, this is really cool.
00:01:41.980 We were wrong and profitable.
00:01:44.260 Our feeling was we were way further along
00:01:46.340 than a bunch of other companies raising at lower valuations.
00:01:49.360 And then they would always ask, what's the valuation?
00:01:51.640 And we're like, well, we're raising $700K on $7 million
00:01:53.980 pre.
00:01:55.300 And I remember the first conversation
00:01:56.700 where we said this, the guy said, wow,
00:01:59.440 how are other investors taking it?
00:02:00.940 And we were just like, oh, really favorable,
00:02:02.860 totally makes sense, et cetera, based on our traction.
00:02:05.560 No pushback, no issues.
00:02:07.020 He's like, well, I really appreciate it.
00:02:08.960 You guys are amazing.
00:02:09.660 Sounds like you've built a great company,
00:02:10.800 but it's just probably outside of where I like to invest.
00:02:14.160 And we kept getting this time and time again.
00:02:16.680 And luckily, we got some incredible advice
00:02:19.440 by Nivy, who's one of the silent co-founders of AngelList.
00:02:23.640 A lot of people don't even know about.
00:02:25.040 He's Nival's co-founder.
00:02:26.400 And he's like, dudes, seriously?
00:02:29.560 Here's all the reasons why this is crazy.
00:02:31.440 And he helped us rearrange our valuation.
00:02:34.300 But it was based on a bunch of things
00:02:37.120 that I've since helped many founders like yourself
00:02:40.660 understand to have them go raise hundreds of millions
00:02:43.840 of dollars in funding, help set probably 100 plus founders
00:02:49.520 valuation for the different rounds.
00:02:51.520 But for this conversation, we're focused on kind of the seed
00:02:54.640 round or the A round, because I think
00:02:56.800 that in those early days, this framework kind of applies.
00:03:01.240 So let's talk about those four key factors.
00:03:04.480 Number one, the 409A valuation.
00:03:08.360 Now, if you don't know what that is, that's cool.
00:03:10.540 Google it.
00:03:11.200 It'll tell you everything about it.
00:03:12.640 But essentially, what it is is a process
00:03:14.960 to establish fair market value for your shares in the equity.
00:03:18.520 What's the business worth?
00:03:20.480 Now, the reason we do that is because legally,
00:03:23.740 from a tax point of view, is we need to figure that out
00:03:26.120 so that you don't undervalue your shares when you give equity
00:03:29.900 to other people.
00:03:30.920 Because there's a bunch of tax reasons.
00:03:32.480 I'm not going to get into it.
00:03:33.480 If I give you something that's worth very little,
00:03:35.660 but then you turn around and you cash it in because it's
00:03:38.660 worth a lot more, then you wouldn't
00:03:39.980 have paid the taxes you should have when you received it.
00:03:42.380 It was almost like compensation that you should have.
00:03:45.420 You may have read about Steve Jobs doing some backdating
00:03:49.020 on stock options, that kind of stuff.
00:03:50.660 I'm not going to get into the history,
00:03:52.720 but you can Google it.
00:03:53.640 It's a fascinating story.
00:03:55.020 I believe the CFO lost his job or got in a lot of trouble
00:03:58.360 around it.
00:03:59.160 But that is why, typically, we do a 49A valuation.
00:04:04.920 It's $1,000 or $1,500, depending.
00:04:07.180 There's a lot of firms that do it.
00:04:09.120 But that'll at least get you the fair market value.
00:04:12.480 OK?
00:04:12.980 So if you're going to raise capital,
00:04:14.380 maybe not on doing like a convertible note or a debt
00:04:16.900 round, but if you're going to do a price round,
00:04:18.740 you're definitely going to need it.
00:04:19.940 You got to pay for it.
00:04:21.000 So it might be worth doing it.
00:04:22.540 But I will say this, it's not going to be high.
00:04:25.500 It's just really there to just set kind of a lower
00:04:28.380 threshold.
00:04:29.160 Every investment I've done, I've done 30 plus investments.
00:04:32.880 The fair market value was like half, if not a third,
00:04:36.780 of what the actual stock traded at, which is fine.
00:04:39.960 But it's just so you know that it's not the way
00:04:42.120 we want to use when we go raise money from other investors.
00:04:45.840 Number two, market norms.
00:04:48.120 So here's the way I think about it.
00:04:49.740 There's kind of like two big things
00:04:51.780 that are going to impact valuation and kind of what
00:04:55.200 you feel you can set.
00:04:57.000 One is where you live.
00:04:59.040 I've mentioned this in other sessions,
00:05:01.380 where if you live in the heart of Silicon Valley
00:05:04.080 versus Nebraska, the valuations on your business
00:05:07.720 can be totally different.
00:05:08.500 You might see these companies, you're like,
00:05:09.880 how are they worth so much?
00:05:11.820 I remember a few years ago, all of a sudden,
00:05:13.480 the valuations for startups coming out
00:05:15.260 was uncapped notes or $10 million valuation
00:05:18.180 for a six-month-old company.
00:05:19.820 And look, I love that the founder was
00:05:21.920 excited about their vision, about what it's worth,
00:05:24.560 and they could come to me and stick to their guns
00:05:26.580 and say, I really believe this is at that.
00:05:28.920 But the only thing they could point to
00:05:30.660 was other companies raising at similar valuation.
00:05:32.920 So the market norm definitely plays a big part.
00:05:36.080 And the best way to figure out what it is for your area
00:05:38.680 is find people locally that have raised
00:05:40.680 from other investors at those rounds in your area.
00:05:45.440 And you can go on.
00:05:46.320 There's a bunch of different sites
00:05:47.940 online like AngelList and Gusto and others
00:05:50.520 that will help you understand kind
00:05:52.480 of what the appetite for the market
00:05:54.580 is for companies at your stage of growth.
00:05:57.760 And that'll give you another data point
00:05:59.680 to kind of use in putting this whole thing together.
00:06:02.980 Number three, competitive process.
00:06:06.040 Now, at the end of the day, and this
00:06:08.020 is where I think Y Combinator, in many ways,
00:06:11.700 is a professional fundraising training area.
00:06:15.160 And look, they provide great mentorship.
00:06:17.480 And their alumni network is ridiculous.
00:06:20.580 And the inspirational aspect of Loan of YC
00:06:24.000 is worth going if you can get into it.
00:06:25.860 I mean, it's crazy.
00:06:27.120 But in regards to their sole focus on growth, which
00:06:30.720 I think is great, but really just so that they could create
00:06:33.380 the best output for demo day, which is not bad.
00:06:38.320 It's just you're essentially indexing and strategizing
00:06:40.980 100% on growth so that you can show hockey sticks
00:06:43.620 so you can get the best valuation at YC.
00:06:46.740 The reason why is there's a competitive process.
00:06:48.680 If all of a sudden you're in a position where you have
00:06:51.320 a couple hundred investors looking at your deal,
00:06:54.440 coming up to talk to you afterwards,
00:06:55.940 and you create a competitive process,
00:06:57.440 you can feel confident to set your valuation high.
00:07:01.340 On the flip side, if you're from Eastern Canada, where
00:07:04.640 I grew up, and you don't have access to a hotbed network
00:07:08.840 of investors, then the competitive process
00:07:10.780 might be just a few rich uncles, real estate investors
00:07:13.580 that you might know, some high net worth individuals.
00:07:16.100 It's not going to have that same,
00:07:18.020 and many of them may not even know,
00:07:19.480 or you might be the first tech investment.
00:07:21.200 So if you want to increase your valuation,
00:07:24.300 be sure to build a process, which
00:07:26.420 I'm going to share with you at the end,
00:07:27.980 on how to create a competitive process
00:07:30.440 so that you have a lot of investors interested in your deal
00:07:33.980 to essentially ratchet up your valuation.
00:07:36.740 Whereas if you don't, then you're
00:07:38.140 going to have to take maybe a sub-market norm valuation
00:07:41.900 on your business.
00:07:42.960 Number four, a strong thesis.
00:07:45.560 What I mean by that is your pitch, your presentation,
00:07:48.740 your story, your team, all aspects of the investment
00:07:52.500 and the thesis.
00:07:53.500 So the way I think of all founders
00:07:55.880 that are going to raise money is you
00:07:57.580 need to explain what you see in the world that's
00:08:00.360 different from everybody else and how you have figured out
00:08:03.980 the strategy to build $100 million a year company
00:08:06.240 in the next seven years.
00:08:07.460 The thesis around that, what's changed in the world
00:08:10.280 that makes your solution the right solution
00:08:12.620 at this point in time to achieve that outcome.
00:08:16.140 And your ability to share that narrative,
00:08:18.620 to share that story, to communicate that
00:08:21.440 through the product demo, through your team slide,
00:08:24.140 through the market slide, and really present it well
00:08:28.860 is going to have a huge impact on your ability
00:08:32.300 to set and own and claim your valuation.
00:08:38.060 So in many ways, the byproduct of your ability
00:08:40.880 to tell a story, which I've shared many times.
00:08:42.860 You search Dan Martell storytelling,
00:08:44.340 I'll share the three stories that every founder needs
00:08:46.340 to perfect.
00:08:47.600 But your ability to do that is going
00:08:50.060 to be critical for getting the best valuation on your round.
00:08:53.300 Now, all those things being said,
00:08:55.520 let me share this with you because here's the risk.
00:08:58.340 Just because you can doesn't mean you should.
00:09:01.600 What I mean by that is I think too often founders
00:09:04.280 raise high valuations in their seed rounds, early rounds,
00:09:08.180 that makes it near impossible for them
00:09:10.460 to add the level of growth that there
00:09:12.180 is going to be required for them to get an increase in valuation
00:09:15.680 on their next round.
00:09:16.840 And in those moments, what you end up happening
00:09:19.240 is a down round, meaning that your valuation might have
00:09:22.620 been $15, $25, $30 million at this stage of funding,
00:09:26.060 and you didn't hit the numbers.
00:09:27.700 And all of a sudden now, the market's
00:09:29.720 evaluating at you maybe $20 million.
00:09:32.540 So you actually do a negative down round.
00:09:34.120 Just because somebody was crazy enough
00:09:36.280 to invest at that level does not guarantee
00:09:38.500 the next person will invest at a higher level.
00:09:41.340 So in understanding that, it might
00:09:43.380 makes sense if you know that for you
00:09:46.020 to hit the next level of valuation that you want to get,
00:09:48.440 maybe you take a lower number today
00:09:51.000 so that you give yourself the room
00:09:53.640 to grow into your valuation versus just because you can
00:09:57.660 get a $20 million pre on your first round of funding.
00:10:00.480 Doesn't mean you should.
00:10:01.740 You can go back to 2008, 1999, 2000 time frame.
00:10:05.440 Those periods where people are getting these crazy valuations
00:10:08.860 ended up hurting them in the long run because they
00:10:11.100 got diluted harder because they took too much money
00:10:14.220 at a higher valuation.
00:10:15.360 So all this stuff's just going to help you
00:10:17.580 argue your valuation for your business.
00:10:19.860 I feel like now I should have started a drinking game for you.
00:10:22.620 Every time I say the word valuation,
00:10:24.180 you guys should be taking a shot.
00:10:25.500 Anyways, I don't even drink.
00:10:26.920 But if you do, play the video over, have some fun,
00:10:30.720 get your glow on.
00:10:32.120 But if you really, truly want to argue for the best number,
00:10:38.100 outcome for your fundraising, I'm
00:10:39.840 I'm not going to say the word again.
00:10:41.660 Then these are the key factors you've
00:10:44.020 got to take into consideration to really knock it out
00:10:46.380 of the park.
00:10:47.120 So quick recap, how to value your SaaS when fundraising.
00:10:50.940 These are the key factors.
00:10:51.880 Number one, you want to get a 409A valuation.
00:10:55.800 Maybe not on the debt round, but definitely on a price round.
00:10:59.920 Number two, market norms.
00:11:01.560 Number three, competitive process.
00:11:03.700 And number four, strong thesis.
00:11:06.600 As I mentioned at the beginning of this episode,
00:11:08.340 I want to share with you my Fundraising Like a Pro training.
00:11:12.040 It is literally the best training.
00:11:14.140 I got taught by Travis Kalanick, the founder of Uber,
00:11:17.400 who was an early investor and advisor,
00:11:20.120 formal advisor to Flowtown.
00:11:22.500 The guy, you can't dispute, was one of the masters.
00:11:25.060 And literally, most of the training
00:11:26.940 that I teach you comes from Travis himself.
00:11:29.580 He's raised billions of dollars.
00:11:31.000 That framework has helped people that work with me
00:11:33.620 raise hundreds of millions of dollars.
00:11:35.340 But it's yours.
00:11:36.180 If you click the link below, you can get access to that.
00:11:38.300 I go over the three phases of fundraising
00:11:40.740 and really a strategy and checklist
00:11:42.640 for how to do it in the next seven weeks, which is aggressive.
00:11:46.400 But it's possible.
00:11:47.440 My last round of funding I did for Clarity,
00:11:49.240 I did it in three days.
00:11:51.080 Why?
00:11:51.900 Because I executed the framework called the pre-funding phase.
00:11:56.420 There's a pre-phase to getting ready to actually fundraising.
00:11:59.260 So check out the pre-marketing phase, sorry,
00:12:01.280 marketing phase that will help you close those deals.
00:12:03.360 Click the link.
00:12:03.860 You can download that.
00:12:04.800 If this video has been helpful, feel
00:12:06.900 free to share it with a friend that you care about.
00:12:09.240 Click the like button.
00:12:10.320 Subscribe if you're new.
00:12:12.060 And as per usual, I want to challenge you
00:12:14.540 to get up every day, live a bigger life,
00:12:16.920 and grow a bigger business.
00:12:18.340 And I'll see you next Monday.
00:12:19.840 And I'll value your shots at fundraising.
00:12:22.020 What's more valuable?