Valuing Early Stage and Venture Backed Companies

CHAPTER 1

Laying the Foundation

This book doesn’t profess to have all the answers, but it will provide solutions for, and alternatives to, many valuation issues faced by early stage, venture-backed companies. Furthermore, this book is not a treatise on proper accounting treatment; other books are available that cover that topic, and it should be said that there is little consensus among accounting firms as to how a particular issue should be treated. However, this book does provide an experiential and practical guide to valuing early stage, venture-backed companies. It incorporates what I’ve learned during more than 15 years of focused start-up work along with the collective wisdom of the many practitioners whom I’ve had the joy and honor to work with over the years.

A UNIQUE LANDSCAPE

To really understand the context in which early stage companies are valued, a thorough background of the different economic and socioeconomic environments in which such companies exist is needed. In addition, a working understanding of the venture capital industry is helpful, given that venture capital is the engine that powers these companies to success (success is the goal, even though it’s not always achieved). The following paragraphs and sections lay the basic groundwork for the unique aspects of valuing early stage companies.

Readers who were performing valuations during the dot-com boom of the late 1990s are familiar with the crazy valuations that were prevalent at the time for early ...