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Valuing startups without a headache

Young companies are difficult to value for many reasons; these companies do not have historical information, they have little or no revenues and operating losses, they are dependent upon private capital first and venture capital and discount rates should take into account that many companies will not survive.

For these reasons traditional valuation techniques based on discounted cash flows and multiples cannot be used.

One way to solve these issues is to value existing assets estimating a cash flow from the assets and to find a value for them. This valuation method is useful for young firms whose assets represent the overall value of the firm (for example for companies with patents).

With most startups the bulk of the value of the company comes from growth assets. In this case we do not have any historicals and future revenues will be estimated by the firm. Another important fact is to measure the quality of sales growth, analyzing how much money the firm will have to reinvest. When the firm generates a higher return on capital than its cost of capital (WACC) is when it is worth investing.

Estimating the cost of capital with standard approaches is not possible due to a number of reasons; beta cannot be calculated comparing the stock return with an index, in some cases companies are fully funded by the owners or also by venture capital firms and do not use bank financing and equity claims might vary so different costs of equities should be applied.

For these companies, the terminal value might be around 85-100% of the current value of the company. We have to estimate if the company will be able to stabilize its growth and when it will take place.

But using relative valuation is not an easy task either. Ratios such as PER or EV/EBITDA cannot be used since most of the companies have operating losses. Appart from that, relative valuation is used focusing on publicly traded companies in the same sector and operating in the same geographical area and with similar margins. We would be comparing stable growth traded companies with startups with a higher level of risk, differences in equity claims and illiquidity issues. thus, this is not a valid methodology.

In conclusion, we advise to use precedent transactions in the sector with a startup database combined with an estimation of discounted cash flow valuation instead of the traditional multiple and DCF approaches. 

Borja Hernández

In 2008 he began his career by joining the Cajamar bank as a private banking manager. In 2011, he joined the administrative department of Akerton Partners, S.L., additionally

supporting the different lines of business of the company (Back Office).

In 2017 he became part of the team of Annu Inversiones, S.L., participating in various transactions of assignment of receivables, loans and debt purchase.

Marta Muñoz

Marta holds a degree in Business Administration from the University of Castilla la Mancha.

In 2017 she began her professional career by offering tax and commercial advisory services to various companies.

A year later, in 2018, she joined the financial department of Rosa Clará Group, in which she developed financial analysis tasks and accounting oriented to the presentation of monthly results.

In 2019 she joined the Financing department of Akerton Partners.

In 2019 she joined the Financing department of Akerton Partners.

Francisco Camacho

Founder and CEO

Francisco has a degree in Economics and Business Sciences with specialization in Audit by the Complutense University of Madrid, Advanced Direction programme in INSEAD (Fontainebleu). He has accomplished financial courses in Spain, France and U.SA.. He has been teacher and speaker in several universities besides giving lectures. He is member of the REA, ICJ.

In 1984 he joined Arthur Andersen as industrial businesses manager, being responsible of several projects in both audit and consulting.

In 1993 he joined Alstom as CFO and council secretary, being financial responsible and Advisor of several companies of the Group in Canada, México, France and Spain, besides being responsible for Real Estate projects in Spain, as well as for global cash flow and of financing projects in different countries. I

In 2000 he joined to Auna as Administration and Finance Director, being responsible for various financing and debt restructurings, achieving in 2004 along with his team, the award to the best refinancing of the year (4.500M€), award given by the magazine Euromoney. In 2005 he was designated CFO of the Auna Group, culminating with the sale of the Group to France Telecom Group (the mobile phone business) and to ONO (the fixed-line business) for the amount of € 12.800M. From 2006 he was designated CFO Purchasing Director of Orange Spain by France Telecom Group.

In 2007 he was awarded by the Spanish Association of Financial and Corporate Treasurers (ASSET) with the award to the financial excellence in the category of “Best financial manager of the year”. The aim of this award is to distinguish the actions implemented by the CFO in the company and the original financial solutions that had contributed to the success of the financial departments and that had an impact on the companies performance.

In 2008 he founded the financial advisory firm today known as Akerton Partners.