SO, how do we think about valuation. This is the simple bit. It’s quite easy. Keep point 3 in mind and read on.
As a VC fund, we know we won’t pick winners every time. In fact, though we hope we’ll do better, realistically we can bet on 10% to 20% of our investments doing extraordinarily well and the rest less well. In our current fund of £37.5m we want to find 3 “Dragons” (a Dragon is a fund-returner – i.e. our stake of 15-20% will return £37.5m). we expect to lose money on 25-50% of the companies we invest in (not on 25-50% of first rounds, but on 25-50% of the companies where we may invest in several rounds). The other non-Dragon companies we might make 1-3x say. Then our aim is adding this all together we need to make about 4x on the companies we invest in across the whole portfolio resulting in about 3x back to our investors over 10-12 years. When you do the maths, aiming for 20% of a company and a £250m exit gives us the potential dragons in our fund (it’s not £200m as we are likely to be diluted at least a bit over the rounds of investment)
SO, each time we make an investment we want to buy as much of the company as we can at the best price we can – typically a 20% stake. How much is that worth in a very early stage company? Here’s how we go about calculating that – bit of science, bit of art, bit of circumstance:
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