The valuation of start-ups
Not a long time ago companies valued at 1 billion dollar or more were rare. That is why they were called ‘unicorns’ by venture capitalists. Today there are 107 companies worth more than 1 billion dollar and venture capitalists gave them another name called ‘decacorn’. Startups can actually be worth a lot of money, but are they worth a lot of money today? How are they valued? Why are they valued that high? This is something I actually wanted to know because of the very high valuation of Hello Fresh I heard about. This blog will explain my incentive and the method of valuation of start-up tech firms.
Why this topic?
A few days ago, Hello Fresh raised an extra amount of 75 million Euro. This amount brought Hello Fresh to a total valuation of around 2.6 billion Euro. Hello Fresh started during the year 2011 and is currently looking forward to a IPO. The moment this valuation became a little bit strange to me, was when Hello Fresh stated the amount of customers they serve: 250.000 regular subscribers. This brings Hello Fresh to an estimated valuations of 10.000 Euro per customer. Doesn’t this look a bit strange?
How are startups valued?
The valuation determines the share of the company the owners have to give away. The owner always wants to give away as less as possible. This for instance will also result in an higher valuation from the owners side. More important is the valuation startups are actually based on; there is no standard valuation. The valuation is more or less based on the following: Traction, reputation, revenue, distribution channel and hotness of the industry.
Figure 1 ‘Hello Fresh Logo’
I would like to try to explain every factor with Hello Fresh as an example. First of all traction; the amount of users. This is, as said earlier, 250.000 users. Second of all the reputation; the strength of the founder himself. But more importantly, the revenue: over 200 million Euro in revenue. Last but not least, the hotness of the industry and the distribution channel Hello Fresh is using, are promising. Online food sales are expected to grow more and more in the upcoming years and the distribution channel Hello Fresh is using, subscription based food boxes delivery, makes them compete with brick and mortar supermarkets.
All in all, I still need to ask myself the same question, and you may be doing that as well, namely: Why a valuation of 2.6 billion Euro, with only 250.000 users and less than 300 million Euro in Revenue?
What to do with this?
When Facebook was publicly offered via an IPO, they were first valued at a 90 billion dollar market cap. Within a week this dropped to 70 billion dollar and after that even lower. In my opinion, the valuation of a technological start-up looks a lot like science. Especially when you have a look at the figure below (for a more detailed look at the figure, please see the link provided at ‘sources’).
Figure 2 ‘Start-up valuation science’
Should start-up firms be valued more using present value instead of future value? What will Hello Fresh be worth after their IPO? Will Hello Fresh keep growing or will they be stopped by current supermarkets? But most importantly: Do you think technological start-ups are valued correctly or are we in a so called ‘bubble’?