How to value your company in 5-minutes (and how I valued mine)

It's all about reducing risk and increasing certainty

I did it!

I have met or exceeded all the financial and operating targets in my factory build to date -

So this is your official warning: Next Friday – April 5th – I am closing our Series A2 EARLY and raising the share price.

And if you’re interested in stepping into what I believe is the single best deal I’ve ever done in my entire career… As in, “this deal will be every chapter of my next book” -level of good…

Why are we raising the price of the stock? It’s called “I’ve been hitting my milestones way ahead of schedule.”

Which is why I want to talk today about VALUATION.

Because this is the most common thing I hear from entrepreneurs and executives: “What do you think our company is worth?”

So if you’ve ever wondered how you properly determine the valuation of a company, even if you haven’t started the company yet, here’s how this works…

In “typical” finance, the value of a company (or asset) is usually determined by a discounted cashflow model.

Basically, you have a spreadsheet that says how much cashflow the asset is going to produce over it’s lifetime…

Then, you discount the value of all future cashflows to today to account for the risk and uncertainty of that forecast coming true.

For example, you say to me, “Hey Oren, I’m going to open another 10 locations of my coffee shop concept… and launch my new Double Shot Redeye with shadegrown wild Kopi Luwak …”

Hmmmm. Maybe you can, maybe you can’t … but I just don’t have enough evidence to believe in that plan. But I do think you can open five stores in the next year.

So I discount your plan to What I Think Is Really Going To Happen …

And if I’m the investor, well, we go with my numbers. And now we have a Priced Deal or VALUATION.

This value is a compromise between what you say is going to happen in the future in the extreme case, and what I think is going to happen in the base case. 

But that doesn’t explain all these “Unicorns” like running around Palo Alto. Unicorns like Dapper, Gong, Airwallex, Hopper, Ramp and a hundred other companies you never heard of.

These deals are carrying or have carried above $1B valuation, but it’s NOT because of cash flow.

Those Unicorns are valued as a multiple of some metric – whether it’s revenue, user growth, monthly recurring revenue or even EBITDA – you’ll notice the larger the number being multiplied is, the larger the valuation is.

Which makes sense when you think about it…

The more mature the company is – or the faster it is growing – the more likely it is the forecasted results are going to come true.

And if you want to know the trick to having control over your valuation, it all revolves around how much investors believe your forecasted results are going to come true.

Here’s a real world example – the $200m advanced manufacturing facility I’m building in Dallas, Texas with my partners Breton SpA – the global leaders in engineered stone manufacturing technology.

When we started raising capital in our Series A1 – which oversubscribed in a day – here was my original forecast.

This was our original forecast – we are now essentially a full year ahead of schedule from a revenue perspective

How did I come up with this forecast? After speaking with our partners at Breton – which has built 80 other factories – this is the model they’ve succeeded with many times already.

In fact, the most recent factory they built went from $0 to $100m in revenue in three years (once built), and generates around $24m of income for shareholders.

Now let’s assume I could “copy and paste” this factory, put it in the United States, and turn it into a publicly traded manufacturing company

So how much is this factory worth? It depends on who the buyer is, the market comparables at the time, and the overall market sentiment (i.e. the forces of Supply and Demand inevitably determine price).

But to keep things simple, let’s just say an asset generating $60m of EBIDTA, which is our plan, could be reasonably valued at a 12-18x multiple – which would be $720m - $1bn in market cap (see chart for comps)

What factors – aside from pure supply and demand – would justify a higher multiple?

  1. A highly engineered product using advanced technologies

  2. Critical product(s) (think medical devices))

  3. High-growth (this could be from a change in gov’t regulations)

  4. A large addressable market or the ability to expand into adjacent ones

  5. High margin (indicative of a high level of automation (lights off facility) and differentiation from competitors

  6. Recurring customer base without customer concentration

  7. Strong leadership team

  8. Clean, well organized financials.

  9. Long term customer contracts.

Said another way, it all comes down to how much investors believe in your forecast.

If you think of each deal point as another card you have in your Royal Flush hand in The Game of Money, the more of these “playing cards” your deal has, the more you “de-risk the deal” and increase the certainty of the forecast coming true.

Want to see a Royal Flush deal? Click here and I’ll show you mine.

If you’ve got a proven track record of hitting forecasts on time and on budget, investors reward management team in the form of higher valuations.

Even better? You’ve got a track record of outperforming your forecasts, delivering results ahead of schedule and below budget.

But that still doesn’t entirely answer the question of “how do you price your company” at any stage, even if it’s pre-revenue? To answer this, we have to go back to the discounted cashflow model, risk, and uncertainty.

If an investor in my high-tech factory could reasonably assume the forecast I provided was going to come true – exactly as I’ve presented it, with no variation – that would be a risk-free investment.

Assuming the forecast was guaranteed – I’d snap my fingers and create a $1bn asset by 2029 – 

However, I can’t do that, so this isn’t a risk-free investment.

And for that reason, the investors want to be compensated for the risk they are being asked to take, in the form of a discount to the forecasted $1bn valuation.

We can see this fact represented in the annual Pepperdine Private Capital Markets Project report via the expected returns investors are looking for – the earlier and more risky the investment, the higher rate of return.

The cost of capital for privately-held businesses varies significantly by capital type, size, and risk assumed. This relationship is depicted in the Pepperdine Private Capital Market Line. Source: Pepperdine

When I raised the first tranche of capital – our Series A1 that oversubscribed in one day – they invested because they have a close personal relationship with me.

At that time, the key “playing cards” I had in my deal were a great story, a proven business model, and rights to the intellectual property supporting the product I am selling.

Here’s what we didn’t have: a building (or land for that matter), equipment contracts, raw materials, and a management team + employees to run the whole thing.

Sure, these are my friends and they wanted to support me. And sure, I had already put in $1m of my own capital + four years of my time.

But A LOT still had to happen for my original forecast to come true.

For that reason, they got to come in at the lowest price.

“Hey that’s great Oren. You’ve got some rich friends who gave you some money for your deal. What does that have to do with me investing in this current round?”

As the sponsor of this deal, one of the things I know my investors want is to see the value of their investment go up… and ideally, go up quickly.

In public markets, you’ve got a real time stock ticker telling you what the shares are worth.

But in private markets, the only time the deal valuation goes up (or down) is when a new round of capital is raised.

In order to control my cost of capital and protect the value of equity for early investors, this means I need to have a plan for constantly increasing the valuation as we hit major risk reducing milestones in the project.

It looks like of like this…

In fact, if you’re looking of the “gameboard” in The Game of Money, this is it:

Between the Series A1 price and the current Series A2 price, here’s what I achieved:

  • Recruited Management Team

  • Formed Board of Directors

  • Completed Financial model for US factory

  • Completed Due diligence on Breton SpA (e.g. on site tour)

  • Completed initial Site selection.

  • Completed Feasibility study

  • Validated market demand for proposed product line

Based on all these major milestones being hit, we decided to raise the price. Since we opened the Series A2, here’s what we’ve achieved:

  • 50-acre site locked down in the Dallas-area: Signed LOI and are entering into a purchase and sale agreement for a 50-acre site to be used for the construction of my factory.

  • IP Agreements: In addition to the already disclosed technologies – see my last two emails - BioQuartz, Chromia, and Kreos-Plus – my technology partner, a 500M company, has agreed to license our company with additional and proprietary new advanced manufacturing technology that will be unique to our facility.

  • LOI for up to $100m in Debt financing: As part of our broader capital markets program, I’m going to open debt facility for our equipment needs with the help of Wolbert Holdings, a corporate finance advisory firm we’ve engaged, and obtained the first non-binding LOI in a series of potential debt commitments for the project.

  • Additional Purchase Orders for high-tech precision Manufacturing Equipment: As management of this deal I have signed a purchase order for up to $100m in precision manufacturing equipment.

  • I have signed a lease document for an additional 170,000 sq/ft in Dallas: Because the new ground-up site build will not be finished until 2025 at the earliest, I’ve identified an already existing 170,000 sq/ft site to install up to four (4) manufacturing stations needed for the fulfillment of target revenue in 2024. 

Now that we’ve hit all of these milestones – and dramatically accelerated our forecasted results – we believe it more than justifies the step up in price, as we have significantly reduced the risk by hitting these milestones.

And if you want to join me – and about a dozen other investors – all you need to do is become a shareholder BEFORE we close this round on Friday, April 5th.

At the end of the presentation I’m going to give you my phone number. All you need to do is text me your name and the amount you’d be comfortable investing (this is called an “indication of interest” and is non-binding).

Once you send in your details, someone from my team will follow up with you, send you some additional materials (like pitch deck and ppm), and see if you’re the kind of investor we want in our deal.

And just in case you’re wondering…

You can invest with your post-tax funds, your retirement funds (401k/IRA), any corporate entity (LLC, S-Corp, C-Corp), or Trust.

This investment opportunity is open to you if you’re over 18, regardless of income, net worth, or nationality (with a few exceptions).

If you are a fund manager, RIA, or just someone who wants to put together an SPV for your group of investors… and you’re looking for a true institutional quality deal that will make you look good to all the people you show it too…


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