Pre-revenue Valuation Exercise: Use the three valuation methods provided (Scorecard Method, Venture Capital Method, and Berkus Method) to determine the value you as the investor would place on these two businesses. Provide the value and your analysis as to why the value is appropriate.

Scenario 1

Company 1 is a Texas-based C-Corporation with 5 founding shareholders. Together, the five have invested $1.15 million. The team is comprised of a chief science officer, a chief marketing officer, chief financial officer, president and one silent owner. Three of the founding members have experience in startups.

The company is seeking to raise $1 million in preferred stock in return for 9% equity post-money. If all goes well, they anticipate third-year revenues of $2 million with a positive net income of $150,000 in year 3, $10 million in revenue in year 4 and $30 million in year 5. There is a potential for the firm to be acquired at that point. The company is pre-revenue but expect revenue of $300,000 and net loss of $700,000 in the first year and revenue of $750,000 and net loss of $400,000 in the second year of operation.

The technology they have developed has applications in existing medical/health care markets. There is tough competition, but they have patented technology that goes well beyond the current solutions in their industry. One of their prospective corporate customers paid almost $250,000 to an independent lab to test their product against competitors and the product had great results. The company operates in a $3 billion industry with some major competitors, but the existing technology is dated with little new development.

Company 2

Company 2 is a Nevada-based LLC with 2 members. One member owns 25% of shares and provided $80,000 and the other own owns 75% and developed the technology that drives the business. The company has developed a water purification system that utilizes a simple combination of naturally available mineral and sunlight to purify water. The market for the product includes relief and development organizations, camping/survival enthusiasts among others.

The technology has a provisional patent and is working on a utility patent. It might take another 2 years to receive the final patent. Many water purification companies exist and 3 have a pretty strong place in the market, dominating shelf space in sports and outdoors retail stores.

Although pre-revenue, the company anticipates revenues of $750,000 in year 1 and $3.5 million in the second year. They anticipate a break even in year 3. Year 5 revenues could be nearing $10 million. The investor has experience with three other start-ups, but not in this industry. The inventor has not been a part of a start-up before.

The company is seeking an investment of $500,000 in return for a 15% equity position post-money. If the technology is proven and if it can gain credibility, it could have a significant role in helping people in developing nations have access to clean drinking water. This could have life-saving potential for millions of people.