How to Value a Startup from VC Joy Marcus
April 17, 2023
Joy is currently co-founder and Managing Director of Brilliant Friends Investing, an early stage venture group that invests in women-led, tech enabled businesses. She is a Lecturer at Princeton University, where she teaches the foundational entrepreneurship classes and also serves as a Venture Fellow at JVP, a large venture capital firm. Previously Joy was Executive Vice President and General Manager Digital Video at Condé Nast Entertainment (CNE), a subsidiary of Conde Nast, the publishing giant whose properties include Vogue, The New Yorker and Vanity Fair.

Joy is an active board director and advisor. She is Chairperson of the Compensation Committee of the Board of publicly listed Perion, an ad tech conglomerate (NASD: PERI) and is Chairperson of the Board of private equity backed Qwire, a music technology company with clients including Warner Brothers and the NFL. She is also an Advisor to fashion technology company Dressit and influencer marketing company 98Strong.Joy’s work regularly receives public recognition. She was named to the Digital Power 50 by the

Hollywood Reporter in 2009 and 2010, and was a Top 50 Most Powerful Working Mother of

2013. In 2014, Joy was named a Woman to Watch by Crain’s Magazine and was also named a

Woman of Power and Influence by the National Organization for Women (NOW). She is a Magna Cum Laude, Phi Beta Kappa graduate of Princeton University and received her

law degree from New York University School of Law where she was awarded the prize for Best

Oralist. She is also on the board of the non-profits New York Tech Alliance and the Video


Venture capital is an art and not a science.

The valuation of companies and venture capital is art, not a science. Why is that? Why do you think it's an art? In theory, at the stage that we're investing, which is early stage, often, it's pre-revenue.

In all venture, when you get to a point where you're turning a lot of revenue every year, you're probably ready for growth capital and venture steps aside. So ventures is really in the business of investing in companies that may have demonstrated some kind of great thing, like people use their products, they love their product, they have a little bit of revenue, something's cooking, right? There's something there. The patient has a pulse, but the patient needs more blood, intravenous, whatever. They need help to get to the next stage. That's the business of venture. It's the business of finding those companies that really have the pulse, and they have the potential, and all they need is capital.

Bias impacts female founders.

The reason women fail in raising venture capital is a bias. Men at that stage will be believed about their potential, what they're going to do in the future. A guy could be sitting with a million-dollar revenue run rate and no plan to get to $50 million, and say, with unbelievable certainty, I'm going to be a $50 million business in three years. The woman at the same table might say, I really can see my way to $50 million but here's the 10 things I have to jump through. They're not getting rewarded for that, frankly. Also, the venture capitalists, who are 88% men, tend to value men on their potential and women on what they've done before.

Good enough team?

So this all is a perfect storm for women and venture because what VCs do is they invest on potential. They're looking at the team. Is this a high-quality team? What is their professional background? Have they had an exit before? That's like the big checkmark. Then it's 10 times easier to raise capital. They're looking very, very closely at team because when you invest early in a company, it's basically like you're getting married to the company. You're in it. It could be five, could be longer, years, before there's some some kind of liquidity event for your capital. So it's a marriage. And you're evaluating this team. Do I want to bet on, do I want to be married to this team? Number one thing they look at.

Big enough market?

Number two thing they look at is is the market big enough? Is this a market that has the potential to generate, say, in the 10s of millions of dollars of revenue to this company? Is there potential for that? Or are they thinking too small? And I've got to tell you, when I first started looking only at women, women were thinking a little bit too small. I was seeing a lot of very small, niche, scented candle kind of brands. There's nothing wrong with scented candles, it's just a saturated market and very competitive. And the part you can slice off is very, very small. Not a great market. Great lifestyle business, but not venture investable. What we look for is, can this grow to a business that will yield a high valuation by generating at least in the 10s of millions of dollars of revenue and that's looking at the market. Does the market have that potential?

Good enough product? Not that important.

Finally, and this is last, which I think is really interesting and this is something I learned doing venture in between selling companies along the way, and now most recently, in the last few years, product is kind of last. The reason for that is, if you're fabulous, and you have an interesting take on a very large market, we'll help you get the product there. We'll help you hire the team. We'll do what it takes. So in some ways, we know when we're investing this early that the product actually will change. We're not betting on the precise product you've built probably at this stage, but we're betting on your potential, the size of the market, and the fact that whatever you're building has identified the right problem. Whether it's perfect now or going to get perfect in a year, we'll work with you on that. That's what we're good at. We're good at helping you hire engineers or marketers or whatever the heck you need. We'll help you with that. That's what venture is really good at. We're not really so put off by a product that isn't quite perfect as long as you kick butt basically, and the market is big enough. And as I said before, once the business is more predictable, you can see your way to $50 million in revenue very, very clearly, that's usually growth stage and not backed by early stage VCs.

Early stage VCs come in when things are more uncertain.

They get bigger stakes for less money because they're taking a bigger bet. And that's really the business of venture. Growth stage capital write very big checks, but the risk is very, very low and they own a smaller piece of the companies they're investing in frankly. And that's how the system works.

How is venture capital good business?

I ask myself this question quite a bit because I made the jump from corporate to venture. We accept risk, because we take a portfolio approach. So every reasonably constructed venture capital firm will invest in somewhere, I think the national average is about 18 per fund so somewhere in the range of 15 to 20 companies. We have a large portfolio, and in that portfolio, we know, because we're investing so early, we know that we will have some winners and we will have some losers. Then some will be kind of meh. And by meh, I mean, we invested a million dollars, we got a million dollars back. We didn't lose our shirts, but nothing to write home about. Total loss? Definitely some percentage is going to be that, we invest way too early for there never to be a total loss. Then the hope is that there are some that literally return the fund and the metrics of return, that's something we look at.

I'll give you some metrics here.

This idea of returning the funder an unlimited amount of return. Here's the math we do. If I have, say, a $10 million fund, I'm investing a million dollars in a company. I want to think before I make that investment that that investment can be worth $10 million dollars to my fund, not the whole company, my piece of it, right. We're going to be worth $10 million. So every single investment really a venture firm is making, that's the mental math that they're doing in their head. Can there be a way for this company to be so valuable that the stake I invest in it will be big enough to return my whole fund, be a fund returner? And look, we don't make every investment that way but it is a driver of how we think about investments. So how do we figure out what a company is worth? Has anyone here gone through valuation process with a VC?

Basically all that's required to justify an early stage investment is to believe that the potential multiple on the investment, the number of times my dollars get returned, is my million turn into 10 million, offsets the risk that the capital may not be returned. That's pretty obvious, right? Because we know some of this capital will not be returned. Some of these companies are going out of business, but we're feeling okay about it because the most we can lose is 1x our money. And the most we can make, in theory, is unlimited, subject to the fact that we know that there are limitations on what even the potential value of this company can be, and also that the company can go away.

I do a little bit different math. We invest $5 million in an early stage out of a total fund of $100 million. We would want to know that that investment has the ability to return $100 million, which means that that investment has the capacity to be a 20x. So, before I get into how we figure out that capacity, I really want to tell you what valuation is really about at this stage. What valuation is really about at this stage is everyone stays motivated and everybody's in the game. Is it a good marriage? Coming in, particularly at the seed where you may be the first institution investing, you're dealing with founders. Presumably, if you're making the investment, you really, really, really like the founders. And you respect what they're doing and you want them to stay engaged with the business because what they've been doing so far has been working. What we want to do is make sure the founders still have enough skin in the game, enough ownership, to make the business continue to be interesting. A typical structure might be something like this. A company is raising, this is at early stage, I consider up to really $30 million in valuation early stage, it's kind of a rule of thumb. A company is raising $5 million at a $15 million pre-money. So that's what the company is worth today or what the company is valued at today. It's selling 25% of the company to new investors, so that $5 million that's getting invested is going to be $5 million over $20 million post valuation. So whoever owns the company right now is pretty damn happy at this point, because they're keeping 75% of the company. Whether it's the founders, the early angel investors, whoever is in it there, is still holding on to enough ownership in the company that they're really, really, really motivated to keep working. A VC would invest maybe $2 million and might lead the $5 million round, maybe not at that check size, I don't know, but let's say they are. That investor, at the end of the day, owns 10% of the company because the company has a post money valuation of $20 million. post money valuation is equal to the pre money valuation, plus the total size of the investment round. And the ownership is the investment the individual VC makes over the post money valuation. So in this case, me VC, I'm writing a reasonably big-sized check for an early stage venture but I'm owning 10% of the company that's not bad. Meanwhile, the other $3 million is going to be worth, another 15% of the company is going to come from other places. Meanwhile, the original founders, owners, whoever put money in early, those people are retaining, I'm doing it super simple because I'm not accounting for dilution, which is like a whole class into of itself, they're holding on to 75% of the company still, so they're pretty happy. And they're pretty motivated to get out of bed in the morning and deliver a great product every day and grow every day.

How do we figure out what a company is worth?

I already referred to things like discounted cash flow and PE ratio, again. The companies I generally work with, you couldn't possibly apply those factors, there's just not enough revenue in the company. There may be zero, negative earnings, for example. You couldn't possibly apply those factors. So we had to come up with some other tools, because we're not totally crazy people, and we're good stewards of other people's money. We have a fiduciary responsibility to our investors to do the best diligence and really come up with a set of factors that can justify the valuation. Usually what happens is that we identify similar companies in both sectors and stage and identify what was the price given to that company at the most recent rounds of financing, either they raised around or they sold. And the tricky part of this business, especially when you're dealing with smaller companies, is always the price reported. There are proprietary sources you can buy to get a little bit more transparency into the price, into the sales price. But mostly, this is conversations with friends in the industry who know how much a company was valued at when it was sold. Then we look at how much revenue did that company that was sold have, and what multiple of that revenue did the company achieve in the sale. For example, if we know that that company that's in a similar sector and stage to the company we're investing in had a million dollars in annual revenue, and at a post money valuation of $20 million, we know that the multiple was 20x. And we're seeing this play out right now, before our very eyes.

I work a lot in adtech and martech. And the adtech and martech industry has been super hot with very high multiples, especially in the b2b sector, on those companies. Even in the public markets. Now that has all deflated over the last month and a half or so. Some of the companies, probably people you've heard of, SPAC, some of the companies that went public buy a SPAC especially, the market cap has like just gone into the toilet. And those are companies we would traditionally use as comps. We are now looking at private companies, small private companies in those same industries. And there's no way we're going to pay the high valuations to them anymore because we're looking at what's happening in the public markets. So the influence on what's happening in the public markets on private company valuations, particularly in the same sector, is very high. What if there really is no revenue, and often we do invest in companies with no revenue. What we do is we look at companies with a little bit of revenue, and apply the multiple equation that I just talked about, and discount like crazy because this company hasn't started to generate revenue. Or we might do something like look at the number of users and look at the number of users in a company that did trade recently, either through sale or IPO or through an investment and say, okay, how much did the investors pay per user, and that might be a way we figure out the value of a company we're trying to value.

What do you want from your VC? What do you think about when you're first taking money from a venture capitalist?

You think about ownership. We hit on that a little bit with that keeping 75% of the company only selling 25%. Control, which is something we have not spoken about, which has to do with, who gets to decide big things like when the company gets sold, firing the CEO, major corporate events. Is it a shareholder, right? Is it a board, right? How active is your position on the board as a founder? For example, are you going to be able to control your destiny? Really, really, really big issues. The other thing you want from your VC, and this is I believe, my and my partner's really distinguishing factor. We really hope to help to maybe change the face of VC a little bit. We hope to provide mentorship, network, and then of course, additional capital as the company is growing. But on the mentorship front, remember, this is a marriage. You want a VC that can help you because they're going to be probably around in your life for a long time. You need to understand how well they understand your business, how well they're connected in your business, because it's not just the capital that they're going to provide you. It's the context of what they're providing you. Can they provide you everything else? Can they expand your universe in a way that multiplies your opportunities? And that to me is the thesis of the fund I've just put together and there a couple of others out there. There aren't too many because a lot of funds are run by really very, very smart but pure finance types. Very, very smart and been doing it for a lot of time with a lot of success, and can't knock them, but I think for early stage in particular, look very carefully at who you're taking money from and say okay, they're money and hopefully they're more money if I need it. But they're also something else. They're mentorship. They're going to grow with me, they're going to send me clients, they're going to expand my network, they're going to bring in other investors to the fold. If you can think about those three things, and be really stern about it, ownership is going to be obvious, because you're going to haggle on ownership. Control is the one that is often forgotten until you show up and you realize you're one person on a seven-person board and you don't have control over shareholding anymore, and you've lost the company. That's not good. Be very careful about those control mechanisms that are implicit in the way that these deals are documented.

Finally, if you have any choice at all, if you're lucky enough to have more than one offer for funding, I really urge you to choose the one that's going to expand your network. Someone with less of a network and less ability to mentor and worse attitude towards you might offer you a better valuation and hence more ownership, right, because they're going to take a smaller piece. But I always say to my students, 0% of 0 is 0. If that entity does not give you the growth potential that the other one who's pushing a little bit on the value, taking a little bit more than you want them to take, they're going to offer you multiples on that in their network.



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