Financial and analytical information on investments in quoted companies is readily available. Not so for private companies, especially young ones.
Why is this an issue?
Founders of start-ups raise money from friends and family, business angels, incubators, crowd funding platforms and VCs; they issue equity securities at different points in time with rights which become increasingly complex (common and preferred stock, convertible loans and other equity securities are accompanied by certain rights such as liquidation preferences, warrants, options, etc.); but neither they nor many investors really know what it all means for equity valuation at a given point in time under different scenarios.
What do I want to know?
If I am an investor, how can I figure out what my start-up and private equity investments are worth? How can I best decide whether to participate in a round which offers more than common equity? If I am an entrepreneur, how can I figure out the real impact of a term sheet on different classes of shareholders? How can I make simulations to improve my negotiating position in financing rounds? Or when talking to a strategic investor? Or when considering a company sale?
And for all the participants in the founder/investor ecosystem, how can surprises (or nasty litigation) be avoided before or at an exit? Why do so few investors get the return they were expecting? How can valuations done for tax and other regulatory compliance purposes be reconciled with the fair economic value of one’s investments? How can a Board make smart decisions when considering capital raising, private placements, IPOs or company sale?
Definitely NOT by looking at the cap table, typically the first analytical port of call. ONLY by making extremely complicated, opaque, painful, time-consuming calculations. To make matters worse, these calculations, most often done on excel spread sheets, frequently contain mistakes.
Believe me, I know. My partner and I worked at PricewaterhouseCoopers in Tel Aviv as valuation experts and spent years being frustrated at having to do client work using old-fashioned, slow and ultimately, inadequate tools.
Three years ago, sure that the time had come to bring valuation techniques into the 21st century, we decided to develop a user-friendly, easy to learn and use, cloud-based software which would revolutionize valuation calculations by making the whole process quick, cheap, accurate and transparent.
We launched the AlgoValue online valuation tool one year ago; it is being used every day both in Israel and the USA by VCs, law firms, valuation firms, private investors and accounting firms with 100% audit success. It is saving clients time and money by avoiding mistakes, getting extremely rapid results (1-2 hours instead of a few days or weeks), allowing real- time simulation in negotiations and bringing transparency to all stakeholders in a wide variety of decision-making scenarios.