Comment by ivankirigin
19 years ago
Even in a simple model, time should be incorporated, right? The total cost for the life of the company of an employee is included, assuming a particular growth rate. What about for investment? "the total cost of this round of funding" doesn't make sense so much. And surely the rate of increased value of your company matters.
Also, it seems, like you note in the end, that there is still a gut feeling, and here it is stated simply: how can you predict how much your company will grow because of an investment?
This is easier if you have sales numbers that show some trend, where investing $N in business development yields X more users leading to Y more profit. If you're reddit, and you haven't even monetized your users before being purchased, this can be harder. Also organic growth implies less direct business development.
One simple question that I think has a standard/GAAP answer: how much is your company worth if you are making $X yearly and growing at a rate of Y%? I vaguely recall terms like "good-will estimates" and "present value of future money" in the single management class I've taken years ago. But is there something standard for a company going through valuation for acquisition or taking a next round of funding. [Ignore for the moment that a company making a nice profit and growing ideally wouldn't need a next round of funding.]
"how much is your company worth if you are making $X yearly and growing at a rate of Y%"
In finance, the standard answer is "the net present value of all future cash flows". Basically, all cash that the company throws off beyond expenses technically belongs to the owners. However, owners could've parked their money in T-bills instead of investing it, and they'd receive interest for it. So you discount these future cash flows by a factor that depends on the rate of interest and the time between investment and cash flow, and then sum up all these discounted cash flows over the life of the company. If earnings are growing, you just figure the increased earnings into your calculations. http://en.wikipedia.org/wiki/Net_present_value
I dunno if VCs and acquirers use this method: they face a problem in that it's notoriously difficult to estimate the future cash flows of an unprofitable technology company. They might be building a stellar product and growing market share for years, then suddenly start raising their prices when they become a monopoly. Or they might be building a mediocre product and growing market share for years, and then lose them all when they start raising their prices and a competitor comes along.
Thanks!
Then my earlier points are even more important. How much will your company be worth? How much _more_ is it worth after taking more funding? Who knows? All hard questions.