Startup Valuation: From Strategic Business Planning to Digital Networking, Second Edition
RobertoMoro-Visconti
Contents
1 Introduction 1
1.1 General Remarks 1
1.2 Main Differences from the First Edition 3
1.3 Outline of the Book 5
1.4 Discussion 7
1.5 Selected References 11
1.6 Conclusion 16
Part I Valuation
2 From Business Models to Business Planning 21
2.1 From Budgeting to Business Planning 21
2.2 Literature on Business Models 24
2.3 How to Write a Business Plan … Step After Step 30
2.4 Upstarting and Forecasting a New Business 31
2.5 The Accounting Picture: Interacting Balance
Sheets with Income and Cash Flow Statements 35
2.5.1 Typologies of Cash Flow Statements 35
2.5.2 Sources of Funds and Uses of Capital 38
2.5.3 From the Balance Sheet and the Economic
Flows to the Financial Flows 42
2.5.4 Cash Flow Statement Analytics 45
2.6 Getting Information from Big Data and Networks 45
2.7 Frameworking the Strategic Environment
with PESTLE and SWOT Analysis 48
2.8 A Matrix for Risk Metrics 50
2.9 Sensitivity and Scenario Analysis: Deterministic
Versus Stochastic Planning 57
2.10 Fixing the Sustainable Bottom Line: How to Avoid
Cash or Equity Burnouts 62
2.11 Periodically Monitoring and Upgrading the Model
and Its Underlying Mis-calibrated Expectations 63
2.12 A Corporate Governance Perspective 65
2.13 Augmented Business Planning 67
2.14 Business Incubators and Accelerators 69
2.15 Business Planning and the Cultural Concept of Time 73
2.16 Discussion 75
2.17 Conclusion 76
References 77
3 Profitability, Intangible Value Creation,
and Scalability Patterns 81
3.1 Introduction and Literature Review 81
3.2 Profitability 85
3.2.1 Understanding Profitability in Startups
and Scaleups 85
3.3 Return on Equity, Return on Invested Capital,
and Other Profitability Ratios 86
3.3.1 Return on Equity (ROE) 87
3.3.2 Return on Invested Capital (ROIC)
and Return on Assets (ROA) 88
3.3.3 Ratio Tree and DuPont Formulation 89
3.4 Invested Capital 90
3.5 Relationships Between ROIC and ROE 90
3.6 From Economic Value Added (EVA) to Market
Value Added (MVA) 93
3.7 Operating Leverage 97
3.8 Break-Even Analysis 103
3.9 Digital Scalability 104
3.10 The Impact of Intangible Investments
on EBITDA-Driven Market Valuation 106
3.11 Valuation Drivers, Overcoming the Accounting
Puzzle 107
3.12 From EBITDA to EBIT 109
3.13 The Scalable Impact of the Intangibles on Revenues
and Monetary OPEX 109
3.14 The Impact of EBITDA on the Profitability Ratios 111
3.15 The Impact of EBITDA on the Market Multipliers 114
3.16 SWOT Analysis 118
3.17 The PESTLE and ESG Framework 120
3.18 Discussion 125
3.19 Conclusion 126
References 128
4 Boosting Sustainable Growth with Innovative
Intangibles 131
4.1 Intangible Assets: Introduction and Literature
Review 131
4.2 From the Accounting to the Book Value 138
4.3 (Digital) Trademarks 141
4.4 The Web Value Chain: Domain Names, M-Apps,
and Internet Firms 143
4.5 Acquisition and Processing of Information: IoT,
Big Data, Artificial Intelligence, and Blockchains 146
4.6 Residual Goodwill and the Intangible Portfolio 149
4.7 The Value of Growth: Multi-Stage Cash Flows
and Dividends 150
4.7.1 Franchise Factor Model 152
4.8 Sustainable Growth, ESG Drivers, and Ethical
Funding 153
4.9 Sustainable Patterns 155
4.10 Circular Economy 158
4.11 Resilient Supply and Value Chains 160
4.12 Sharing Economy and Collaborative Commons 161
4.13 Discussion 163
4.14 Conclusion 165
References 168
5 From Incremental Know-How to Patent-Driven
Startups 173
5.1 Know-How and Startups 173
5.1.1 Literature Review 174
5.2 Trade Secrets and Know-How 180
5.3 Protection, Sharing, and Transfer of Intellectual
Property 184
5.4 Product and Process Innovation 189
5.5 From Know-How to Patents 191
5.6 Patents: Definition and Rationale 195
5.7 Accounting as a Prerequisite for Valuation 196
5.8 License or Sale? 199
5.9 Economic and Financial Valuation of Know-How
and Patents 204
5.9.1 The Relief-from-Royalty Approach 207
5.9.2 The Incremental Income Approach 208
5.9.3 The Estimate of the Cost Incurred
(or of Reproduction) 210
5.9.4 The Complex Balance Sheet-Based Approach 211
5.9.5 The Mixed Capital-Income Approach,
with an Independent Estimate of Goodwill 211
5.10 Cost-Based Approaches 213
5.11 Market Valuations and Net Present Value 214
5.12 Comparability Factors 217
5.13 Income Approach 219
5.14 Real Options 221
5.15 Quick and Dirty Valuation Techniques 223
5.16 Forecasting Patent Outcomes with Big Data
and Stochastic Estimates 224
5.17 The Impact of Digitalization on Patents 224
5.18 The Impact of Standard Essential Patents (SEPs)
on the Startup Ecosystem 227
5.19 Discussion 229
5.20 Conclusion 232
References 234
6 Digital Networking and Artificial Intelligence-Driven
Startups 241
6.1 From Digital Platforms to Network Catalyzers:
Unveiling the Key Role of Digital Platforms
in Network Formation 241
6.2 Literature Review and Research Gaps 249
6.3 Vertical and Horizontal Scalability 252
6.4 Digital Scalability 254
6.5 Artificial Intelligence-Driven Scalability as a Real
Option 256
6.6 The Accounting Background: Operating Leverage 264
6.7 The Impact of Scalability on the Enterprise Valuation 268
6.8 Metcalfe’s Law 271
6.9 From Digital Scalability to Blitzscaling 272
6.10 Scalable and Digital Supply and Value Chains 274
6.11 Digital Transformation 277
6.12 Networking Digital Platforms 278
6.13 Artificial Intelligence and Network Theory 282
6.14 Discussion 284
6.15 Conclusion 286
References 288
7 Cherry Picking Intermediaries: From Venture Capital
to Private Equity Funds 293
7.1 Venture Capital, Private Equity, and Equity
Crowdfunding 293
7.1.1 Literature Review and Research Gaps 295
7.2 Risk Capital for Growth: The Role of Venture
Capital, Private Equity, and Business Angels 299
7.3 Types of Investments, Intermediaries, and Bankability 304
7.3.1 Startup Loans and Venture Capital
Activities 305
7.3.2 Financing for Expansion
and Development: The Role of Private
Equity and Bridge Financing 308
7.3.3 Financing of Change and Modification
of Ownership Structures: Replacement
Capital, Buyout, Venture Purchase,
and Turnaround Financing 309
7.4 The Investment Process 310
7.5 The Valuation Framework 316
7.6 The (Uneasy) Estimate of Cash Flows for Financial
Companies 319
7.7 Applying DCF to Asset Management Firms 320
7.8 Multiples and Rule of Thumbs 322
7.9 The Dividend Discount Model 324
7.10 Pros and Cons of the Valuation Methods 325
7.11 Generative AI in Startup Pitch Deck Analysis:
A Case Study 325
7.12 Discussion 328
7.13 Conclusion 330
References 332
8 Early-Stage and Debt-Free Startups 337
8.1 Cash Is King 337
8.2 Literature Review and Research Gaps 338
8.3 The Integrated Economic, Financial, and Balance
Sheet Accounting System 342
8.4 Cash Flow Metrics 342
8.5 From Contacts to Contracts: Budgeting, Sale
Forecasting, and Market Traction 344
8.6 Scalability Drivers, Growth Opportunities,
and Real Options 345
8.7 Sales-Driven Net Working Capital 346
8.8 OPEX and CAPEX 348
8.9 Monetary Equity 349
8.10 Runway Cash Planning 351
8.11 The Winter of Capital: Matching Cash Burnout
with Monetary Equity Burnout and Bridge
Financing 353
8.12 Discussion 356
8.13 Conclusion 358
References 361
9 Leveraging Startup’s Development with Debt 363
9.1 Introduction 363
9.2 Literature Review and Research Gaps 365
9.3 Transition from a Debt-Free to a Levered Startup 367
9.4 Net Present Value, Internal Rate of Return,
and Investment Payback 371
9.5 Modigliani and Miller Proposition II 372
9.6 Information Asymmetries and Leverage 380
9.7 The Theory of Capital Structure: A Startup’s
Reassessment 381
9.8 A Practical Case of Corporate Profitability Analysis 382
9.9 Why Startups Fail? 386
9.10 Discussion 388
9.11 Conclusion 391
References 393
10 A Comprehensive Valuation Metrics 395
10.1 Purpose of the Startup Evaluation 395
10.1.1 Literature Review and Research Gaps 401
10.2 The balance Sheet-Based Approach 405
10.3 The Income Approach 407
10.3.1 Estimated Normalized Income 408
10.4 The Mixed Capital-Income Approach 411
10.5 The Financial Approach 414
10.6 Empirical Approaches 422
10.7 The Control Approach 425
10.8 Discussion 426
10.9 Conclusion 428
References 430
11 Startup Valuation 433
11.1 Startups 433
11.2 AI and Digitalization 436
11.3 From Startups to Scaleups 438
11.4 Startup Trends 441
11.5 Literature Review 443
11.6 An Introduction to the Valuation Approaches 446
11.7 Adaptation of the General Valuation Approaches 449
11.8 How Does Risk Impact Startup Valuations? 460
11.9 How Do Partnerships with Established
Corporations Impact Startup Valuations? 461
11.10 The IPEV Valuation Guidelines 461
11.11 The Fair Value of the Investments in the Target
Firms 468
11.12 The Fair Value of the Investments in the Portfolio
Companies 473
11.13 Startup Evaluation with Binomial Trees 474
11.14 The Venture Capital Method 481
11.15 The Break-Up Value of Venture-Backed Companies 485
11.16 Stock Exchange Listing and Other Exit Procedures 487
11.17 Valuation of the Investment Portfolio with a Net
Asset Value 491
11.18 From Startup to Scaleup Valuation 493
11.19 Boom and Bust Cycles 497
11.20 Valuation Sensitivity to Interest Rate Changes 499
11.21 David versus Goliath: The Fate of Promising
Startups Acquired by Big Tech 501
11.22 A Practical Valuation Case 505
11.23 Discussion 509
11.24 Conclusion 516
References 518
Part II Industry Applications
12 Fintech Valuation 525
12.1 Introduction 525
12.2 Literature Review and Research Gaps 529
12.3 The Ecosystem: Digital Platforms and Multilayer
Networks 533
12.4 Financial Bottlenecks: Inefficiencies and Friction
Points 535
12.5 The Accounting Background for Valuation 536
12.6 FinTech Business Models 537
12.7 Banks Versus Fintechs: Cross-Pollination
and Scalability 541
12.8 Insights from Listed FinTechs 544
12.9 Valuation Methods 546
12.9.1 The Financial Approach 549
12.9.2 Empirical Approaches (Market Multipliers) 553
12.10 Market Stress Tests and Business Model Sensitivity 556
12.11 Competitive Advantage, Excess Returns, Economic
Value Added, and Goodwill 557
12.12 Challenges and Failures: Why FinTechs Burn Out 560
12.13 Discussion 562
12.14 Conclusion 563
References 565
13 The Valuation of Deep-Tech Startups 569
13.1 Introduction 569
13.2 Literature Review on the Valuation of Deep-Tech
Startups 572
13.3 Taxonomy and Features 575
13.4 Business Models 580
13.5 Market Potential 582
13.6 Evaluation Criteria 583
13.7 Discussion 588
13.8 Conclusion 590
References 592
14 Metaverse Startups 595
14.1 Introduction 595
14.2 Literature Review and Research Gaps 597
14.3 Taxonomy 601
14.4 Business Models 607
14.5 Valuation Approaches 609
14.6 Startups and the Metaverse: Driving Innovation
and Navigating Complexity 612
14.7 Discussion 614
14.8 Conclusion 615
References 617
15 Medtech, Biotech, and E-Health Startup Valuation 619
15.1 Introduction 619
15.2 Literature Review 621
15.3 The Healthcare Ecosystem 625
15.4 Business Models 626
15.5 Investors and Market Players 628
15.6 The Accounting Background for Valuation 628
15.7 Valuation Methods 631
15.7.1 The Financial Approach 635
15.7.2 The Financial Approach with Debt-Free
Startups and Scaleups 636
15.7.3 Empirical Approaches (Market Multipliers) 637
15.8 Discussion 639
15.9 Conclusion 640
References 641
16 Foodtech and Agritech Startup Valuation 645
16.1 Introduction 645
16.2 Literature Review and Research Gaps 647
16.3 The FoodTech Ecosystem (From the Farm
to the Fork): Digital Platforms and the Circular
Economy 651
16.4 Foodchains 654
16.5 Business Models 656
16.6 The Accounting Background for Valuation 656
16.7 Valuation Methods 663
16.7.1 The Financial Approach: A Dynamic
Perspective on Startups and Scaleups 664
16.8 Discussion 670
16.9 Conclusion 671
References 673
17 The Valuation of ClimateTech Startups and Scaleups 677
17.1 Taxonomy and Business Models 677
17.1.1 Energy Storage 681
17.2 From Startup to Scaleup 684
17.3 Literature Review 690
17.4 Valuation Approaches 694
17.5 Discussion 702
17.6 Conclusion 704
References 707
18 FashionTech Startup Valuation 711
18.1 The Fashion Industry 711
18.2 Literature Review and Research Gaps 712
18.3 Traditional Fashion Branding 715
18.4 Business Models as a Prerequisite for Valuation 718
18.5 Valuation Approaches 723
18.6 Brand Equity 724
18.7 Digital Branding 726
18.8 FashionTech 727
18.9 NFT-Backed Virtual Fashion and Dematerialized
Digital Clothing 729
18.10 The Shift from Conventional Fashion
to FashionTech and Intelligent (Augmented) Fashion 730
18.11 Valuation Approaches 733
18.12 Discussion 734
18.13 Conclusion 736
References 737
Index 741