Case Study – Valuation Consulting – Innovative Start-Up
Case Study #4 – Valuation Consulting – Innovative Start-Up
Company X (company details removed for privacy purposes)
InteleK was engaged by a team of talented engineers who had developed a patented medical device that would have the potential to increase the effectiveness of certain diagnosis processes while reducing the costs for health plans and providers. The device is designed to integrate with a software solution and utilizes artificial intelligence (AI) and machine learning (ML) to continuously improve the medical practice and the decision-making process.
The talented engineers were facing the challenge of raising capital to continue developing their solution, going through the regulatory process, and fine-tuning an attractive business model around their patent.
As business valuation experts, we have a deep understanding of the common challenges and questions of a pre-revenue stage venture; how much do we need to raise? How will we maximize the proceeds? How much can we expect to charge for our product? How profitable would be a business like this? What would be a reasonable market share to target? Among many other concerns.
With all those questions in mind, our challenge was to determine a reasonable and defensible valuation range. This would guide the capital raising process while educating the entrepreneurs and their advisors in business valuation practices as it applies to the startup ecosystem. Establishing a defensible position was key in this engagement. To achieve this, we needed to eliminate natural biases associated with overly optimistic entrepreneurs, relying on factual evidence from both financial and non-financial sources.
Valuing pre-revenue companies are especially difficult as there is no history of financial earnings, where establishing a ´reasonable´ valuation range would naturally tend to become a speculative exercise in a highly uncertain environment.
With several years of experience in startup valuation, understanding the ecosystem and what’s inside the mind of the investors, their beliefs and expectations, their way to approach risks, their rules of thumbs and the rationale behind it, InteleK reformulated the projections provided by management and grounded them on evidence, market data, and economic logic.
We evaluation of the business understood that it was actually two different models with their own risk-reward and growth characteristics: a software business model and a hardware business model. We considered different assumptions for cost of capital estimations, profitability expectations, break-even possibilities, and, of course, failure probabilities at every stage.
With all our data, tools and insights at hand we were able to guide management in what was reasonable and defensible valuation range, what was unreasonable, likely and unlikely so they knew what to expect in a negotiation. The entrepreneurs were able to identify the strengths and weaknesses of their business model and how to leverage the financial data to gain a significant advantage.