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There is a company, they've done two rounds of investing in last 6 months
They've raised 4.2m end 2018. Raising another 1.5m April 19
Looking for third round in 19/20
Revenues 8.5m
Projected sales revenues of 45m in 22/23, currently have market share of 1%
Now, my question is, how do they come up with a share price of 2.50 euro per share
What's the relationship between sales revenues of 45m and saying they want an IPO valuation of 100m
What's the relationship between pre IPO share price and post? How do you set the target? How do you determine how many total shares there should be?
This is not a life changing investment, but it's interesting in a diversification sort of way.
There are as many ways to come up with valuation as there are people looking to ascertain value.
Two rounds in 6 months seems pretty close together, unless they're growing so quickly they needed the infusion. But the real question is how believable are their projections. They have revenues of $8.5M now, but what is their EBITDA on that? Will EBITDA improve once they hit revenues of $45M?
Some valuation calculations work off current EBITDA and multiply it by something, like 7x for manufacturing. Other valuations get more sophisticated, subtracting projected debt from projected EBITDA and discounting that back to today's dollars.
With early-stage companies it's less about the formulas you use than about how confident you are in the product and the team bringing it to market.
No hard rules - plenty of rules of thumb.
Valuations for companies like this vary. It can be based on a factor times EBITDA, but it can be just as much about the growth potential. Is there are reason to believe this business may have the opportunity to dominate the market? You said it has a 1% market share at $8M. That's only a $800M market... just on that info the $100M valuation seems high without other info.
Will the company disrupt the market and create a new, bigger market. For example - Amazon was initially a bookseller - competing in a relatively 'small' market. But when it became a everything retailer to everyone, it created a much bigger market.
Remember - It's important to be comfortable in your own skin... because it turns out society frowns on wearing other people's
5x seems to be the number I hear/see thrown around a lot. As a numbers guy, I would love to be the fly on the wall when companies like lyft and Uber are determining valuations.
There's no hard and fast rule for setting a valuation for a fundraise in a small startup (the company you describe is small). Larger companies seeking funding or planning an IPO are measured with multiples of financial metrics (EBITDA, Historical Growth, Competitors, etc).
In small companies, it's more art than science. My company just completed a Series B funding round, raising $14.5m. The valuation was essentially an uplift from the previous round and was a number new investors could absorb. If the valuation is too high, new investors won't invest; too low and current investors won't approve the new round due to dilution. (simplified example).
Forward projections for small startups are (99% of the time) wishful thinking. Sure, some hit big but they are few and far between. Given the company numbers you laid out, it's likely the latest round was an extension of the previous round as they're so close together. Companies will also raise a Bridge round that isn't priced but will convert into a subsequent round, usually at a discount or with warrant coverage.
The per share price relates to the total shares outstanding, the valuation, and the amount of money being raised. So, there share price itself isn't much of an indicator of anything. Investors focus on their % of ownership post round (on a fully-diluted basis).