What's the difference between Venture Capital and Private Equity?
A lot...
Read on:
Pinned Tweet
81
1,003
4,367
Show this thread
Follow
CJ Gustafson
@cjgustafson222
I tweet about financial metrics and business models | Startup CFO | Opinions are my own, not investment advice
CJ Gustafson’s Tweets
When you gate crash an industry you have no experience in, you don’t know shit
This can also be a benefit
Yes, there’s a lot to learn, but you aren’t entrenched in pre conceived notions of how things are supposed to work
If you liked this tweet, I send a free email once a week on business metrics & startup concepts.
Join +14,000 VCs, Startup Founders, & Financial Analysts who subscribe.
Subscribe at
Show this thread
That's DCFs for you. If you learned something feel free to RT
twitter.com/cjgustafson222
And follow for more stuff like this
Quote Tweet
WTF is a DCF model?
I lived inside of Discounted Cash Flow models for years.
And will explain them SIMPLY:
Show this thread
GIF
1
2
Show this thread
Conclusion:
At the end of the day, valuation isn’t just one metric or one model - it’s a triangulation of multiple views.
Valuation doesn’t work when we over index on one methodology, like the DCF, so consider other views as well.
1
Show this thread
12. Terminal Value:
This is a product of the Exit Multiple and the final year’s free cash flow.
The terminal value is typically a large portion (>50%) of the total assessed value and is therefore a huge component of the overall analysis.
1
Show this thread
11. Exit Multiple:
Multiple of Free Cash Flow. MSFT trades in the low 20x’s right now based on growth, Snowflake in the mid 30x’s, and very high growth companies up to 50x. The last year in the forecast gets hit with this multiple.
1
Show this thread
10. Cost of Debt:
Think of this as how much the company would pay in interest for a loan if they went to a big bank.
Larger, more stable companies get better rates. A small SMB HR Tech Co. pays a lot more for a revolving debt facility than Apple.
1
Show this thread
9. Equity Risk Premium:
The excess return an investor gets when they invest in the stock market, compared to the risk-free rate.
Just take the avg market return (8%) less the Risk Free Rate (3%) to get your Equity Risk Premium (5%).
1
Show this thread
8. Risk Free Rate:
Usually baselined to the price of US treasuries (aka “that free free”)
1
Show this thread
7. Market Beta: A measure of how the company moves with the larger equity market.
As an example, Gitlab, a high growth risky-ish tech stock, uses a Market Beta of more than 2. High risk, high return.
1
Show this thread
Next, here are the building blocks of the WACC...
1
Show this thread
6. Weighted Average Cost of Capital:
Think of the WACC as two things:
a) A hurdle rate investors expect to exceed in return for investing their money
b) A way to discount (or shrink) the cash flow forecast back to present day values based on risk.
1
Show this thread
5. EBITDA Forecast:
Based on a target operating model where OPEX plateaus and profits creep up towards ~20% to 30% (or more)
1
Show this thread
4. Long Term Growth Rate:
The estimated growth rate towards the end of the ten year timeframe, and what you think it should grow at in perpetuity.
This should generally match what the sector as a whole is forecasted to grow at
1
Show this thread
3. Medium Term Growth Rate:
What you believe the company will grow at over the next 3 to 5 years
1
Show this thread
2. Revenue Forecast:
Usually assumes base case top line achievability, plus a bit more conservatism if there’s no historical free cash flow to date
1
Show this thread
Let's take a look at the components:
1. Timeframe:
Typically 10 years are shown in the model
1
Show this thread
As a primer, to the majority who are not valuation dorks...
a DCF model is basically a way to estimate what a company is worth by projecting the cash it’s expected to generate over the course of its lifetime
And then discounting that cash back to a smaller present day value.
1
Show this thread
WTF is a DCF model?
I lived inside of Discounted Cash Flow models for years.
And will explain them SIMPLY:
GIF
1
3
12
Show this thread
There are a million ways to say no, and only one way to say yes.
Thats why Kickstarter is so wonderful - it forces customers who say they would buy it to actually pull out a credit card and commit.
CTC - cut the check
1
1
If I could only choose one metric to evaluate a company...
I'd chooose revenue per employee
Why?
It cuts through all the noise.
And there's no hiding.
18
19
133
Show this thread
Yesterday, 16,000 readers learned how CFOs think about software spend.
If you are selling software, or looking to buy software for your department, this will help you get ahead 👇
1
3
If you liked this tweet, I send a free email once a week on business metrics & startup concepts.
Join +14,000 VCs, Startup Founders, & Financial Analysts who subscribe.
Subscribe at
1
2
Show this thread
In particular, this metric is great for evaluating unprofitable, high-growth tech firms. You're drilling down to the core economics - you can't drill down any further.
Most SaaS firms in the high-growth stage have a rev per employee between $250k and $350k.
2
3
18
Show this thread
As your company grows it should see operational leverage - that means the ability to do more with less.
The best way to check if you are getting leverage is simply:
Revenue per head = revenue / # of employees
1
7
Show this thread
If I could only choose one metric to evaluate a company...
I'd chooose revenue per employee
Why?
It cuts through all the noise.
And there's no hiding.
18
19
133
Show this thread
Just published my 1st issue
Curating the best recent software content, including
1
5
17
How much dilution to startups take in each round of fundraising?
6
15
53
Show this thread
Awesome analysis on dilution and what founders and startups should be thinking when raising their next round. Very relevant given the current funding environment. Thank you #MostMetrics and for compiling the data!
mostlymetrics.com/p/how-much-dil
1
2
7
If you liked this tweet, I send a free email once a week on business metrics & startup concepts.
Join +15,000 VCs, Startup Founders, & Financial Analysts who subscribe.
Subscribe at
1
3
Show this thread
Investors are also working backwards, anticipating further dilution in rounds later on, to the percentage they need to hold starting at Series A for their return at exit.
This usually ends up being 20% to 25% of the firm at the time.
1
1
Show this thread
Why Series A?
In a Seed round individual angels are often OK with writing smaller checks, especially since it’s still really risky.
When it comes to Series A, investors are cutting the largest check to the firm so far, but the valuation hasn’t ballooned yet to offset money in
1
1
Show this thread
Takeaway: The early money you take is often the most expensive. Series A often causes the highest dilution, followed by Seed.
1
1
Show this thread
NOTE: This can vary depending on the company’s valuation. We saw companies raise a huge chunk of primary money for limited dilution in 2020 and 2021, driven by massive valuations.
1
2
Show this thread
IPO: ~6%
Typical Range: 5% to 10%
Example: Raise $180M on a $3B valuation (6% investor dilution)
1
1
Show this thread
Series D: ~7%
Typical Range: 5% to 10%
Example: Raise $70M on a $1.0B valuation (7% investor dilution)
1
1
Show this thread
Series C: ~11%
Typical Range: 8% to 15%
Example: Raise $55M on a $500M valuation (11% investor dilution)
1
1
Show this thread
Series B: ~15%
Typical Range: 10% to 20%
Example: Raise $30M on a $200M valuation (15% investor dilution)
1
1
Show this thread