Startup Valuation From Strategic Business Planning to Digital Networking - Roberto Moro-Visconti
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Roberto Moro-Visconti Startup Valuation From Strategic Business Planning to Digital Networking
Startup Valuation
Roberto Moro-Visconti
Startup Valuation
From Strategic Business Planning to Digital
NetworkingRoberto Moro-Visconti Catholic University of the Sacred Heart Milan, Italy ISBN 978-3-030-71607-3 ISBN 978-3-030-71608-0 (eBook) https://doi.org/10.1007/978-3-030-71608-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and informa- tion in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Contents
1 Introduction 1
Part I Valuation
2 From Business Models to Business Planning 9
2.1 From Budgeting to Business Planning 9
2.2 How to Write a Business Plan … Step After Step 11
2.3 Upstarting and Forecasting a New Business 13
2.4 The Accounting Picture: Interacting Balance
Sheets with Income and Cash Flow Statements 15
2.4.1 Typologies of Cash Flow Statements 15
2.4.2 Sources of Funds and Uses of Capital 18
2.4.3 From the Balance Sheet and the Economic
Flows to the Financial Flows 21
2.4.4 Cash Flow Statement Analytics 25
2.5 Getting Information from Big Data and Networks 29
2.6 Frame-Working the Strategic Environment
with PESTLE and SWOT Analysis 31
2.7 A Matrix for Risk Metrics 32
2.8 Sensitivity and Scenario Analysis: Deterministic
Versus Stochastic Planning 35
2.9 Fixing the Sustainable Bottom Line: How to Avoid
Cash or Equity Burn Outs 37
vvi CONTENTS
2.10 Periodically Monitoring and Upgrading the Model
and Its Underlying Miscalibrated Expectations 38
2.11 A Corporate Governance Perspective 39
2.12 Augmented Business Planning 40
2.13 Business Incubators and Accelerators 41
References 43
3 Profitability, Intangible Value Creation, and Scalability
Patterns 47
3.1 Return on Equity, Return on Invested Capital,
and Other Profitability Ratios 47
3.1.1 Return on Equity (ROE) 48
3.1.2 Return on Invested Capital (ROIC)
and Return on Assets (ROA) 49
3.1.3 Ratio Tree and DuPont Formulation 50
3.2 Invested Capital 51
3.3 Relationships Between ROIC and ROE 51
3.4 From Economic Value Added (EVA) to Market
Value Added (MVA) 53
3.5 Operating Leverage 58
3.6 Break-Even Analysis 62
3.7 Digital Scalability 64
3.8 The Impact of Intangible Investments
on EBITDA-Driven Market Valuation 65
3.9 Valuation Drivers, Overcoming the Accounting
Puzzle 66
3.10 From EBITDA to EBIT 68
3.11 The Scalable Impact of the Intangibles on Revenues
and Monetary OPEX 69
3.12 The Impact of EBITDA on the Profitability Ratios 70
3.13 The Impact of the EBITDA on the Market
Multipliers 73
References 78
4 Boosting Sustainable Growth with Innovative
Intangibles 81
4.1 Intangible Assets 81
4.1.1 From the Accounting to the Book Value 82
4.2 (Digital) Trademarks 86CONTENTS vii
4.2.1 Technological Intangibles: From
Know-How to Patents 89
4.2.2 The Web Value Chain: Domain Names,
M-Apps, and Internet Firms 91
4.2.3 Acquisition and Processing
of Information: IoT, Big Data,
Artificial Intelligence, and Blockchains 93
4.3 Residual Goodwill and the Intangible Portfolio 97
4.4 The Value of Growth: Multi-Stage Cash Flows
and Dividends 99
4.4.1 Franchise Factor Model 100
4.5 Sustainable Growth, ESG Drivers, and Ethical
Funding 101
4.6 Sustainable Patterns 104
4.7 Circular Economy 105
4.8 Resilient Supply and Value Chains 107
4.9 Digital Platforms and Networks 108
4.10 Sharing Economy and Collaborative Commons 108
References 109
5 Cherry-Picking Intermediaries: From Venture Capital
to Private Equity Funds 113
5.1 Venture Capital, Private Equity, and Equity
Crowdfunding 113
5.2 Risk Capital for Growth: The Role of Venture
Capital, Private Equity and Business Angels 114
5.3 Types of Investments, Intermediaries,
and Bankability 118
5.3.1 Startup Loans and Venture Capital
Activities 120
5.3.2 Financing for Expansion
and Development: The Role of Private
Equity and Bridge Financing 122
5.3.3 Financing of Change and Modification
of Ownership Structures: Replacement
Capital, Buyout, Venture Purchase,
and Turnaround Financing 123
5.4 The Investment Process 124
5.5 The Valuation Framework 130viii CONTENTS
5.6 The (Uneasy) Estimate of Cash Flows for Financial
Companies 133
5.7 Applying DCF to Asset Management Firms 133
5.8 Multiples and Rules of Thumbs 136
5.9 The Dividend Discount Model 138
5.10 Pros and Cons of the Valuation Methods 139
References 140
6 Early-Stage and Debt-Free Startups 143
6.1 Cash is King 143
6.2 The Integrated Economic, Financial, and Balance
Sheet Accounting System 144
6.3 Cash Flow Metrics 144
6.4 From Contacts to Contracts: Budgeting, Sale
Forecasting, and Market Traction 146
6.5 Scalability Drivers, Growth Opportunities,
and Real Options 147
6.6 Sales-Driven Net Working Capital 148
6.7 OPEX and CAPEX 150
6.8 Monetary Equity 151
6.9 Runway Cash Planning 153
6.10 The Winter of Capital: Matching Cash Burnout
with Monetary Equity Burnout, and Bridge
Financing 156
6.11 Conclusion 157
References 158
7 Leveraging Startup’s Development with Debt 161
7.1 Transition from a Debt-Free to a Levered Startup 161
7.2 Net Present Value, Internal Rate of Return,
and Investment Payback 164
7.3 Modigliani & Miller Proposition II 165
7.4 Information Asymmetries and Leverage 173
7.5 The Theory of Capital Structure: A Startup’s
Reassessment 173
7.6 A Practical Case of Corporate Profitability Analysis 175
7.7 Why Startups Fail? 179
References 180CONTENTS ix
8 A Comprehensive Valuation Metrics 183
8.1 Purpose of the Startup Evaluation 183
8.2 The Balance Sheet-Based Approach 187
8.3 The Income Approach 190
8.3.1 Estimated Normalized Income 190
8.3.2 Choice of the Capitalization Rate 192
8.3.3 Choice of the Capitalization Formula 193
8.4 The Mixed Capital-Income Approach 194
8.5 The Financial Approach 196
8.6 Empirical Approaches 205
8.7 The Control Approach 210
References 210
9 Startup Valuation 213
9.1 An Adaptation of the General Valuation
Approaches 213
9.2 The IPEV Valuation Guidelines 214
9.3 The Fair Value of the Investments in the Target
Firms 218
9.4 The Fair Value of the Investments in the Portfolio
Companies 220
9.5 Startup Evaluation with Binomial Trees 221
9.6 The Venture Capital Method 223
9.7 The Break-up Value of Venture-Backed Companies 225
9.8 Stock Exchange Listing and Other Exit Procedures 227
9.9 Valuation of the Investment Portfolio with a Net
Asset Value 228
9.10 Unicorns 229
9.11 Key Person Discounts, Founder Control,
and Governance Implications 232
9.12 A Practical Valuation Case 233
References 238
Part II Industry Applications
10 FinTech Valuation 245
10.1 Introduction 245
10.2 The Ecosystem: Digital Platforms and Multilayer
Networks 248x CONTENTS
10.3 Financial Bottlenecks: Inefficiencies and Friction
Points 250
10.4 The Accounting Background for Valuation 252
10.5 FinTech Business Models 252
10.6 Banks Versus FinTechs: Cross-Pollination
and Scalability 257
10.7 Insights from Listed FinTechs 258
10.8 Valuation Methods 261
10.8.1 The Financial Approach 264
10.8.2 Empirical Approaches (Market
Multipliers) 268
10.9 Market Stress Tests and Business Model Sensitivity 271
10.10 Competitive Advantage, Excess Returns, Economic
Value Added, and Goodwill 272
10.11 Challenges and Failures: Why FinTechs Burn Out 275
10.12 Concluding Remarks 277
References 277
11 From Informal Financial Intermediaries
to MicroFinTech Valuation 281
11.1 Introduction 281
11.2 Sustainability Versus Outreach 285
11.3 Technological Innovation 287
11.4 FinTech-Driven Scalability and Economic
Sustainability 289
11.5 A Pecking Order Reinterpretation of MFIs
Funding 290
11.6 Expanding Outreach with Multilayer Digital
Platforms 291
References 292
12 Digital Platforms and Network Catalyzers 297
12.1 Networked Digital Platforms 297
12.2 Network Theory 300
12.3 The Impact of Digital Platforms on Supply
and Value Chains 301
12.4 Evolutionary Multilayer Startups 303
References 306CONTENTS xi
13 From Netflix to Youtube: Over-the-Top
and Video-on-Demand Platform Valuation 309
13.1 Introduction 309
13.2 Digital Platforms and Scalability 311
13.3 Business Models 315
13.4 M-Apps 319
13.5 The Accounting Background for Valuation 320
13.6 Valuation Methods 322
13.6.1 The Customers’ Portfolio (e-Loyalty
of Digital Clients) 323
13.6.2 The Financial Approach 329
13.6.3 Empirical Approaches (Market
Multipliers) 335
References 338
14 E-Health and Telemedicine Startup Valuation 341
14.1 Introduction 341
14.2 The Healthcare Ecosystem 343
14.3 Business Models 344
14.4 Investors and Market Players 345
14.5 The Accounting Background for Valuation 345
14.6 Valuation Methods 348
14.6.1 The Financial Approach 350
14.6.2 The Financial Approach with Debt-Free
Startups 354
14.6.3 Empirical Approaches (Market
Multipliers) 357
References 360
15 FoodTech and AgriTech Startup Valuation 363
15.1 Introduction 363
15.2 The FoodTech Ecosystem (from the Farm
to the Fork): Digital Platforms and the Circular
Economy 365
15.3 Food Chains 368
15.4 Business Models 370
15.5 The Accounting Background for Valuation 375
15.6 Valuation Methods 377
15.6.1 The Financial Approach 378xii CONTENTS
15.6.2 The Financial Approach with Debt-Free
Startups 383
15.6.3 Empirical Approaches (Market
Multipliers) 384
References 389
Index 391List of Figures
Fig. 2.1 Subdivision of the cash flows 16
Fig. 2.2 Accounting derivation of the cash flow statement 17
Fig. 2.3 Typologies of cash flow statement 18
Fig. 2.4 Sources and uses of funds 20
Fig. 2.5 Monetary costs and revenues 21
Fig. 2.6 Subdivision of net working capital 22
Fig. 2.7 Variation of the balance sheet and identification
of liquidity as the target variable 23
Fig. 2.8 Reclassification of the income statement propaedeutic
to the determination of the cash flow statement 24
Fig. 2.9 Subdivision of the cash-generating EBITDA 30
Fig. 2.10 Upside and downside risk, due to revenues’ volatility 33
Fig. 2.11 Interactive risk matrix 34
Fig. 2.12 Example of binomial model 36
Fig. 2.13 Risk scoring matrix 37
Fig. 2.14 Equity- and cash-burnout 38
Fig. 2.15 Interaction of top-down and bottom-up strategies 41
Fig. 2.16 Startup Interactions with Incubators, Angels,
and Accelerators 42
Fig. 3.1 Profitability ratio tree 51
Fig. 3.2 Assets and liability structure 52
Fig. 3.3 The link between invested and raised capital
and the income statement 53
Fig. 3.4 From EVA to MVA 57
Fig. 3.5 Value creation: when ROIC exceeds the cost of capital 58
xiiixiv LIST OF FIGURES
Fig. 3.6 Break-even analysis 64
Fig. 3.7 Break-even point 65
Fig. 3.8 The impact of the intangible investments
on the EBITDA 69
Fig. 4.1 Multi-stage dividend growth 99
Fig. 4.2 ESG impact on cash flows, cost of capital, and DCF value 103
Fig. 4.3 Sustainability patterns 105
Fig. 4.4 Circular economy flowchart 107
Fig. 4.5 From digital platforms to Networks 108
Fig. 5.1 Startup investors 116
Fig. 5.2 The Gartner Hype-Cycle model 118
Fig. 5.3 Startup financing cycle 120
Fig. 5.4 The investment process 125
Fig. 5.5 Economic and financial performance of a venture capital 131
Fig. 5.6 Valuation methods of asset management firms 132
Fig. 6.1 Interactions of income statement and variations
of the Balance Sheet to Produce the Cash Flow
Statement in a Debt-free startup 145
Fig. 6.2 Book, monetary, tangible and intangible equity 152
Fig. 6.3 The financing and investing cycle 1 Funds acquisition
of capital (equity), 2 Funds investment in net working
capital and fixed assets (invested capital), 3 Generation
of operating NOPAT (funds applications in net working
capital and fixed assets →sales →operating NOPAT),
4 Operating NOPAT generates operating cash flows
to payback investors (shareholders) 153
Fig. 6.4 Cash runway and equity refinancing 155
Fig. 7.1 The Financial-Economic Cycle ➀ Funds acquisition
of capital and debt (raised capital), ➁ Funds investment
in net working capital and fixed assets (invested
capital), ➂ Generation of operating NOPAT (funds
applications in net working capital and fixed assets
sales operating NOPAT), ➃ Operating NOPAT
generates operating cash flows for investors (debtholders
and shareholders) 162
Fig. 7.2 Impact of a leverage increase on the cost of capital 163
Fig. 7.3 Evolution from a debt-free to a levered startup 164
Fig. 7.4 Modigliani & Miller (M&M)—Proposition II (where:
K e = cost of equity; k o = WACC (weighted average
cost of capital); K d = cost of debt) 167
Fig. 7.5 ROE and ROIC 172LIST OF FIGURES xv
Fig. 7.6 Impact of an increase in financial leverage (d) on the cost
of debt (i) and ROE 172
Fig. 8.1 Functional analysis, business planning, and startup
valuation 187
Fig. 8.2 Value of the startup and cash flows 199
Fig. 8.3 The integrated equity—economic—financial—empirical
and market valuation 202
Fig. 9.1 Representation of the pay-off 222
Fig. 10.1 Main FinTech activities 247
Fig. 10.2 Interaction of FinTech with BigTechs and traditional
banks 251
Fig. 10.3 Evaluation methodology 256
Fig. 10.4 Business model and value drivers 257
Fig. 10.5 FinTech versus technological and banking stock market
index 259
Fig. 10.6 Business model and valuation approach of FinTechs 261
Fig. 10.7 Goodwill as a positive differential between the yield
and the cost of invested capital 273
Fig. 11.1 From informal financial intermediaries to MicroFinTechs 284
Fig. 11.2 Operational functions in traditional and technological
MFIs 284
Fig. 11.3 The financial ecosystems network 285
Fig. 11.4 Impact of microfinance evolution
on the trade-off sustainability versus Outreach 292
Fig. 12.1 Interaction between the infrastructural network,
the platform, and the startup 298
Fig. 12.2 Networked digital platforms 299
Fig. 12.3 Digital supply and value chains 302
Fig. 12.4 Multilayer networks 305
Fig. 12.5 Superimposed multilayer networks with a bridging
digital platform 305
Fig. 12.6 Multilayer evolution of startup stakeholders 306
Fig. 13.1 The link between media, the internet, and the platforms 312
Fig. 13.2 The link between digital transformation and scalability 313
Fig. 13.3 The digital media ecosystem 314
Fig. 13.4 Interactions of intangibles 315
Fig. 13.5 Video on demand business models 319
Fig. 13.6 Evaluation methodology 320
Fig. 13.7 Business model and value drivers 321
Fig. 13.8 Business model and valuation approach 322
Fig. 13.9 From blitzscaling to client retention 324
Fig. 13.10 Internet traffic monetization process 327xvi LIST OF FIGURES
Fig. 14.1 The link between e-Health, m-Health, and telemedicine 342
Fig. 14.2 The healthcare ecosystem 343
Fig. 14.3 Interactions of intangibles 344
Fig. 14.4 Healthcare supply chain 347
Fig. 14.5 Evaluation methodology 347
Fig. 14.6 Business model and value drivers 348
Fig. 14.7 Business model and valuation approach 349
Fig. 14.8 Interactions of income statement and variations
of the balance sheet to produce the cash flow statement
in a debt-free startup 356
Fig. 15.1 Food chain 368
Fig. 15.2 FoodTech and AgriTech value chains 369
Fig. 15.3 The Food Supply Chain 370
Fig. 15.4 Evaluation Methodology 376
Fig. 15.5 Business model and value drivers 376
Fig. 15.6 Business model and valuation approach of foodTechs 377
Fig. 15.7 Valuation framework—traditional firm 385
Fig. 15.8 Valuation framework—startup 386List of Tables
Table 2.1 From revenues to EBIT, differentiating between fixed
and variable costs 14
Table 2.2 Composition of operating net working capital 22
Table 2.3 Cash flow statement 24
Table 2.4 Derivation of the EBITDA 25
Table 2.5 From the EBITDA to the operating cash flow 26
Table 2.6 Composition of the operating net working capital 26
Table 2.7 Composition of the fixed assets (CAPEX) 27
Table 2.8 From the operating to the net cash flow 27
Table 2.9 Net financial liabilities and equity 28
Table 2.10 Variation of reserves 29
Table 2.11 Cash flow statement reconciliation 29
Table 2.12 PESTE and SWOT definition 31
Table 3.1 Equity equivalent adjustments to EVA 55
Table 3.2 From revenues to operating profit 59
Table 3.3 Degree of operating leverage 61
Table 3.4 Degree of operating leverage with a revenue decrease
(a) Hypothesis 1: revenues decrease to 50 62
Table 3.5 Degree of operating leverage with a revenue increase
(b) Hypothesis 2: revenues grow to 300 62
Table 3.6 From sales to EBIT 67
Table 3.7 From EBITDA to EBIT 69
Table 3.8 Discounted operating cash flow 75
Table 4.1 The big data 10Vs and their impact on forecasting 96
Table 5.1 Operating and net cash flows in startups 130
xviixviii LIST OF TABLES
Table 5.2 Value drivers for asset management firms 132
Table 5.3 Strengths and weakness of valuation methods of asset
management firms 139
Table 6.1 From sales to EBIT 147
Table 6.2 Turnover ratios 148
Table 6.3 From EBITDA to operating cash flows 151
Table 6.4 Cash flow runway 154
Table 6.5 Impact of the monetary equity injections on the net
cash flow 156
Table 7.1 Combination of profitability ratios 170
Table 7.2 Profitability ratios, leverage, and credit spread 171
Table 7.3 Impact of a leverage (d) increase on the cost of debt (i)
and ROE 172
Table 7.4 Delta case. Balance sheet T3 and T4 (Asset
and liabilities; income statement T4) 176
Table 7.5 Input data for the profitability equation 178
Table 7.6 Collected or invested capital 178
Table 7.7 Reclassified data for the profitability equation 178
Table 7.8 Subdivision of the profitability equation 178
Table 8.1 Cash flow statement and link with the cost of capital 203
Table 9.1 Pay-off calculation 223
Table 9.2 Mean forecast EBITDA 234
Table 9.3 From the net cash flow to the equity value 235
Table 9.4 Listed comparables 236
Table 9.5 Net financial position 236
Table 9.6 Adjusted multiple of the EBITDA 237
Table 9.7 Synthetic valuation 237
Table 9.8 Sensitivity analysis 237
Table 9.9 Cost of equity (ke) sensitivity 238
Table 10.1 FinTech typologies and business models 254
Table 10.2 Comparison of the main evaluation approaches
of traditional firms, technological startups, and banks 263
Table 10.3 FinTech valuation approaches 264
Table 10.4 Cash flow statement of a FinTech and link with the cost
of capital 269
Table 11.1 MFI Income Statement and Impact of Technology 289
Table 13.1 Business models of the AudioVisual Industry 317
Table 13.2 Comparison of the main evaluation approaches
of traditional firms and technological startups 323
Table 13.3 Cash flow statement and link with the cost of capital
of a VoD/OTT company 333LIST OF TABLES xix
Table 14.1 e-Health and telemedicine business models and value
chain issues 346
Table 14.2 Comparison of the main evaluation approaches
of traditional firms and technological startups 350
Table 14.3 Cash flow statement and link with the cost of capital
of an E-health startup 355
Table 14.4 Working capital turnover 357
Table 15.1 FoodTech and agriTech business models 371
Table 15.2 Comparison of the main evaluation approaches
of traditional firms and technological startups 378
Table 15.3 Cash flow statement and link with the cost of capital
of a FoodTech startup 383
Table 15.4 Turnover Ratios 386CHAPTER 1
Introduction
A startup is a newly established business begun by an entrepreneur to
seek, develop, and validate a scalable economic model, transforming a
project into a hopefully viable commercial activity. Bringing ideas to
fruition is the ultimate target of successful startuppers.
Innovative startups are characterized by high growth potential, which
usually absorbs a lot of liquidity in the early years of life, to finance
development, against minimal collateralizable assets. This is unattractive
for traditional banks, usually replaced by other specialized intermediaries
as venture capital or private equity funds, which diversify their port-
folio basing their strategies on a multi-year exit with substantial expected
increases in value from investments that survive a Darwinian selection.
Startups coexist in an evolving ecosystem with established firms, to which
they transfer innovativeness, technology, flexibility, and time-to-market
speed, contributing to reinvent the business models, and receiving from
mature firms feedbacks on the current market features, the existing clients,
and their unsatisfied needs.
The valuation paradigms represent a central issue for any startupper
seeking external finance, either from “family and friends” or through a
wider and professional placement, from equity crowdfunding to venture
capital or private equity underwriting.
This book represents an updated guide to both practitioners, students,
and academics about the trendy valuation patterns of the startups. The
© The Author(s), under exclusive license to Springer Nature 1
Switzerland AG 2021
R. Moro-Visconti, Startup Valuation,
https://doi.org/10.1007/978-3-030-71608-0_12 R. MORO-VISCONTI
topic is very actual and shows the presence of a theoretical and prac-
tical gap in the literature. In particular, what is missing in the literature
is the interaction between sound corporate finance theory and appraisal
applications. Empirical cases, with industry applications, show how the
theoretical background can be applied to real situations.
The main audience may be tentatively represented by practitioners
(investors, startuppers, venture capital /private equity managers, etc.),
specializing students (attending MBA programs, etc.), and academics
working in this wide and interdisciplinary field.
This book innovatively combines classic aspects of valuation with
personalized considerations for startups. Theoretical corporate finance
aspects, ranging from discounted cash flows, capital budgeting, or capital
structure issues, are combined with practical insights that describe and
interpret the startup features. Startups increasingly incorporate in their
business model ESG-compliant sustainability patterns and so represent a
template for typically less reactive traditional businesses.
Fifteen chapters describe these complementary topics. They are divided
into two parts: the first (Chapters from 2 to 9), dedicated to valuation
practices, and the second (Chapters from 10 to 15), devoted to some
empirical cases and industry applications.
Chapter 2 deals with an introductory framework, represented by the
interaction between business models and business planning, describing
the uneasy attempt to transform visionary ideas into feasible numbers.
Chapter 3 is dedicated to value creation and scalability patterns that are
intrinsic in any startup, and accompany it to the scaleup phase. Corporate
profitability is a core issue of financial statement analysis and corpo-
rate finance that is consequentially examined. Economic profitability,
deriving from positive marginality where revenues exceed costs, is consid-
ered in complementary ways. Chapter 4 follows the thread of Chapter 3
and analyzes how innovative intangibles may boost growth, and scala-
bility, especially if they have digital features. Trendy intangibles that may
well operate in coordination range from M-Apps, IoT, and big data to
blockchains, artificial intelligence, and interoperable databases, showing
potential for scale-up if properly combined within a firm.
Chapter 5 describes “cherry-picking” intermediaries that select the best
startups. They range from venture capitalists to private equity investors,
depending on the life state of the target company. In the early stages of
seed financing, professional intermediaries may be preceded by business
angels or equity crowd-funders.1 INTRODUCTION 3
The corporate finance structure of a typical startup is described in
Chapters 6 and 7. Chapter 6 illustrates early-stage startups that are typi-
cally debt-free, being unable to collateralize their tiny assets or to produce
enough liquidity to properly serve debt. Startups that survive the “Death
Valley” and the equity- and cash- burnout may start raising debt, as shown
in Chapter 7, leveraging their development with bank loans, and reaching
scaleup status.
After these framework chapters, a comprehensive valuation approach
for standard firms is described in Chapter 8. Reference to traditional
firms and their valuation standards is important because startups are like
other companies, albeit showing some peculiarities. Specific reference to
startup valuation issues is contained in Chapter 9, showing which are the
approaches suggested by private equity associations or other practitioners.
The second part of the book, as anticipated, is dedicated to some
industry applications, concerning empirical examples of startup valua-
tion issues. Six complimentary examples decline the appraisal issues in
specific segments of activity. While the valuation approaches are consistent
with the general principles illustrated in the first part, some fine-tuning is
necessary to adapt the appraisal standards to specific cases.
Chapter 10 is devoted to FinTechs, a paradigmatic example of fashion-
able startups that are reshaping the somewhat old-styled banking industry.
Chapter 11 analyzes the complementary business of microfinance activ-
ities scaled up by technology, showing that innovation may also have
a positive social impact. MicroFinTech businesses incorporate startup
innovation in not-for-profit activities, representing a paradigm for similar
ventures.
Digital platforms, described in Chapter 12, are network catalyzers that
represent more a product and device than a firm typology. They are
consistent with the scalability features shown in Chapter 3 and easily
interact with any kind of startup, boosting productivity.
Entertainment startups, exemplified by Over-the-Top and video-on-
demand platforms, are analyzed in Chapter 13. They are, for instance,
represented by popular firms (Netflix, YouTube, Amazon Prime, etc.)
that have evolved from the startup phase, or by newcomers that challenge
incumbent competitors.
E-health and telemedicine startups, illustrated in Chapter 14, refer
to a trendy business where innovation tries to match growing quality
expectations, driven by a patient-centric approach.
FoodTech and complementary AgriTech startups, examined in
Chapter 15, start from innovation in food chains and to the desire to4 R. MORO-VISCONTI
discover new food products and tastes, in a vital sector where demand—
like that of healthcare—is potentially unlimited.
Whereas these six examples, illustrated in Part II, do not exhaust the
full range of possible sectors—that is, of course, much wider—they offer,
anyway, a template for the adaptation of the valuation patterns described
in Part I to further business models that may be incorporated in a new
entrepreneurial activity.
Even startups can be innovatively interpreted with network theory,
considering them as a node that is linked to other nodes (external stake-
holders, etc.) through connecting edges. This structure also applies to
this book, where each chapter is connected to the others, as graphically
shown in the following representation.
Business Models Early-Stage Startups
(Chapter 2) (Chapter 6)
Business Planning Venture Capital - Private Equity
(Chapter 2) (Chapter 5)
InnovaƟve Intangibles Intangible Value CreaƟon Maturing (levered) Startups
(Chapter 4) (Chapter 3) (Chapter 7)
Sustainable Growth - ESG Startup ValuaƟon
(Chapter 4) (Chapter 9)
(General) ValuaƟon Principles
(Chapter 8)
THEORY
PRACTICE
FinTechs
Digital Plaƞorms / Media Startups e-Health /
(Chapter 10) FoodTech / AgriTech
Networks (Chapter 13) Life Sciences Startups
(Chapter 12) Startups (Chapter 15 )
(Chapter 14)
Not-for-Profit Startups
(MicroFinTech)
(Chapter 11)1 INTRODUCTION 5
∗ ∗ ∗
Any useful comment may be sent to roberto.morovisconti@morovisconti.it
or by visiting www.morovisconti.com.
This book is dedicated to the loving memory of Alfredo Scotti (1948–
2020), a mentor and a friend.
Milan, Italy, Catholic University of the Sacred Heart, March 2021.PART I Valuation
CHAPTER 2
From Business Models to Business Planning
2.1 From Budgeting to Business Planning
The successful commercialization of an innovation strongly depends on
its business model (Ruseva, 2015; Gajewski & Rzemieniak, 2018).
Management scholars and practitioners generally agree that the
primary functions of a business model are value creation and value capture
(Biloshapka & Osiyevskyy, 2018).
Startups base their strategic ideas on a business model canvas that
quantifies their managerial goals.
Digital startups in the early stages of their development frequently
undergo innovation to their value architecture and Business Model
(Ghezzi & Cavallo, 2020). Lean Startup has been impacting how star-
tups and incumbents innovate their business models (Bocken & Snihur,
2020).
Startups struggle to align their business models coherently, particularly
in the early phases. At the same time, their founders’ backgrounds and
experiences have a critical influence on the design of the business model
(Dopfer, 2018). Startup success is greatly attributed to pre-startup phase
planning. Startups develop business plans to pitch their ideas to secure
funding and/or partners (Khan, 2018).
Investors need a practical, flexible, and comprehensive framework to
model their management strategies, synthesizing their theoretical knowl-
edge.
© The Author(s), under exclusive license to Springer Nature 9
Switzerland AG 2021
R. Moro-Visconti, Startup Valuation,
https://doi.org/10.1007/978-3-030-71608-0_210 R. MORO-VISCONTI
In synthesis, two background skills are necessary for proper business
planning:
1. basic accounting (to prepare the balance sheet, income statement,
and cash flow account)
2. basic Excel knowledge (to transform ideas into IT numbers).
Budgeting lies at the foundation of every perspective economic and finan-
cial plan, not only for startups. Budgeting considers the trendy outlook
of sales and revenues, costs, production, marketing strategies, and their
impact on cash flows.
Budgeting and “power to predict” must be properly incorporated
within a wider system of business planning (Teece, 2010).
It should be made immediately clear that the accounting backbone of
any business plan is first represented by the interactive matching of the
three basic balance sheet documents:
1. the balance sheet, with a representation of assets, liabilities, and
differential net equity;
2. the income statement (profit & loss account), with a coherent
matching of revenues and costs;
3. the cash flow statement, showing the quantity (and quality) of
liquidity created or absorbed by the ongoing business.
The cash flow statement is automatically derived combining balance sheet
variations (from the previous year) with the income statement of the year
under investigation and so no new information is given, since they are
already existing, just needing to be reclassified.
Among the major mistakes in preparing a business plan, the mere fore-
cast of expected revenues and costs over a conventional multi-year time
horizon, accompanied by a rough and unsupported estimate of cash flows,
stands out as a most likely banana skin.
To those who look for shortcuts, avoiding deriving the cash flow state-
ment from the necessary comparison of two consecutive balance sheets,
matched with the income statement, it may suffice to mention that if
they so behave (completely ignoring the necessity to prepare a balance
sheet, which is the company’s cumulated “backbone”), they are likely to
undergo unsolvable problems, such as:2 FROM BUSINESS MODELS TO BUSINESS PLANNING 11
• how to calculate the impact of a changing net working capital (due
to modifications in accounts receivable and payable, in the inventory
…);
• how to determine any modification in the net financial position (i.e.,
financial debts net of financial credits).
The balance sheet and the expected income statements along with the
whole useful life of the investment horizon are the true backbones
behind any business plan. Anything else (break-even analysis; financial
ratios; market evaluation …), albeit useful or even necessary, is just
complementary.
Startuppers should try to transform their vision into feasible numbers,
blending imagination with concreteness.
2.2 How to Write a Business
Plan … Step After Step
Some basic questions for the preparation of the business plan
(Osterwalder & Pigneur, 2010; Pinson, 2004; Rhonda & Kleiner, 2000;
Shalman, 1997) concern the following issues:
• How to conceive and prepare a business plan?
• Which are the consequential steps?
• How to be simultaneously effective and comprehensive?
• How to properly combine hard and soft skills?
These are just a few of the many issues that every practitioner must face.
And even non-business plan experts that may never be asked to prepare a
business plan (McKeever, 2011), are extremely likely to be in the position
to evaluate, assess, or just read somebody else’s strategies. So, it is always
useful to know how to read it and, to do so, any potential user should
have at least a basic knowledge about how to prepare a business plan;
not everybody is due to become an expert, but we are all likely to be
somewhat involved in some business plan issues, so … it is better to start
approaching them, at least broadly and intuitively.
The steps may be the following (see http://www.wikihow.com/Write-
a-Business-Plan):12 R. MORO-VISCONTI
1. Analyze the Potential Markets: Who will want your product or
service?
2. Define the Company: What will you accomplish for others? What
products and services will you produce or provide?
3. Choose a Winning Strategy: How will you distinguish the product
or service from others?
4. Develop a Strong Marketing Campaign: How will you reach the
customers and what will you say?
5. Build A Dynamic Sales Effort: How will you attract customers?
6. Design the Company: How will you hire and organize the work-
force?
7. Identify the Company’s Initial Needs: What will you require to
get started? Back and support the sources with appropriate and
verifiable data;
8. Target the Funding Sources: Where will you find the financing? As
the business concept begins to take shape, you can begin to home
in on the most likely financing sources;
9. Explain the Financial Data: How will you convince others to invest
in the endeavor?
10. Present the startup in the Best Light: What are the qualifications
for bringing the plan to fruition?
Other useful tips may include the following:
• Many sources exist for finding information for the business plan.
The local library and the Internet are always helpful sources for
data. If you live near a university, you may be able to schedule an
appointment with a mentor.
• Make sure you cite the appropriate information. This way you will
have support for any statistics you put into the business plan.
• Soft skills are concerned with creativity, imagination, “immaterial”
and pioneering entrepreneurship, stamina, flexibility, and resilience
(…), willingness to create new unexploited value, beyond simple
quantitative data entry or numbering.
• Remember that business planning is always a work in progress: never
stop refining, fine-tuning, upgrading, updating …
• Never be satisfied: only enthusiasm can light up the fire of changing!2 FROM BUSINESS MODELS TO BUSINESS PLANNING 13
• follow the Market traction: From Target Addressable Market (TAM)
to Serviceable Addressable Market (SAM).
2.3 Upstarting and Forecasting a New Business
Starting up a new business, any entrepreneur is surrounded by initial
excitement and following frustration, with ups and downs, and hope
to take off, eventually. Soft skills must be carefully blended with an
entrepreneurial spirit. And it should always be remembered that there
are no self-igniting businesses.
Preparing a business plan from scratch, after a tiring brainstorming, the
entrepreneur needs to transform ideas and dreams into feasible numbers.
A projection of the income statement across the useful life of the
project or, at least, its starting phase, must consider a period of some
3–5 years: the longer the forecast, the lower its accuracy; but forecasts do
not even have to be too short-termed: financial supporters are anxious to
know about their payback. The extension of the business plan depends
on the useful life of the project, often uneasy to exactly assess. Innovation
exacerbates business discontinuity, increasing business planning volatility.
The income statement forecast must be accompanied by a projec-
tion of pro forma balance sheet; the first balance sheet may be
the photography of the company’s assets and liabilities at time zero,
whereas successive balance sheets may be conceived mainly on an incre-
mental/developmental basis, considering the impact of yearly income
statement on the starting balance sheet:
Balance sheet T0 → Income Statement T1 →
→Balance sheet T1 →Income Statement T2 →
→Balance sheet T2 ...
Some shortcuts may be useful:
1. First concentrate on the initial balance sheet, which is typically very
simple, just containing the starting investments, covered by pocket
money or some other equity/loan injections; for the moment, there
are no stocks, no credits, no structured debt, no working capital …
it is so not too difficult to make the initial photography;
2. Then concentrate on the income statement forecast for a sufficiently
long period of some 3 years; this is the core part of your projectionsYou can also read
