Dana Mead: Understanding Early Valuations

Let me tell you, there's no formula on how these values happen, right? So with a big company, a big company's buying another company, they're trying to value, they do discounted cash flow analysis to figure out a valuation or a net present value to figure that out. You can't do that in our businesses. So in this example, we picked a pre money of $5 million. Now how did we arrive at $5 million? Well, it's kind of about the number that a very new venture with an unproven technology, many times they come in and they're valued in that anywhere between 2 and $10 million range. So they've raised a million dollars, they've done some good work, they've got some intellectual property, they have some good ideas on how they want to move forward. So let's pick that pre money of $5 million. Let's just make this easy. Especially for me, it's $1 a share. So the founders have 5 million shares. Because that's the pre money of 5 million. They're going to divide that up between what they keep and what they're going to put in a management pool. And that equity will be used to attract other talent to the company. And then Kleiner Perkins says, that's great, you have a $5 million valuation, you need $5 million. We're going to put $5 million in and buy 5 million shares. So then the post money value would be 10 million, right? The first 5 million pre 5 million, new money, 10 million. And then the post money fully diluted ownership would be. Kleiner Perkins would own 50%, the founders would own 30, and the management pool would own 20%. So that's very similar to what most cap tables look like right after a series A investment if you just have one investor going in the company. So let's go back to this. So you've gotten that investment, your $5 million. So normally what that gets you in a life science venture is kind of a first in human experience. So you take your technology, you cobble it together, it may not be your final technology, but you try it in a patient. That's the first thing. Then you need to raise money again, the Series B round. And what's your goal when you raise money the next time? Well, to have a higher valuation on the company so that the new investor has to pay more for those shares. So they get fewer shares and it dilutes you less. Right. The fewer shares you sell, the less dilution you get. So that's really the process you go through all the way through. And this would be a basic 510k device venture where you're probably going to raise 50 to 60 million dollars over the life of the venture, from four to five venture capitalists over that.