Has the current financial meltdown affected early stage valuations?

BVWireIssue #74-2
November 12, 2008

At the ASA/AICPA session on Early Stage Company Valuations, Neil Beaton, CPA/ABV, CFA, ASA with Grant Thornton explains “The financial meltdown could have a dramatic impact on early stage company valuation and liquidity.”  Even given an early stage company’s relative insulation from the economy, the current economic situation will most likely impact them at some point.  “If your company went out for a round of financing a year ago as opposed to now, you’d likely get a different result.”  In the session, Beaton and professor Atulya Sarin with the Department of Finance Leavey School of Business Santa Clara University point out that, under the current market conditions, mergers and acquisitions will decrease, prices will decrease, acquiring entities will favor profitable companies, and IPOs will continue to decrease and take longer.  These factors will result in overall lower valuations.

So is the sky falling?  “Maybe,” Beaton contends, adding that, “It depends on your company.  If your company is well funded, you’re probably going to be okay.  If you’re looking for funding, you’re facing a tough situation.”  How do you incorporate these influences in valuing early stage companies?  Beaton and Sarin suggest increasing funding risk, increasing liquidity risk, increasing operational risk, and a longer runway to product development.  Beaton adds that, “it’s important to remember that, although the short term economic picture is challenging, market ups and downs are cyclical and conditions will improve."  For more information on valuing early stage companies, watch for Beaton’s upcoming guide from BVR on this topic in early 2009.

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