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Simple math of valuing the Bridge Part 1

· startup

On the 18th March 2015, I had a conversation with a good friend of mine, Abhinav , the founder of ourhealthmate. We had a conversation of how can we understand the market sentiment about startups. He felt that my idea was useful, so I shall present a general framework about valuing the bridge.

The bridge is defined as a way to achieve small amount of financing to achieve the next major milestone required for the next round of funding. That round can be Series A or B or etc.

Let's start by understanding the value of a startup from the investors' perspective and then follow by understanding that value from the founders' perspective.

Different investors, different valuations

The investors consider the bridge as another seed round. An opportunistic investor will try to get the founders to sell the company at the seed valuation , $A, seen in the banner picture. A thoughtful and uber optimistic investor will do a favor by buying the shares at the anchor valuation, $D, seen in the same picture. Such anchor bridge valuation is possible if there is evidence such as an acquisition offer.

Valuing the Bridge @ the Anchor

The calculation of the anchor bridge valuation is determined by the average of the Seed value and the Acquisition offer. This formula is stated as follow:

The fact that the founders did not accept the acquisition offer signals their beliefs that they can grow the company to one with a higher valuation. That level is termed Desired Value at point C , as seen in the banner picture. As such, they want to raise the Desired Bridge Value at point E, $E , as seen in the banner picture.

Valuing Bridge @ the Desired point

Similarly to calculating the valuation at the anchor bridge, one can calculate the Desired Bridge value by taking the mean of the Seed value and the Desired value. The formula is stated as follow:

The reality is that the true market value of the Bridge, point F is somewhere between the Anchor Bridge at point D and the Desired Bridge at point E. This is termed as the Inbetween Bridge Value.

Valuation is in the eye of beholder

Valuation is an art but I hope that this technique can help to add some structure to reducing the pain of valuing the Bridge between that of founders and that of investors.

Another new alternative: next

The best way to gain more clarity is to gain more perspectives. It just so happens that as I was deriving the intuition and math for this article, I figure another new way of valuing the bridge using simple math and logic. You can find this here .

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