In the previous article , Simple math of valuing the Bridge Part 1, we talk about how founders and investors are getting to a consensus about Bridge valuation. Here I present another new way of valuing the bridge.
Measuring ROI for Investors @ the Bridge
Investors want a high return with low risk. The fact that the founders receive an acquisition offer signals an anchoring value at point B, $B. A relatively conservative investor will figure his return of investment, ROI by calculating the gradient of the valuation interval over the time interval. The valuation interval is the difference in value between the anchor value , $B and the seed value, $A while the time interval is the time difference between the point of receiving acquisition offer at TA, and the point of receiving receiving the seed money at TB. To arrive at the investors' valuation of the bridge, the investor multiples that rate by the time difference between the time of receiving seed money and the time to finance the bridge.
Measuring ROI for founders @ the Bridge
Founders generally want a higher valuation so they can raise money to build better products or services. In addition, they can use a higher valuation to attract great talents via giving stock options. Therefore they will calculate the ROI via computing the gradient of the desired valuation interval over the time interval. The desired valuation interval is the difference in value between the desired value , $ and the seed value $A while the time interval is the time difference between the point of receiving the expected Series A/B/etc funding at the desired valuation T and the point of receiving the seed money at TA. To arrive at the founders' valuation of the desired bridge valuation, the founders multiply that rate by the time difference between the time of receiving the seed money and the time to finance the bridge.
The reality is that the true market ROI is somewhere in between the anchor ROI and the desired ROI. This is market bridge ROI.
High risk , high return
Here the ROI is calculated as the weighted average of the anchor ROI and the desired ROI. If the market is bearish or is conservative, then more weight should be added to the anchor ROI. Likewise, if the market is bullish about this space in which the startup is in, then more weights should be given to the market ROI.