Startup Q&A Blog Series: Valuing Early-Stage Startups

The Foresight team regularly spends time answering our startup clients’ most pressing questions regarding Financial Modeling, IP Strategy, Valuation, and more. We’ve decided to share some of these important insights in our Startup Q&A Blog Series. This blog deals with valuing an early-stage startup when dealing with seed investors.

Question:

How Do I Value My Seed Stage Startup?

A Foresight client was preparing for a seed funding round, and asked us the best way to value their business. Because early-stage companies lack operating history, and in a majority of cases lack any form of revenue, assigning value to the startup cannot be done with “traditional” methods such as a discounted cash flow analysis or a revenue “multiple” approach. The client is launching a smart wearable health tracking device, and looking to substantiate a $12M pre-money valuation.

Answer:

  1. Know the Current Market Comps

Because early-stage startups cannot be valued on cash flows, investors often turn to the market to determine the “going rate” for businesses in any given sector. This is where the entrepreneur should start as well. Undervaluing your business in negotiations with investors means you will likely give up greater ownership percentage than is necessary – something that should be avoided at any stage of the business, not just the seed stage. Conversely, overvaluing your business could kill the deal before it even starts. When both the investor and entrepreneur are educated on current market conditions, the starting point of valuation negotiations can at least begin in the same ballpark. The ColleyGO publication is a great resource for starting your market research. Below is a sample chart from this report:

Not only can we gather the median pre-money valuation for seed companies of which was $16,725,000 in 2024 according to this chart, but we can also observe trends in seed stage valuation over time. Various public sources are available for valuation research by country, market, etc. As a starting point, Foresight’s client knows that they within the median range with the targeted $12M valuation.

  1. Know What Matters to Early-Stage Investors

Although it is a great starting point, most investors will be a bit more sophisticated in their valuation process than simply taking the market median. In particular, there are certain characteristics of a business that investors will consider when assigning value to an early-stage company. In 2011, Dave McClure, founder of the accelerator 500 Startups, shared insights on his methodology for valuing such companies. McClure said that each of these 5 components of a business were worth $1M in value:

  • Market
  • Product
  • Team
  • Customers
  • Revenue

The value assigned to each point can change over time, and would probably be more than $1M today given the sharp increase in pre-money valuations since 2011.  Each investor has her or his own heuristics.

When developing your pitch deck for the seed round, it is important to keep these factors in mind, and highlight those that are strengths of your own business. If you have existing, brand name customers, make sure to call them out. If you operate in a particularly large or “hot” market, emphasize this and quantify it in any way possible. Our client happens to have a particularly strong founding team with experience working with and launching products in similar industries. This will be a great point to emphasize when negotiating for their target valuation.

  1. Efrat’s “Bonus Point”

One component that is noticeably absent from McClure’s list, and that is particularly pertinent to Foresight, is Intellectual Property. IP gives companies an inherent advantage over the competition, and as such, such advantages should be considered in the valuation of the business. Traditional valuation methodologies often overlook the true value of IP to a business – something that Foresight tries to combat. For this reason, entrepreneurs should be acutely aware of the business’s  IP value from the early stages and understand how it impacts the value of the business as a whole.

When considering your company’s IP and the value it adds to your business, make sure to consider all forms of IP,  not just patents. A granted patent is undoubtedly something to hang your hat on when negotiating valuation, but remember to also highlight things like a strong brand, customer relationships, trade secrets, customer data, etc. Even the potential to develop these strong IP assets is something to be considered for your pitch (for example, the potential of amassing customer data even though you may only have a small number of subscribers at this stage). With 2 design patents and 4 provisional patents, our client certainly has some increased leverage in the valuation discussion.

  1. Bonus Note for Hardware Startups

Hardware startups are still very viable businesses, although they come with a number of inherent challenges that software or service startups do not face. Because of this (and because hardware is not the most trendy space), some early-stage investors may shy away from hardware deals.

For those entrepreneurs dealing with hardware, Foresight recommends a few things. First, be creative when developing your business model. One of the main drawbacks of traditional hardware businesses is that revenue is restricted to a single transaction. Modern business models, like we see in software, integrate things like subscriptions or upgrade plans to increase the recurring nature of the company’s revenue. Second, think about how software can work with your product. Even something as simple as a mobile application can open many more possibilities for your hardware business (customer data, premium content, community building, etc.). Finally, be mindful of your audience when pitching your business. Knowing that the word “hardware” might raise some red flags, be creative in how you present your idea to keep investors engaged. For our client, we suggested simply replacing any mention of the word “hardware” with words like “device,” or “delivery mechanism”.

Lynn’s Picks: Foresight’s Patent of the Week – US Granted Patent 11,858,498: Autonomous Vehicle Loading with Smart Transportation Platforms (Ford Global Technologies)

Disclaimer: This blog was created for informational purposes only and does not represent Foresight’s or the author’s opinion regarding the validity, quality or enforceability of any particular patent covered in this blog.  Foresight is not a law firm and no portion of the information contained in this blog was intended to serve as legal opinion.

One of the most memorable scenes from the HBO cult show “Silicon Valley” has a character named Jared summon an autonomous car which, in a twisted turn of events, had its route hijacked by its operator who rerouted it into a container ship, leading poor Jared to find himself unable to break free and finally emerge in the middle of the ocean surrounded by containers and robots! This week we are looking at a patent held by Ford Global Technologies carrying the patent number 11,858,498 and titled Autonomous Vehicle Loading with Smart Transportation Platforms, which could have prevented the situation that Jared found himself in. Ford Global Technologies operates as a subsidiary of Ford Motor Company and owns, manages, and commercializes patents and copyrights for Ford Motors. This patent was selected because it highlights a feature of autonomous operations that many people likely overlook, the benefit and cost savings such features can bring to the automotive manufacturer as opposed to the purchaser. Moreover, it highlights the potential revenue generation potential that intellectual property can bring to a patent holder.

Ford Global Technologies’ patent is focused on an application of self-driving that has been featured by other automotive companies, such as “Smart Summon” by Tesla, where the owner can activate this function and have their vehicle drive itself to your location, or a target destination, autonomously. These features have been marketed as a convenience tool to help move your vehicle out of a tight parking spot, through puddles, or to bring your vehicle closer to you while you are carrying packages. However, based on the details contained in the Ford patent, if these features are used by the manufacturer, it is possible to increase the speed of transporting vehicles as well as increase the safety and efficiency of a process that nearly all vehicles go through prior to arriving at the dealership. As seen in the image below, the concept behind this patent is relatively straightforward, by using autonomous driving to load vehicles onto transportation platforms, no longer is there a need for human drivers to move vehicles one-by-one onto the platform.

 

The patent itself describes the problem that this patent is seeking to solve; namely, the logistical hurdles inherent with loading and unloading vehicles at the scale and throughput required of a major automotive manufacturing company. The logistical hurdles mentioned in the patent specification include damage due to accidents or carelessness when loading and unloading vehicles on transportation platforms such as rail cars, shipping containers and trailers. Additionally, the description notes that this process of loading and unloading vehicles that are being shipped from manufacturers to dealerships or customers requires significantly manpower and time. According to information published on Ford’s website, the company assembled more than 1.8 million vehicles in the US in 2022 and every one of these vehicles need to be transported to a dealership or customer and this process currently involves an employee of physically sitting in each vehicle to load and another person responsible for the unloading process at the point of destination.

The patent is targeting this time, manpower and cost of damage issue by leveraging current and future autonomous features. The embodiments described in the patents do not require autonomy of this process. One example found in the patent requires a driver to be present to select the vehicle to be loaded and then has the option of activating a self-loading system found on the infotainment system and then the driver acts in a supervisory role, having that ability to take control of the vehicle if needed. However, the real benefits to Ford, and other manufacturers or transportation entities that may license the technology, is found in the fully autonomous embodiment. In this embodiment, a small number of employees act as coordinators who are able to select vehicles to activate a self-loading program. Once activated, the vehicle turns on, identifies the instructions related to the assigned transportation platform and order of loading and then the system will orchestrate the loading sequence of one or more vehicles. Within this embodiment, human involvement is limited to designing the specific program for loading on a given day and a confirmation process to ensure that the process is running smoothly. Such a process removes the requirement for a 1:1 ratio of human interactions per loaded vehicle and enables a small number of employees to act in a supervisory role. Not only does Ford benefit from the reduced manpower and time needed for loading, but also benefits from the precision driving that is expected from a vehicle once full autonomy is achieved. An additional benefit to Ford would be the ability to license this technology to its network of dealerships and transportation partners to increase efficiencies across the entire network while also having the option to license the technology to other automotive companies who have embraced full autonomous driving capabilities within their vehicles.  So next time you summon an autonomous ride, you can rest assured that you will not end up like Jared!

Have you come across any interesting patents you would like us to feature in future blogs or did you invent a technology you would like featured? Please send us an email at media@foresightvaluation.com or call our office at (650) 561-3374.

 

Demystifying the ITC: A Guide on the Role of the ITC in Patent Disputes

The International Trade Commission (ITC) received a lot of media attention in December of 2023 due to the patent dispute between Apple and Masimo resulting in a temporary ban on the importation and sale of certain models of the Apple Watch. While many people are familiar with State and Federal courts, most people are not familiar with ITC so Foresight created this primer to better understand the role of the ITC in patent disputes.

The ITC stands as a critical resource for patent holders, offering a unique avenue to counter patent infringements by preventing the importation of infringing products at U.S. ports of entry. However, the ITC’s procedures are distinct from those of Federal courts where patent disputes are normally litigated, demanding a nuanced understanding, especially for startups.

Filing a Complaint and Building Your Case

Initiating an ITC investigation is akin to commencing a lawsuit in Federal court. A formal complaint, known as a Section 337 action, is submitted, alleging that products arriving in the U.S. violate a valid patent. Simultaneously, the complaint must demonstrate the presence of a “domestic industry” linked to the allegedly infringed patented products.

Proving a “domestic industry” involves showcasing substantial investments in areas like labor, facilities, or research and development that support both the infringing products and the complainant’s own products. Following the complaint, the ITC evaluates whether to commence an investigation, typically within 30 days. Once initiated, the investigation becomes official and is documented in the Federal Register. Concurrently, any ongoing court cases dealing with the same issues and involving the same parties are temporarily paused during the ITC’s investigation.

The Role of the Judge and Special Staff

Throughout the investigation, an Administrative Law Judge (ALJ) assumes a central role as the fact-finder. The ALJ presides over hearings, issues decisions on motions, and substantially influences the investigation’s course. Adding to the complexity is the “Staff,” an attorney appointed from the Office of Unfair Import Investigations (OUII), who maintains an independent role during the investigation.

Timetables and Procedural Rules

The ITC strives for expedited investigations, determining an ultimate “target date” for the final decision, usually within 16 months of commencement. The ALJ establishes a procedural schedule encompassing deadlines for various aspects such as discovery, claim interpretation, motions, and hearings.

Collecting Evidence and Safeguarding Sensitive Information

After the investigation begins, both parties embark on evidence gathering, adhering to the established schedule. They employ tools like questions, document requests, and interviews. It is worth noting that in the ITC, responses to discovery requests must be provided within a shorter timeframe, just 10 days, in contrast to the more extended periods typically allowed in standard court proceedings. Renowned for its efficiency, an ITC investigation often concludes in months rather than the year or more typical in district court cases.

To safeguard sensitive information revealed during discovery, protective orders are issued, requiring attorneys to adhere to specific guidelines. Confidential business information (CBI) remains accessible only to specific individuals, including outside lawyers, experts, the Staff, ALJ, and the Commission.

Hearings and Witness Testimonies

ITC hearings depart significantly from traditional court trials. A jury is absent, and the ALJ serves as the fact-finder. Additionally, many ALJs opt for written witness statements instead of live testimony, with cross-examinations conducted during the hearing.

Initial and Final Decisions and Post-Investigation Remedies

Following the hearing and post-hearing arguments, the ALJ delivers an initial determination (ID). This document determines whether a violation of Section 337 occurred, based on evidence and the presence of a domestic industry. It also scrutinizes patent claims individually. Once the ITC’s determination has been finalized, and if a violation is established, remedies specified in the final determination (FD) become accessible.

Typically, the ITC offers exclusion orders or cease and desist orders. Exclusion orders direct U.S. Customs and Border Protection to block infringing products at ports of entry, with two types available – general (applicable to all infringing products) and limited (specific to identified manufacturers or importers). Cease and desist orders prohibit respondents from selling infringing products already within the U.S.

Presidential Review and Appellate Processes

Given that the ITC is a government agency, the President reviews exclusion orders within 60 days of the FD’s issuance. If no action is taken during this period, the ITC’s decision becomes final. Subsequently, either party can launch an appeal to the United States Court of Appeals for the Federal Circuit.

Conclusion

The ITC is an important forum for startups to become familiar with due to the impact of an exclusion order. Patent infringement is a common issue that startups are dealing with, the ITC is an important venue to addressing infringement involving products imported into the U.S. For a recent example of the role of the ITC in patent disputes and the impact of an exclusion order, please see our next blog focused on the ITC dispute between Apple and Masimo.

Digital Intangibles: How NFTs Transform the World of Art and Sports Memorabilia

The utilization of blockchain within the digital art environment is a new and rapidly growing application of the technology to enable ownership and authentication of intangible works of art. Historically, physical pieces of art could be bought, sold and authenticated based on the documentation that accompanies the work (known as provenance). The authentication process relies on documents such as artist signatures, ownership records, signed certificates of authenticity, exhibition stickers and other forms that link the piece of art to the artist. While it was possible for another artist to make a replica of a particular painting and try to sell it as an original, the lack of provenance would make it apparent to a buyer that the piece of art was not an original and the price would reflect the art as being a replica. Setting aside replicas, with physical pieces of art, there is typically only one version of the original work and because it is a tangible object, the owner can physically hold the piece of art and once it has been authenticated the owner is assured of the uniqueness and value above any replica. With ownership authenticated, the piece of art may still be displayed publicly in museums and found online in various forms without devaluing the original piece of art.

For digital art, the physical component is absent and the work is typically found online and available for anyone to view and copy. While this ecosystem has extended the reach of digital artists to anyone with internet, it has also complicated the management of rights and ownership as well as the value. Since a piece of digital art can be easily copied, the perceived value has remained low. Blockchain technology has provided a solution to this problem due to the immutable nature of the data stored on a blockchain. The data stored on a blockchain has the ability to provide the provenance for digital art that has historically eluded the industry and depressed the value of original digital art. This data and the process of storing it on a blockchain to create the provenance necessary to authenticate the original piece of digital art happens through the process of tokenizing the art to make a Non-Fungible Token (“NFT”).

An NFT is unique digital object that represents the digital asset or a particular right in the underlying asset. When a particular piece of digital art is tokenized with an NFT, the data (artist information, signature, purchaser history, etc.) is stored on the blockchain. Because the blockchain is both immutable and open source, anyone can view the digital provenance of a particular NFT. While this also means that anyone can view the piece of digital art, as is the case with most high-value tangible art, true ownership of the art is stored on the blockchain which, in theory, should create a strong market for authenticated ownership that parallels that of tangible pieces of art.

Recent headlines have hinted at this theoretical market for digital art in the form of NFTs becoming a reality. Christie’s Auction House recently sold an NFT for $69,346,250. This sale represented the first major auction house to offer a purely digital work with a unique NFT as well as the first to accept payment in the form of cryptocurrency. The piece of art was created by Mike Winkelmann (also known as “Beeple”) and was a collage of digital works of art he created and posted daily for 13-and-a-half years. Other examples include Twitter co-founder Jack Dorsey selling his first tweet as an NFT for over $2.9 million. NFT marketplaces are in the process of raising significant VC funding, particularly in the area of sports.  According to the Wall Street Journal, the market for NFTs grew to at least $338 million in 2020, from around $41 million in 2018.  In March 2021, Dapper Labs Inc., maker of NBA Top Shot, has raised $305 million from investors including NBA legends and other athletes and celebrities.  NBA Top Shot is a site where basketball fans can own a digital copy of a video highlight such as a dunk or game-winning shot.

It is too early to determine if this new market for NFTs will be a short-lived bubble or if we are seeing the early stages of a growing NFT market where collectors will eventually no longer see a distinction between tangible and intangible works. One early indication that the value of owning tangible and intangible art may be converging can be seen in the story of one tech investor who was outbid for the Beeple NFT; this art collector returned to Christie’s to see if any other NFTs were available. While Christie’s had no NFTs to offer, the auction house informed him of an upcoming lot of tangible art, and he ultimately purchased a collection that included artworks by Pablo Picasso and Andy Warhol. Given the rapid rise in prices paid and media exposure of NFT, it is likely a trend that will continue. However, due to the unique nature of art and purchasers of art, the NFT market may simply result in a small number of digital artists receiving high prices for their work with others struggling to find a buyer for their work, just as we see in the world of tangible pieces of art.

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