Investing in unquoted companies
From a regulatory perspective, investments in unquoted companies are classified as Non-Readily Realisable Securities (NRRS). The shares are illiquid in nature -they are not quoted or listed on a Recognised Stock Exchange – and as such are difficult to sell. Likewise, the price of the shares is difficult to value.
The difference between pre-money and post-money
For those new to investing, it is important to understand the valuation of the company into which you might invest and clarifying if any figure provided by the Directors of the company is a pre-money or post-money figure. For example, if an investor group invests a total of £500,000 at a pre-money valuation of £1m, they would own 33% of the company (i.e. a post-money valuation of £1.5m).
Using the Envestry™ Valuation Scorecard
The Envestry™ Valuation Scorecard looks at a range of hygienic factors to assess the pre-money valuation of start-ups and early-stage businesses.
The model is based upon research into more than 200 early-stage companies and uses quantitative measures based upon numerical responses from historical data
and binary inputs.
The key inputs for the Scorecard are
- Current Annualised Revenue (actual)
- Cash Investment to Date
- Eligibility for tax relief under the S/EIS
- Profitability on a month-by-month basis
- Scalable recurring revenue model
- Solvency test for the forthcoming three months
- Long term liabilities (including Directors Loans)
The Scorecard does not cover commercial due diligence in terms of reviewing customers and the competitive market. Nor does it allow for future financial projections (mainly because these have not proved to be a fair reflection of actual performance).
Exceptions to the rule
The following factors may influence the valuation of
- Technology platforms offering software as a service (SaaS). Companies which can demonstrate contracted regular recurring monthly revenue will be valued at 50% higher than the Scorecard output figures
- Medical devices. The risks and returns of MedTech businesses are significantly higher with much depending upon the success of trials and gaining regulatory approvals. For this reason, valuations may be higher than Scorecard output figures
- Social networks and marketplaces. Typically, high risk and dependent upon significant investment in marketing to build market share. Valuations may be higher than those shown in the Scorecard output figures if the management team have a track record and relevant experience
- Blockchain and distributed ledger. A specialist investment area where valuations can be higher than the Scorecard output figures
- Management Team. There is a particularly strong executive management team comprising
You can download our 2019 valuation calculator here.