 Valuation of privately held companies. Why would it be important for an entrepreneur to know how to calculate the valuation for a company? And where are valuations applied? Let's start by looking at the context in which valuations of entrepreneur companies are used. Most people know valuation from this context. Pretty good deal. The entrepreneur is looking for $800,000 to expand his business. But what are these numbers based on? Why $400,000 equity? Why $400,000 loan? And where does the 10% come from? And that's the question of valuations. So most people know valuation or hear about the valuation the first time by watching this Sark tank program, where entrepreneurs pitch their products or their ideas to a panel of business angels who have made their money in business and now are willing to help other entrepreneurs or to invest their money in these smaller companies. So where does this $400,000 come from? And in what other context we would use valuations? Valuations are generally used in two different contexts in entrepreneur companies or small companies. First, there is equity based investment. So we look for more money into the company. And to do so we issue more stock, new stock and the purchase of that stock, the purchase price goes to the company. Business angels, venture capital, crowdfunding are some of the kinds of equity based investments that require valuations that entrepreneur companies use. Valuations can also be used when the company is divested. The divestment can be in the form of harvesting where a company is sold for profit. For example, the entrepreneur decides to sell their company to a larger business in which case we call it a trade sale or do an initial public offering where the initial entrepreneur sell some of their stock to the stock market and then cash in on the venture. Another kind of scenario of valuation might be required is liquidation. When you decide that the company has been failed, no one wants to buy the company, then you simply take the company apart and sell those assets that can be sold, take the money and then the company ceases to exist. In that case understanding valuation is useful as well, but how we calculate the actual valuation is slightly different. Quite often we talk about the investment more because that is more relevant for most companies. Having a lucrative exit is not as common as seeking funding and to seek funding you need to understand what is the value of your company. Why do companies need funding? We need to understand that a small company does not become a large company overnight but they need to grow and to grow you need money. If you want to expand buy a new factory might cost tens or hundreds of millions of euros, that money needs to come from somewhere. If all the money that comes into the company is simply revenues then growth will be very slow. So in practice companies seek external investment to grow and why an entrepreneur would like to do that? It's simply because originally you have all of 100% of a very small pie and often times it's better to actually have a smaller slice of this a lot bigger pie. So which pie? Which one is better owning 1% of Google or owning 100% of the Surgeoning company that you started last week? Of course owning 1% of a large company. On the way from a small company to a large public listed company the entrepreneur typically goes through different sources of financing. Most of the time you start with your own money or a co-founder you might get some money from friends and family that gets you started. Then you might get an angel investor. Once you have proven that you actually have a viable business then you might be able to attract a wealthy individual to give you money or invest money so that you can actually get the venture flying. Once you are already growing then venture capitalists become relevant for future growth. So these companies invest in the ballpark of hundreds of thousands of euros to millions to tens of millions and you can have multiple rounds of venture capital funding at different points of growth. Finally companies that are highly successful file for initial public offering in which case general public can buy their stock and they become stock listed large corporation with diversified owner base. At every point of this chain whenever there is equity being issued or stock being traded someone needs to calculate value for that stock and that is where valuation comes in.