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The ‘art’ of VC startup valuations is a forgery – TechCrunch



Venture capitalists frequently say that valuing startups is “more art than science.” If that’s true, then it’s absurdist art, because most seed-stage businesses have no value.

In fact, seed-stage startups — companies that have not yet released a product, regardless of how many rounds they’ve raised — are probably worth less than zero using any rational valuation methodology. The only certainty at this stage is that the startup will keep losing more money until a product is released, at which point it’s possible that revenue may be generated. The chances of going out of business are high.

It’s not that much better for early-stage startups, which again, are not defined by rounds like Series A or Series B, but by how much business progress they’ve made. Once a seed-stage company has released a working product, the startup has reduced one of the two major risks facing the business: commercialization. At this stage, now a company must prove the new product or service can be turned into a scalable business.

Like seed-stage startups, early-stage companies are still very fragile, with little predictability of revenue or cash flows. By definition, once the business has become predictable, the company is in the growth or expansion stage. Without predictability, traditional valuation tools like discounted cash flow (DCF) are nearly useless.

So venture capitalists lie to entrepreneurs and pretend that seed- and early-stage startups have intrinsic value.

Why would investors agree to ascribe value to assets that have no objective current economic value?

I’ve heard many corporate executives ask this exact question, wondering whether it wouldn’t be better simply to acquire startups instead of funding them, usually in hopes that rational valuation techniques can be applied.

The best answer, based on my experience as a venture capitalist and entrepreneur for three decades, has nothing to do with valuation methodology and everything to do with teamwork, belief and commitment. Investors must be on the same team as the entrepreneurs they fund. And this means that each party needs an opportunity to win and must demonstrate that they believe in common goals. In venture capital, where investors rely on high growth rates, a “win-win” compensation design is much more important than a “technically correct” valuation.

At the seed stage, where the value is arguably zero, investors would own all of the startup with an investment of any amount. Obviously, no entrepreneur would willingly accept such an arrangement.

Thus, to be fair to the entrepreneur, the lie is born. We pretend the startup has value so that the startup’s team is motivated and everyone involved has a chance to win. The VC also won’t take a majority of the startup in most cases, because a control position means the entrepreneur is “working for” the investors. The philosophy of venture capital is that the entrepreneur runs the business and the investor provides capital and support in exchange for a minority share and a non-operational role.

I learned this from Bill Draper, who was one of the first venture capitalists on the West Coast in the 1960s. He said that in those early days, the goal was just to keep it simple, in contrast to the “financial engineering” that typified growth-stage investing on the East Coast.

His mantra back then was “half for the entrepreneur and half for the investors.” When investors realized that employees need motivation too, this became a third for the entrepreneur, a third for the investors and a third for employees. It’s not dramatically different today.

So if this is true, is there any role for valuation discipline at the seed or early stage?

The answer is yes, because the investor still needs to evaluate the deal as a potential source of return against other alternative investment opportunities, so long as the resulting valuation is fair to the entrepreneurs.

In fact, a good analogy for how this works may come from real estate. Prior to becoming a venture capitalist in 1992, I worked as a real estate appraiser. Appraisers use three main methodologies when valuing a property: intrinsic value, income-producing value and market value.

Intrinsic value is often called “replacement cost” in real estate. It’s what it would cost to buy a similar parcel of land and rebuild the same house from scratch, estimating the cost of labor and materials. In real estate appraising, this method carries almost no weight, just as in venture capital.

The income method in real estate applies to properties that produce predictable cash flow, like apartment buildings or established rental properties. For obvious reasons, this method is impossible to apply to seed- and early-stage startups where there is no profit and nothing is predictable except for expenses. This is why DCF isn’t used to value startups.

The dominant valuation technique used in real estate appraisals is the third methodology, market value. This approach seeks to understand how the market values similar assets, as defined by location, style, square footage and transaction recency. In other words, what have other buyers demonstrated they will pay for similar houses in the same neighborhood during the last six months?

Real estate appraisers use comparable sales to determine an adjusted price per square foot as the principal basis for calculating valuations when applying the market value method.

Venture capitalists do something very similar. There are clear valuation ranges for startups by stage and by round, which represent an established market value. These figures are even published by PitchBook, CB Insights and other organizations that track startup investment activity.

VCs then look for comparable sales in the exit values of startups with similar business models in the same industry, measuring price-to-revenue for M&A and IPOs. We then apply these multiples to projections of future revenues to determine if we can achieve a “risk-adjusted” multiple at today’s market price.

For a venture capitalist, it doesn’t matter if a startup has an intrinsic value of zero today if there’s a reasonable chance to make 10x our money or better. It’s the potential multiple that matters, not whether we can apply traditional finance metrics to a startup.

This is completely different than how valuations are typically calculated when making an acquisition, creating potential confusion for corporate development personnel who’ve added venture capital investing as a new responsibility.

When a corporation makes acquisitions, each transaction must make independent financial sense. Venture capitalists, however, can accept the risk of seed- and early-stage startups — including a rational expectation of experiencing some failures — by taking a portfolio approach. VC investors don’t require a fixed or predictable return but seek a blended return on a pool of capital that is invested in multiple startups. According to PitchBook, the average VC fund has 18.4 portfolio companies and top-quartile performance has generally corresponded to returning approximately 2x aggregate committed capital over the last few decades.

All that’s required to justify a seed- or early-stage investment is to believe that the potential multiple on investment offsets the risk that capital may not be returned. This is based on the premise that the most VCs can lose is 1x their money — and the most they can make is unlimited. Of course, investors need to be rational about whether the potential multiple is realistic and worth the risk, investor Fred Wilson noted.

And this means venture capitalists are free to participate in the fiction about what seed- and early-stage startups are worth today. The real purpose of valuations at this stage is to find a split that is fair and motivational for everyone involved.

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Rumors confirmed, Street Fighter 6 kicks off in June 2023



Fighting Game fans are excited now that Capcom announced that Street Fighter 6 is coming to PS5, PS4, Xbox Series X/S and PC on June 2, 2023. The game was initially announced in February 2022, but that reveal did not include a specific release date beyond 2023.

The trailer at The Game Awards focused on new mini games and the international setting. In addition to the 18 previously announced fighter, the trailer also confirms that several new fighters — Dee Jay, Manon, Marisa and JP — that will join the game’s roster.

Notably, the June 2 release date for Street Fighter 6 may be a strategic choice for Capcom. June is the very beginning of Q3.

The last installment of the franchise — Street Fighter V — released nearly seven years ago so fans have been eager for another installment. A day before The Game Awards, the game’s June release date was leaked via the PlayStation Store.

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5 Things to Do Now to Propel Your Business in 2023



Opinions expressed by Entrepreneur contributors are their own.

Entrepreneurship is a daily leap of faith. In times of economic uncertainty, that leap may feel like a dive off a cliff. We are in one of those times. It likely will take months to fully re-adjust to the forces that have pummeled the world’s economy, and to entrepreneurs, months can feel like years.

With the right playbook, entrepreneurs can survive and thrive in whatever economic scenario. Here are five things you can do to propel your business ahead now and through the difficulties of business cycles for years to come.

1. Learn the lessons of more challenging times

A rocky economy presents a unique opportunity to make tough decisions about the business plan. Everything is open to reexamination. How has the market changed? Are your customers facing challenges that create new opportunities for your solutions? How do new conditions change your assumptions, and what actions do you need to take in response?

Critically evaluate your product roadmap. Is this the time to pivot or become more aggressive with your current plans? Prioritize the highest margin features that are achievable in the next twelve months. Push out projects that don’t make that list, and re-assign resources accordingly. Re-assess pricing. Even as inflation tiptoes back from the highest levels in forty years, raw material and transportation costs remain way up. What will impact your customers if you adjust the pricing or add surcharges to offset these costs, at least temporarily?

It’s been a rough year for hiring. Many companies took the talent they could get. If there are employees or gig workers who would fare better in a different job, now is the time to let them go. Make tough-minded corrections that will pay off overall — corrections that might be avoidable in less challenging times.

Related: How to Turn Inflation and Recession into Your Largest Business Opportunity

2. Tighten your grip on cash

Venture capitalists are pulling back. In the third quarter, Crunchbase reported that funding for startups in U.S. and Canada fell 50% year-over-year. Valuations are down across the board. If you are fortunate enough to be a later-stage startup that benefited from VC largess in 2021, make your last raise last longer than intended.

Keep your dry powder dry, and put off going for another round until the markets even out. Reemphasize the basics for early-stage companies with less market validation and greater distance between now and a potential exit. Delay all capital expenditures. Leverage the hybrid work model if possible, to reduce rent and other office expenses. Continue with Zoom or Google Meet. Now is not the time to rack up travel costs. Re-negotiate fees and terms with service providers. Seek credit terms with key suppliers, in a word, bootstrap.

3. Talk to customers, in person. Now.

How have the business needs of your customers — whether paying or beta — changed over the last 18 months? Are there benefits to your solution that have more recognized value now? Nearly every business, for example, from corporates to startups, has been forced to re-learn the lessons of supply chain management. Startups that can help their customers make better business decisions based on artificial intelligence (AI), reduce costs by improving inventory management or protect against out-of-stock scenarios by identifying and building relationships with new, more local sources of supply will have an edge.

Related: Finding Validation in Serving Customers

4. Non-dilutive capital

According to PitchBook, venture capitalists are showing greater interest in portfolio companies “whose satellite, robotics and software tools can do double duty” in military and commercial markets. International conflicts are one reason, of course.

Another is that the defense and military security industries are generally viewed as recession-proof. Our firm routinely encourages portfolio companies to consider non-dilutive funding from the Small Business Administration — grants to support cutting-edge technologies range from $150,000 to more than $1 million.

Navigating the application process isn’t for the faint of heart. A startup must be realistic about the work involved, but in many states, there are resources to help. Besides the funding, severe responses to agency requests for proposals are reviewed and evaluated by technologists. At a minimum, this can be terrific feedback and a great source of industry contacts.

5. Blue-chip cultures attract blue-chip talent

Company culture can be an asset or a liability. An inclusive, rich culture helps key hires say yes. Finding stakeholders that believe what you believe and are aligned with your team’s values significantly improves the odds that they will stick with you in good times or bad.

After months of “great resignation” fever, the over-heated demand for talent may be cooling off. Maybe offers aren’t as fast or grand as they were a year ago. Maybe Twitter won’t be the only advanced technology business to let people go. Regardless, the search for great talent isn’t a faucet that a young company turns off and on. A startup might modulate the timing or the number of hires but stand at the ready to recruit and filter for culture fit.

Related: 3 Ways to Stay Competitive in the War for Talent

With the right mindset and intentional approach, an entrepreneur can make 2023 a year to strive and thrive. As Yogi Berra, my favorite baseball player of all time, said, “Swing at the strikes.” In business, like baseball, the right swing can turn even the most challenging pitch into a hit.

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Akros Technologies, an AI-powered asset management platform, raises funding from Z Holdings • TechCrunch



Artificial intelligence is taking over almost every industry. The investment and finance industry is no exception. In Deloitte’s 2019 report, the firm reveals that AI is transforming the financial ecosystem to reduce costs and make operations more efficient by providing automated insights and alternative data, analysis and risk management.

Technology such as AI has digitized the finance sector, ranging from payments and remittances to lending. However, asset management is still in the nascent stage of digitization, according to the chief strategy officer and co-founder of Akros Technologies, Jin Chung.

Akros Technologies wants to disrupt the current asset management industry via its AI-driven asset management software platform that mines market data for stocks. Akros just raised $2.3 million from Z Venture Capital, the corporate venture capital wholly owned by Z Holdings, which also owns the Japanese messaging app Line and internet portal Yahoo Japan.

Akros intends to strengthen strategic ties with Z Holdings via strategic investment, the startup said. The latest funding, which brings Akros’s total amount raised to $6.1 million since its 2021 inception, will help Akros to scale its software platform and asset management products and ramp up its users, including local and global financial institutions and fintech companies.

The outfit is already in discussions with potential partners to expand its AI-powered product called portfolio management as a service, or PMaaS, an all-in-one operating system for portfolio management. Chung explained to TechCrunch that PMaaS “enables B2B clients such as financial institutions, fintech startups and robot-advisors to launch their own exchange-traded funds (ETFs) without having to set up ETF teams and infrastructure.”

He added that it expects to secure more than five B2B clients in the first quarter of 2023.

The startup claims that its AI-powered portfolio management platform can reduce “the overall cost structure [of] the traditional fund development,” including management fees and unnecessary fees involved in the investment process, by more than 80%. The outfit aims to maximize the finance management performance of data-driven ETFs and offer a portfolio management solution via the PMaaS for Akros’s users to help them compete with global ETF institutions like Vanguard or JPMorgan.

In August, Contents Technologies launched Korean pop music, also known as K-pop, and Korea Entertainment ETF, on the NYSE Arca Exchange under the ticker KPOP, using Akros’s PMaaS solution to develop the ETFs. In addition, Akros listed an AI-driven target income ETF, called Akros Monthly Payout ETF (ticker: MPAY), on the NYSE in May with monthly distributions at an annualized target rate of 7%, according to the startup.

To build a slew of investment strategies that lower the cost of portfolio modeling and generate scores of investment portfolios, Akros applies a generative AI model based on a decision transformer, which predicts future actions through the sequencing model, Chung said, adding the company also employs GPT-3 natural language processing (NLP) to analyze unstructured language data.

Akros plans continuously to enhance its engineering technology by bolstering its business to disrupt the asset management market and attract new partners across the globe, including Japan, Singapore and the U.S., co-founder and chief executive officer Kyle Moon said in a statement.

Founded by CEO Moon, CSO Jin and chief marketing officer Justin Gim, Akros employs seven people.

Co-founders of Akros Technologies: (Left to right) Justin Gim, Kyle Moon and Jin Chung. Image Credits: Akros Technologies

Moon previously worked for Qraft Technologies as head of AI research and CSO and had experience listing four ETFs on NYSE. Before co-founding Akros, Gim had more than nine years of experience in the asset management industry; Chung did research work for Bayesian deep learning in autonomous driving cars at Oxford Robotics Institute.

In March, Akros raised $3.75 million in funding from PeopleFund, a South Korean peer-to-peer lending platform. The company declined to provide its valuation when asked.

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