This is where Five23 comes in. As a leader in the field of spatial temporal investing, Five23 is utilizing advanced technologies like machine learning and big data analytics to analyze patterns and relationships in real-time data. By considering both spatial and temporal factors, Five23 is able to provide a more comprehensive and accurate view of the market, allowing investors to make informed decisions with a level of precision that was previously unimaginable.

But what exactly is spatial temporal investing, and how does it differ from traditional approaches?

Spatial temporal investing involves the analysis of both spatial and temporal data to make investment decisions. Spatial data refers to data that has a specific location, such as the location of a company or the location of a natural disaster. Temporal data, on the other hand, refers to data that has a specific time component, such as the time of day or the time of year. By analyzing both of these types of data together, it’s possible to gain a more complete and accurate understanding of the market and make more informed investment decisions.

One of the key benefits of spatial temporal investing is that it allows for a more comprehensive view of the market. By considering both spatial and temporal data, investors are able to take into account a wider range of variables and factors that can impact the market. For example, a traditional approach might consider the historical performance of a particular company, but a spatial temporal approach could also consider the location of the company and the current economic conditions in that region. This allows for a more nuanced and accurate view of the market, and can lead to better investment decisions.

Five23 is at the forefront of the spatial temporal investing movement, using advanced technologies like machine learning and big data analytics to analyze real-time data and identify patterns and relationships that traditional approaches might miss. By considering both spatial and temporal factors, Five23 is able to provide investors with a more comprehensive and accurate view of the market, allowing them to make informed decisions with confidence.

The potential benefits of spatial temporal investing are vast, and I believe that Five23 is leading the way in shaping the future of investing. If you’re interested in learning more about how Five23 is revolutionizing the world of investing, be sure to check out their website and follow them on LinkedIn for the latest updates.

The post Spatial Temporal Investing at Five23 first appeared on Five23.

To be honest, the penalties for 409A Valuation non-compliance are insane; hefty fines, irreversible reputation damage, and a potentially greater tax bill. But they are there for a reason. An inaccurate 409A Valuation can lead to another Enron. We all don’t want that. The IRS doesn’t want companies generating their own 409A Valuation because the likelihood of inaccuracies can by high. That is why there are Safe Harbor provisions for companies who obtain an 409A Valuation from third parties. It’s a win-win situation. The IRS doesn’t have to go through your 409A valuation with a magnifying glass, and in return, you get an accurate, non-biased value of your company. The Safe Harbor 409A Valuation is one of the best assets you can add to your company.

409A Safe Harbor Opportunities

IRS 409A Valuation (Link Here) has two opportunities for startups through which you can achieve a Safe Harbor 409A Valuation. If you meet the conditions of any of these three items, you are considered in “Safe Harbor”. Below is a description of each of the three opportunities:

Independent Appraisal

Binding Formula

Illiquid Startup Safe Harbor

Each of these opportunities are complex and unique. Each provides you with a clear path to achieving a Safe Harbor 409A Valuation. Let’s take a look at each:

Independent Appraisal Safe Harbor

When it comes to the matter of 409A Safe Harbor Valuations methods, the independent appraisal opportunity is among the most common and easiest to pursue. The IRS wants an independent 409A Valuation from a reputable firm that employs consistent, well-documented methodologies in their appraisals (like Five23). This is typically the easiest route to take in securing a Safe Harbor 409A Valuation. Find an independent, trustworthy valuation firm and pay them to do your 409A valuation. What’s so hard about that, right? Turns out, finding a quality fully-independent firm is more difficult than it seems.

Many companies turn to their cap table software providers for a 409A valuation package deal. This makes sense. Your cap table software has access to almost all the data you need to perform a safe harbor 409A valuation. However, even the leading cap table software providers stretch the boundaries on independence. And, in many cases you will run into a conflict of interest. Typically, your software provider doesn’t have the proper authority to provide you with an accurate 409A Valuation. They use old methods which do not require up-to-date financial data, which will eventually lead to an inaccurate 409A. If this is the case, you will find your valuation may be grossly mis-calculated. The IRS may find your company to be grossly mis-valued and take away your Safe Harbor exemption. At this stage you still may be on the hook for the inaccuracies.

Binding Formula Safe Harbor

The binding formula Safe Harbor applies to 409A Valuations based on the consistent use of one, generally-applicable repurchase formula in the company’s stock transfers. The legalese around this provision incomprehensible at best. The formula applies whether those transfers are compensatory or non-compensatory. It’s applied all of a company’s stock transfers and the stock transfers of at least 10% of the company’s shareholders. Additionally, the IRS specifies: any person or issuer holding more than 10% of the combined voting power across all classes of the issuer’s stock is void from this exception. Thus effectively making the provision unattainable for the vast majority of companies (any company which one shareholder owns 10%+ of the companies shares).

The big exception to the binding formula safe harbor presumption are “arm’s length transactions” related to the company’s stock. These are transactions for which both buyer and seller have no prior relationship and act independently of each other’s interests. The actual legislation covering this Safe Harbor presumption states that this generally-applicable formula should apply when used as part of a non-lapsing restrictions surrounding the company’s stock.

In essence, unless your company has a valuation of $100mm+ and more than 100 independent shareholders. You are not going to fall into this exemption opportunity.

Illiquid Startup Safe Harbor

The illiquid startup opportunity to Safe Harbor 409A Valuations is intended to accommodate the startup environment, where equity switches hands on a much more frequent basis. It applies only when both the service recipient and the service provider (typically the “employer” and “employee”, respectively) do not anticipate an IPO within 180 days or a change of control event within 90 days. A ‘Change of Control Event” could be a shift in voting power such that one person or entity holds more than 50%. It could be a liquidation; could be a substantial sale of assets; could be a board call. Point is, you’ll know it when you see it.

Under the illiquid startup presumption, your 409A Valuation must be performed by a “qualified individual”. The IRS specifies a qualified individual to be someone companies can reasonably rely upon based on some combination of knowledge, education, training, and experience (Five23 for example). They further specify this to mean five years of relevant experience.

Failing to Achieve a Safe Harbor 409A Valuation

As stated previously, you should view meeting 409A Safe Harbor requirements as a mandatory part of running your company. While it’s not actually required, the penalties of non-compliance aren’t worth the risk. Not even close. These penalties are exacted on each employee deferring compensation. The employees can be hit with a tax on their income, with the entire balance of their deferred compensation plan applied—for the current year and all past years for which their compensation was deferred. There’s a 20% excise tax on that. On top of that, the IRS charges interest on that 20%. That premium interest rate is roughly 1% plus the federal underpayment rate. Employees are hit with these tax penalties in tandem with whatever fees and fines they accrue in their efforts to pay off what they owe. Basically, get ready to pay a fortune to the government for failure to comply. Luckily, that is why there are Safe Harbor 409A Valuation, and they are cheaper and easier to get than you would imagine.

Safe Harbor 409A Valuation from Five23

At Five23, we pride ourselves on working closely with startups and investors to provide the best service possible. Our 409A Valuations are quick, straightforward, and painless. We give you a simple form to complete with minimal information required. From the time you start the process, we typically complete a 409A Valuation in just a matter of days. In addition, being an unbiased third party. We give provide the Safe Harbor 409A Valuation discussed in this article. 

If you’d like to get started with a 409A Valuation, you can view our packages here (all come with a 409A Valuation). If you’d like to learn more about Five23, please visit our website or send us an email to: contact@five23.io. We’d love to hear from you.

The post 409A Valuation Safe Harbor Guide (2019) first appeared on Five23.

Five23 can help you close your investment round, no matter what stage.

Built for Startups

Since our launch in early 2016, our focus has been you: The Startup. The goal of Five23 is to allow Startups and investors to have a better understanding of the company as a whole, and raise capital faster. We do this by looking at your company from both a macro and micro level. Everything from projected financials to the stress levels of the team members are evaluated. Once we have a clear understanding of the Startup, we create an in depth business report highlighting the strengths and weaknesses. This report can then be sent to investors, giving them a non-biased third party view of your venture.

What Investors Want to See

Five23 was born out of the investment world. We know what investors want to see in your company, and our reports focus on these items. You want to show investors who you are and what you can do. Five23’s reports specifically target these items from both a human and financial side of the business, ensuring your venture receives the attention it deserves. Our business reports are trusted by investors and accelerators around the world. From Dubai to San Francisco, investors use our reports daily.

Simple. Thorough. Precise. Personalized.

We understand, as an entrepreneur time is precious. That’s why we keep our reporting process as simple as possible. It consist of four easy steps, which only two require input from your entrepreneurial team. While a great deal of the analyzation process is done via machine learning artificial intelligence, the overall approach by our team is on a personal level. We look at the “ins and outs” of each company we examine on an individual basis. We want to know what makes the team tick, as well as what will make you the next Uber or Facebook. This personalized and in depth approach is what ensures Five23’s reputable quality. So whether you are a first-timer or a serial entrepreneur, you can be sure Five23’s reports will be of the highest quality for your venture.

Close Your Round Today

Armed with Five23, you will be sure you are giving your startup the best opportunity possible to raise capital. So what are you waiting for? Check out our packages or contact us today to get started today.

The post Closing Your Investment Round with Five23 first appeared on Five23.

Find your Industry

First, find venture firms which are aligned your industry. This will give you a great advantage, as they typically understand what you are trying to do and the overall needs of the industry. An example of this would be a company entering the smart contacts market for IoT devices. There would be no reason for this company to reach out to BioTech venture firms. They need to reach out to IoT venture firms such as Intel Capital, Andreessen Horowitz and Khosla Ventures. These firms understand the IoT market have made investments in uBeam, CellScope and Avegant.

Strengthen with Criticism

Second, “No” is okay. Many first time entrepreneurs and founders take being told “No” to heart. It can lower their self esteem and make it more difficult to reach out to investors in the future. Don’t let this deter you. When an investor says, “No, we are not interested at this time.” ask why. When they tell you the reason, use it as a learning opportunity to strengthen yourself. As you reach out to the next investor, you will be stronger and more prepared if the same problem arrises.

Think Abroad

Third, think internationally. Though 40% of all venture capital firms are located in the U.S., and your company may be domiciled in the U.S.; It doesn’t mean you have to focus your fundraising efforts on U.S. firms. The remaining 60% of VC firms are located around the world. Find one from any corner of the global with a fund focused in your industry and reach out. You may be surprised how open they are to your idea. Don’t limit yourself or your company geographically. In most cases, innovative products can be used worldwide, and if that is the case, it can be easy to find worldwide investors.

In summary, find the top ten investors in your particular industry, then expand it to one hundred. Make sure they are from around the world and have invested in companies similar to yours. If they say, “We are not interested at this time.”, find out why and learn from it. As time goes on, you will become better at raising capital and investors will start taking notice. The checks will come and your idea will become a reality.

The post Find an Aligned Venture Capitalist first appeared on Five23.

EBITDA Margin

EBITDA Margin is a measurement of a startup’s operating profitability as a percentage of its total revenue. Calculating a startup’s EBITDA Margin is done by equalling the total EBITDA (earnings before interest, tax, depreciation and amortization) divided by the total revenue. The higher the EBITDA Margin of a startup, the smaller the startup’s operating expenses are in relation to the total revenue of the company. This is a strong tool used by investors to show how profitable the company is as well as how lean the venture operates in comparison to their revenue. Keep in mind, the average product based company has an EBITDA Margin of roughly 12%, while the average service based company has an EBITDA Margin of roughly 18%.

Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue is the proof of the pudding in your business model. While not all business models have recurring revenue on a monthly basis, it does show potential investors how profitable the company can becomes overtime for subscription based businesses. Once a client is subscribed to the service or software, that revenue can be relied upon each month. It should be noted there are secondary metrics which accompany MRR, such as customer retention and churn, using this metric can show how strong the company can be from a financial standpoint each month. This metric is very predictable and reliable, which investors take comfort in.

Customer Acquisition Cost (CAC)

Customer Acquisition Cost refers to the resources a business must spend in order to acquire more customers. Whether it be financial spending or otherwise, this metric includes every effort necessary to introduce your products and services to potential customers. Common expenses in this metric may include: staffing salaries of sales and marketing employees, CRM software, marketing automation, paid advertisements, sponsorships, events and many other items which may have direct contact with the targeted individuals. Investors look at the ‘Customer Acquistion Cost’ of the startup to better judge the overall expenses of the startup overtime. As the business grows, the cost this metric shows should reduce in size. If this cost increases, it shows an investor the startup is unprofitable in the long run.

Customer Lifetime Value (CLV)

Customer Lifetime Value is a metric used to measure the revenue your business or startup receives from any given customer. The purpose is to see the overall amount of financial assets spent using your service or purchasing your product on a customer by customer level. When used properly, it can help businesses define the correct amount of CAC needed for the service or product. When calculated, it may also improve the overall accuracy of allocating funds in terms of customer retention and sales. Investors use the CLV metric in a variety of ways, however, the majority of them refer to the total addressable market of the startup and the CAC.

Month-Over-Month Growth (MOM)

Month-Over-Month Growth is a metric used to express changes in levels in respect the previous month. While this metric can be used to define growth in many different aspects of the company. Generally it is used to define the growth of the startup financially, and from a market viewpoint. In many service based companies, the MOM metric is for the total amount of customers. With product based companies, the MOM metric is used for the total amount of products purchased. Investors use this metric to judge the overall health of the startup and growth trends.

The post Top 5 Startup Metrics to Show Traction (2019) first appeared on Five23.

Hockey Stick Projections

If you have a startup or been involved with one in anyway, you have definitely seen these charts. Hockey Stick Charts as they are known in the investment world are simply exponential curves based on projected earnings or revenue of the company. These charts start at a very low and flat point. As time moves down the chart, the price starts to increase. Typically after a few months or years in the chart’s history the price starts to triple or quadruple. Quickly going from $1.5mm in revenue to $5mm, then to $20mm the following year. Once you reach the end of the chart a mere 7 years from where you started, the company’s revenue has reached a whopping $400mm.
While this is the dream and goal of every startup up entrepreneur, it is rarely realized by pre and post revenue companies. A more accurate chart is one that increases at a much more linear rate of a 161% per year. This means that if your startup is bringing in $1mm of revenue today, in all likelihood, you will bring in $2.6mm the following year. This rate of growth has been tried and tested by Five23 and seems to be the most accurate when creating realistic projections. Mind you, for post revenue companies it is vitally important to calculate using your actual growth numbers. Start your calculation using those numbers, then use a weighted value of 161% in your business valuation calculator to find an projected growth rate.
When White-Listing and valuing companies, Five23 only looks at realistic projections based on hard numbers and market data. This ensures a strong business valuation while concreting realistic and obtainable goals for the startup.

Bias Market Data

Market data is key when calculating a business’s valuation. It provides vital information and shows the path the startup will most likely follow throughout its life. These indicators can be quite powerful when used with realistic projections. The problem arises when only a section of the market data is viewed.
We’ve seen it time and time again, whether it be in startup decks, business plans or even pitch panels; entrepreneurs are plagued by bias data. It is great when you see 20% of businesses in your field see an average growth of 300% per year. However what happened to that other 80%? In most cases they go the other way. 50% saw a down year with negative growth and the remaining 30% closed their doors for good. This is the type of data that is essential, yet new companies owners seem to be blind to it. Viewing only a portion of the picture.
It has been said, “Don’t raise your voice, improve your argument”. When entrepreneurs use bias data they are raising their voice. When they show and prove how they are a part of that 20% which saw an increase, they are improving their argument. This should be the goal of every new business, show how you are better than the market and why you will beat it. This will increase your valuation calculation much more than bias market data.

Five23 | Standardizing Valuation Calculations

Human Impact

It has been said that 80% of all investments are made on the team, not the company. We at Five23 have seen this time and time again. Great companies with poor leaders seldom move past a ‘Seed Round’. Yet a new company with spectacular leaders can have a lacking business model and easily see a ‘Series B’ raise and even an acquisition. This happens because the team is bought, not the company.
While being a great and eloquent leader is not an easy thing to learn, it can be done. However we at Five23 feel the most important element in this equation is the ability to see your team’s flaws and how to improve them. Investors want to see roadmaps. This includes a roadmap on how to improve your team. Being triumphant on a personal level when times get tough is a must, although showing how you were triumphant is even more important. Having the ability to handle large amounts of stress effectively and with confidence is key. In many cases new companies over-value their true ability in these matters.
When Five23 calculates a valuation using our business calculator, this human factor plays a part. It can raise or lower your company’s valuation based on a few key factors. Mind you, the value is weighted to ensure a high amount of accuracy.

Unicornism

One of the most detrimental things that can happen to a startup is having a bloated vision of self-worth. While having great self-esteem is a must, having it too high can cause a negative effect. Especially when calculating a valuation. We’ve seen it time and time again. An entrepreneur walks into a meeting stating that the coming is worth ‘X’. The problem is there are no solid figures to back it. They see what other entrepreneurs have been able to do and think they can do the same. We hear it all the time, “We will be the next Google”. And maybe you will be, but odds are the startup will not.
We at Five23 call this Unicornism: the blind belief a startup will become a unicorn. This can happen even to the most realistic entrepreneurs. However the problem arises when this belief is factored into the valuation. This is why having a third party do your valuation is so important. It takes all the emotion out of the equation and focuses on the hard data.

End Goal

All companies raise money for a reason. Either they want to hire more talent or maybe set up a production line. While there are necessary funds required for such ventures. The number should not drive the valuation. Basically, don’t set your valuation at $20mm because you need to raise $5mm and don’t want to give away more than 25% of the company. Startups rarely receive funding this way, sadly it is quite common to do the business valuation calculation in this manner.
By far this is the biggest mistake a company can make when raising capital. That’s why Five23 takes it so seriously. We take into consideration the funding needs of the company to reach its next goal. However never at a cost to the valuation and the ability to raise funds.

The post 5 Reasons for Startup Over Valuations first appeared on Five23.