Increasing Portfolio Valuation

What is Portfolio Valuation?

Managing a venture builder involves fulfilling commitments not only to entrepreneurs but also to investors who provide the capital needed to scale companies.

One common ground between the interests of the builder's investors and the startup partners is portfolio valuation. It's a straightforward metric that serves two purposes: measuring the progress of each startup and communicating the performance to the investor board.

Controlling Valuation

Controlling portfolio valuation is a straightforward task, involving monitoring three key indicators. Typically, the primary indicators reflecting the portfolio's value include:

1. Builder's Ownership: The stake held by the venture builder in each startup.
2. Invested Capital: The financial capital injected by the builder to date.
3. Startup Valuation: The current valuation of each startup.

Below is a practical example illustrating how to track these three indicators. In this scenario, consider a venture builder with a portfolio comprising two companies, each with distinct characteristics:

TABLE 2-1
The portfolio valuation control panel
	Builder participation	Startup valuation	Capital invested by the builder in the startup
Going Merry SL	70%	1.750.000€	50.000€
Thousand Sunny SL	54%	5.750.000€	40.000€
Source: The portfolio valuation dashboard. “Builder's Handbook: Builder's Guide” by Taig Mac Carthy, September 16, 2019

With these three indicators, we can directly calculate the total valuation of the portfolio.

$$V_{p} = \sum_{\text{startup}} (\text{O} \times V_{s})$$

Wherein:

• $V_p$ : Valuation of the portfolio
• $V_s$: Valuation of each startup
• $O$: Percentage of ownership that the builder has over a startup

Following the example of the previous table, the Valuation of the portfolio $= 0.7 \times 1.750.000 + 0.54 \times 5.750.000 = 4.330.000€$

Other Metrics Related to Valuation

Number of Startups

From the control table, we can immediately analyze the number of startups that the builder has in its portfolio. The number of startups is a seemingly very simple indicator, which generally constitutes one of the builder's main success indicators.

Typically, a builder commits to its investors to create a certain number of startups each year. Although this indicator is extremely relevant, let us remember that the amount matters only to the extent that it increases the valuation of the portfolio.

If management focuses on creating a number of startups, putting the valuation of the portfolio in second place, it runs the risk of falling into the dynamic of creating startups whose success forecasts are questionable, to the detriment of continuing to mature existing startups. However, when management focuses on the valuation of the portfolio, it will be predisposed to make decisions that benefit the whole, in the longer term.

In relation to this indicator, it is worth mentioning that it is not always so simple to calculate the value of a startup. Furthermore, it is difficult to determine exactly the moment from which a startup can be counted as such. Some builders consider that the startup can only be counted after its legal constitution, while others consider that the existence of a minimum viable product or a promotional team are sufficient milestones to issue a valuation.

Investment multiplier

From the control panel, it is easy to extract the investment multiplier, an indicator that is especially relevant for investors and that reflects the quality of the builder as an investor itself.

$$M = \frac{V_p}{I}$$

Wherein

• $M$: Multiplier of the investment
• $V_p$ : Valuation of the portfolio
• $I$: Capital invested

Following the previous example, theinvestment multiplier is $4.330.000 / 90.000 = 48,11$.

Operations performance

This is an indicator that is updated annually and serves to evaluate management's progress in its ability to make efficient use of the resources available to it.

$$R = \frac{V_p - \sum({I}_{\text{startup}})}{AX}$$

Wherein:

• $R$ = Return of operations
• $V_p$ : Valuation of the portfolio
• $I$: Capital invested
• $AX$: Annual expenses

Following the example of the previous table, theoperations performance would be: $(4.330.000 - 90.000) / 120.000 = 35,33$

Return on investment

It is also possible to extract the profitability of the investment, although for this we require the date of incorporation or the entry date of each investor, since the profitability is different for each investor, because they have been able to enter with different valuations.

However, the average profitability of investors can be extracted.

The IRR profitability can be calculated as:

$$IRR\ profitability = V_p - I$$

Wherein:

• $V_p$ : Valuation of the portfolio
• $I$: Capital invested

Following the example of the previous table, the IRR profitability is: $4.330.000 - 90.000 = 4.240.000$