Equidam is an online platform for startup valuation. Their technology aims to provide transparent and detailed valuation reports, helping startups to close fair deals with investors and buyers. Equidam uses 5 evaluation methods to value startups. It serves businesses from around 90 countries and 136 industries. More than 130,000 companies have already used Equidam to raise their seed and Series A rounds.
For the interview, we had Daniel Faloppa, who leads Equidam as the CEO. He started Equidam right after graduating with Masters in Finance and Investments from Erasmus Universiteit. He spoke to Komal Pattanayak of VCBay.
Komal: Please tell us something about yourself and your company Equidam.
Daniel: I’m originally from Italy. I moved to the Netherlands about 10 years ago. Then I had a couple of years in Spain and I’ve always liked programming and development. I started making little websites and games when I was 16.
But then for many reasons, I went into finance and then started Equidam right out of my masters. Equidam is an automated solution for the valuation of startup companies, meaning high growth potential technology-intensive ventures. We’ve been doing this for more than eight years now and yeah, happy to do it.
Komal: What inspired you to start Equidam? You studied finance and economics, so was this product your brainchild?
Daniel: Yeah, it was in the sense that I always thought that entrepreneurs sort of under-utilized finance because they come from all sorts of backgrounds. But obviously, finance is only something that they learn generally on the job. So, they don’t use it to to its maximum extent. We thought about how we can help. We started with a blog. But then a lot of the questions were around. They wanted to know if they’re receiving a fair deal. So the whole platform kind of came about and the main purpose is to help entrepreneurs use finance better.
Komal: The methods of valuation approaches that you use, cover more base than others from what we have seen. Did you have any firsthand experience or exposure in terms of investment deals that you came across such faulty evaluations and you wanted to put a product out there that did it with much more accuracy?
Daniel: It’s not like super about accuracy. It’s more about fairness. You’re trying to find a deal price that is fair for the company and then for the investor. These two parties become partners and they try to make their joint efforts that large. We’ve seen deals that were very much not fair for investors because the founder didn’t know and valuation was sky high and on the other hand we saw valuations that were underplayed a lot by some investors.
It always looks strange to have a very high valuation for a tech company. Now I think people have understood that a little bit better and you have less of this type of problems.
Komal: You have extensive experience in this field. What, according to you, are the key metrics that investors look for in startup valuation reports?
Daniel: There are two things, right? Valuation is composed of the potential of the company and the risk of the opportunity. In a valuation report and generally, what we see, a lot of people focus on the potential and on how huge the company is going to be, how big the market is and things like that. They focus very little on the risk. So, I think there is a lot more focus on the valuation report than on the pitch deck or on the projections, showing why this opportunity has as little risk as possible. There are risks that nobody thinks about.
Like for example, If the company can be trusted? What is the stage of development, is the company already shipping? Does the company already have customers, employee costs? These types of things lower the risk of the investment opportunity for the investor. They are super important to show in a valuation report.
Komal: Equidam has offices in Spain and the Netherlands, and you’re from Italy. So, what is the Dutch connection?
Daniel: I came here for my Masters. Rotterdam has one of the best Finance Masters in Europe. That’s why I came here and then we started the company here and then a couple of years ago, we wanted to expand basically our talent pool. Spain and Valencia were awesome places for us to be. Now we have two offices, even though everybody’s remote.
Komal: On the Equidam website, you have mentioned that you’re serving around 90 countries. In the future, are we expecting that this list is going to expand or do you have any particular focus markets?
Daniel: Valuation is a bit more general than accounting, so it’s a little bit easier compared to accounting software for us to cover a lot of countries. We cover the 90 major ones where startups more or less historically have been. But now you’re seeing a lot of countries getting into the trend. Everybody is starting internet companies and startups. So, we’re definitely going to expand. We’re seeing more and more interest from Africa. That for us is not covered enough for sure. We’re growing very well in Southeast Asia as well.
We don’t have a particular focus market in the sense that I think we’re still really like skimming the surface of the need and we have such a low penetration that we were still able to basically distribute our marketing activities across the globe.
Komal: How does Equidam help the really early-stage startups where forecasts are uncertain?
Daniel: We have five methods and two of them are completely independent of forecasts. When the company is super early, the valuation itself is only an outcome of forecasts for a minimum part, because of all that uncertainty but for the, for the major part, it is actually dependent on how do they stack up against each other, how much has the business been de-risked so far, and that’s a bigger predictor of the valuation compared to the forecast.
We still use forecasts because we believe it’s an important thing for founders that even at the earliest stages to kind of plan out where they want to be.
Of course, we know that the early-stage forecasts are very uncertain to say the least. But we still think it’s a super beneficial exercise at any stage of a startup.
Komal: Can you tell us in brief about the five valuation methods that you just mentioned.
Daniel: We basically took all the research that there is around the startup valuation and we selected the methods that we think are the most applicable. We’ve tested them in the market now for eight years. Out of the five methods, two of them are qualitative methods.
They take into account, the strength of the team, the market risk, when was the company founded, for how long has it been surviving? We try to estimate all those risks and compare the company with other companies. Now we have evaluated more than 130,000 startups around the world.
The third method is called the venture capital method, and it’s just a very quick valuation exercise generally done by venture capitalists. We brought that into the software because it basically gives the perspective of the required return of an investor. We’re trying to add as many perspectives and points of views to calculate the valuation of the startups as possible.
The last two methods are discounted cash flows. They are generally the gold standard of valuation. They are used for the valuation of anything and they take the point of view of investment. The final evaluation is a weighted average of these methods. And as we were saying before, the more uncertain the projections are, the more weight we put on the methods that don’t depend on the projections.
Komal: Equidam has been running for 8 years. What has the feedback from your users been like?
Daniel: The feedback is very good. I think otherwise we would have stopped. A lot of people don’t have the knowledge or the confidence in these things to do it on their own. And so that’s really the main point for them when they use us. They’re kind of guided through the process. They learn about what drives their valuation, what makes their valuation.
A nice benefit that we have is that being an automated platform, if you have your finances ready, it takes about half an hour to go through the whole process. There are situations in which you need to have a valuation by tomorrow. Because you know founders are busy and the last thing that they get to is their numbers and their fundraising and stuff. And when you need to have a valuation by tomorrow an advisor or a consultant is not going to be able to do it or you’re going to have to contact 50 of them. We can do it in like half an hour and that was good feedback we received.
Komal: Can you tell us about the Equidam Research Center?
Daniel: As you can imagine, as a by-product of our activities, we collect a lot of data about the companies that we value. We don’t share the data or use it unless it’s anonymized and aggregated for research. The Equidam research center stands out of that, and it’s a group of professors and PhD students that basically are working with our data to discover new things about what makes a startup environment successful? What makes a startup successful in fundraising? different types of correlations with different drivers of the business. That has been quite interesting so far to see, and we’re happy to support that type of research.
Komal: What’s in the pipeline for Equidam?
Daniel: The main plan for us now is to try to expand the use cases that we have. We are getting more and more in a leadership position on the fundraising evaluation side, especially the early stage, but there is an array of use cases for valuation that at the moment we are not covering and we hope to be covering in the future. We’re working really hard on that. And hopefully you’ll hear more about that soon.
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