Instruction
The issue of the valuation of private companies, particularly newly formed ones in their early stages, has been and continues to be difficult and complicated. The reason is valuations are often based on human subjective measures. Even though there are quantitative models, IRS regulations, industry trade association guidelines, and SEC standards available to use as benchmarks, both parties—the founders and investors—still frequently rely heavily on subjective measures.
Founding businesses in their early stages typically (whether they forecast it or not) operate in a negative cash flow position. This can last for up to 2 years. Furthermore, their future cash flows from sales can be uncertain but temptingly exciting. This uncertainty with regard to cash and margins adds ambiguity and uncertainty to valuations.
As the e-text author states in Chapter 4, "the capital structures of companies evolve over time. Early stage companies raise money at various times throughout their lives to fund their growth and minimize their investor's exposure. These challenges can lead to very different valuations of the same firm, particularly during periods where market conditions are changing rapidly." Lerner,Leamon & Hardymon, (2012).
In addition, you will need to subjectively determine if you believe the KAYAK.com company founders or any of their investors, partners, acquisitions, or buyers made good or bad deals for themselves. In other words, were there problems or opportunities?
As you draft your situation analysis, remember that this is a recounting of facts and details that may have led to problems or opportunities but they are not the problems or opportunities themselves.
You get to be consultants when you draft your recommendations and suggestions for options and alternative actions. Here you get to state what you believe should have happened if they had taken a different approach or course of action that you would have recommended.