How can I estimate a private company's market cap? What records do I need to consider and how would I go about it?
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2$\begingroup$ Take a class from Prof. Aswath Damodaran at NYU : pages.stern.nyu.edu/~adamodar/New_Home_Page/… $\endgroup$– nbbo2Feb 15, 2017 at 15:05
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$\begingroup$ not very helpful because the lesson 5 (July 17, 9-12.30) cannot be viewed on my end. I am hoping for a more constructive and useful response. $\endgroup$– samanthaFeb 15, 2017 at 15:12
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$\begingroup$ I think these are the corresponding slides: people.stern.nyu.edu/adamodar/pdfiles/eqnotes/pvt.pdf. $\endgroup$– LocalVolatilityFeb 15, 2017 at 15:48
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1 Answer
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Market cap is just the stock price times outstanding shares. The number of outstanding shares is decided by the issuer so the remaining question is how do you value a private company's stock price. There's 3 general classes of methods:
- Book-based (e.g. discounted cash flow, multiple of LTM revenue)
- Relative comps
- Private market demand
The first approach is not very different from how public companies are valued by analysts. However, this becomes a problem for early stage companies that may be cash flow negative or pre-revenue.
That's where relative valuation come in. This is where the company's market cap is valued based on other companies that are similar to it.
Relative comps provide very noisy estimates, so investors in private companies also price the companies based on what other investors have been willing to buy and sell the stock at.
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$\begingroup$ Ok Great. I was also able to see the slides now. It makes sense, but how do I practically go about this ? What statements do I need or could be obtained to make such a valuation ? $\endgroup$– samanthaFeb 16, 2017 at 0:07