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  "documentTitle": "Valuing Pre revenue Companies",
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  "notes": "This slide serves as a continuation of a previous discussion on valuation divergence, focusing on the mechanics of dilution.",
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      "text": "Expect divergence, even in successful investments. Although Gadzoox is just a single example, it's a powerful one. After all, how many early-stage investments are in a company for which the valuation goes from less than $7 million to nearly $2 billion in three-and-a-half years? The data I am compiling for my book strongly suggest that divergence for successful exits is usually between 3x and 5x.",
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      "text": "Summary. An understanding of how divergence works can make negotiations between entrepreneurs and investors more productive and less contentious because expectations on both sides will be more realistic. In nearly all cases, between an early-stage investment and an exit divergence the valuation of investor shares will likely increase by 3x to 5x less than the company valuation.",
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      "text": "Dilution causes divergence. Another way to look at divergence in Gadzoox is that the angels' ownership was diluted to 10.8 percent from 30.3 percent (30.3 / 10.8 = 2.8). Although investors and entrepreneurs are generally familiar with the concept of \"dilution,\" few consider how it affects the valuations of company and investor shares. I developed the concept of divergence to emphasize how these valuations change from investment to exit.",
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      "text": "The \"no dilution\" illusion. Entrepreneurs often believe that subsequent financing won't be needed to reach their five-year plan numbers, so dilution won't occur. But optimism is part and parcel of the entrepreneurial spirit and, in this case, only masks reality. Most ventures lose money for the first couple of years. Even those few that are immediately profitable rarely grow to $50 million or $100 million in three to five years without substantial infusions of capital. A company that does $100 million in its fifth year, for example, can easily need $10 million for cash balances, $20 million for receivables, and cash to finance capital expenses. In addition, non-financing issuances of equity need to be considered.",
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      "text": "Valuation Divergence (continued)",
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