Early Stage Investment Dynamics in an Emerging Market

In early stage investments there are several risks and factors that investors should carefully mitigate and control. Here I isolated many factors that affects the performance of the company and focused simply hypothetical entry and exit valuations and three basic growth scenarios that an investor faces with.

Lets assume we have three companies, all three has a pre-money valuation of 2m and we invest 1m into all three. Within 24 months; company A reached a cash positive stage with a good EBITDA margin, growing and no need for working capital and new Capex. In this case, there will not be a new investment round and we will be seeking an exit at an optimum time. Assuming the revenue growth will be proportional to the invested capital, this company will make 1 to 3 million EBITDA in a few years and the valuations will be somewhere around 10 to 20 millions.

On the other hand Company B and C, will continue to grow and this growth necessitates new investment (either Capex or Working Capital need of the business plan). Assuming 5m new investment has been made with pre-money valuation of 10m into B and C. In company B, we took the lead at the investment and put 5m; in company C, we remained silent and a new investor did the deal. After new cash, the EBITDA of the company B and C realized between 2 to 12 million and the valuations will range around 20 to 100m in a few years.

The chart below shows our exit multiples at these companies. Note that we assumed, we were lucky enough to make exits at these fair values for all three companies.


It is interesting that if we do just a one round investment and make our exit at company valuations around 20m, we reach about 7x exit multiples. Whereas, in order to catch these multiples in other two companies we need to reach valuations 70 to 110m respectively.

The capacity to create 100m+ companies in a few years would be limited in Turkey, on the other hand creating gazelles* being valued around 10 to 20m is more likely. And an investor who can solve the exit puzzle in these gazelles will have a very satisfactory return performance and will have abundant of opportunities to invest.

* please refer to previous posts for the definition of gazelle