Start-up Valuation Clinic
Venture Capital Series
Agenda
Arts & Craft of Valuation Introduction Valuation Methodologies Valuation methodologies used by Venture Capitalist (VCs) Understanding the Venture Capital process What are you worth? First hand valuation by a VC Negotiation with VCs Venture Capital Method Financial Engineering Analyzing actual start-up companies
Where we are ? Funding ECO System
Growth & Profit
Growth
Expansion
Funding Needs
Cradle Investment Programme
Pre Seed
MDeC
Other Grants, SME Loans & Incubators, Government Incentives, Angels & Corp Investors
Project Financiers, Commercial Banks, Venture Capitals, Private Equity, Credit Guarantee Corporation, Leasing & Factoring Providers, Govt. Agencies
Institutional & Foreign Investors, Public Funds, Merger & Acquisitions, Merchant Banks
Point Zero
Maturity
Seed
Arts & Craft of Valuation (1)
Differences between the entrepreneurs/ private investors finance and corporate finance Entrepreneurs / Private Investors Finance More volatile Imperfect Less accessible than corporate capital markets Obtain source of capital differently Companies are younger, more dynamic Environment are more rapidly changing and uncertain Liquidity & timing are everything
Corporate Finance Arena of public companies compete in well-established capital markets Have access almost to everything
Arts & Craft of Valuation (2)
In the VC eyes, determination of a companys value is elusive and its more art than science
So, whats a start-up company worth ? It all depends! Very imperfect market capitalization unlike public companies where market capitalization is readily determined. Entrepreneurial valuation are cash, time and risk.
Arts & Craft of Valuation (3)
Valuation Methodologies
Net Present Value
Comparables Real Options Turkish Bazaar
Adjusted Present Value First Chicago Method DCF Golden Handcuff
Venture Capital Method
Valuation Methodologies used by VCs (1)
Understanding the Venture Capital investment process
Deal Sources
Biz Plans Kicks-In
Due Diligence
Go/No-Go Screening
Evaluation Continues
Entrepreneur Analysis Business/ Venture Analysis
Deal Terms
Conditional Termsheet
Investment Decision
Approval
Products /Services Concepts/Ideas Analysis
Valuation Methodologies used by VCs (2)
What are you worth ?
Leadership (CEO) VC Cash Implementation (CMO, CTO, CFO) Idea Ability to implement project is most important
Idea has limited value
Valuation Methodologies used by VCs (3)
First hand valuation by VCs expected Return on Investment
Cash Investment : $3 million 66.7%
Proposed Investor Share:
Post-Money Valuation
Pre-Money Valuation
:
:
$ 4.5 million
$1.5 million 46% 6.7x
Exit Valuation (Yr 5): $30 million (PAT) Return to Investor (IRR): Cash-on-Cash Return Investor
Valuation Methodologies used by VCs (4)
Negotiation with VCs Company Value $
VC Maximum Value
Negotiating Space
Entrepreneur Minimum Value
PE Multiples
Seed 1 to 2x Early 2 to 3x Expansion 4 to 5x Mezzanine 20 50x
Valuation Methodologies used by VCs (5)
Venture Capital Method (1)
Post-money valuation: The valuation of the company immediately after a round of investment is closed. Pre-money valuation: The valuation of the company just before closing a new round of investment, including the value of the idea, the intellectual property, the assembled management team, and the opportunity. Terminal value: The valuation of the company at exit; that is, the proceeds of the sale of the company via a merger or acquisition or an initial public offering and at which time the investors' ownership can be liquidated. ROIn: The cash-on-cash return on investment expected for such an investment in the year of the harvest, or exit. This ROI is commonly expressed as a multiple of invested cashthat is, 10x, for exampleregardless of the time since investment (n years).
If the terminal value of a company seeking seed/start-up capital is estimated to be $60 million and we assume the stage of the company is appropriate for investors to expect 30x ROI in year of harvest, then the post-money valuation of this company can be estimated at $2 million. If the required investment is $0.5 million, then the pre-money valuation would be $1.5 million.
Valuation Methodologies used by VCs (5)
Venture Capital Method (2)
1. Identify the companys forecasted net income within n years up to exit year. Estimate normally based on sales and margin projections. 2. Assign appropriate P/E ratios to the company based on current multiples for companies within similar economic characteristics. 3. Derived at a Terminal Value . E.g. Terminal Value (t) = Net Income x P/E ratio. 4. Terminal Value can be discounted. Normally VCs discount rates range from 30% - 80% due to the risks involved in the type of investments.
Ownership (%) Required
Required Investment = Total Terminal Value
New Shares
Ownership Required (%) 1 Ownership Required x old shares
Valuation Methodologies used by VCs (6)
Financial Engineering
To overcome valuation or incentive issues, VCs will engage in financial engineering Debt
Preferred Shares
Preferred Convertible Securities Mixed Debt and Equity Ratchets or Clawbacks (Downside for Investor, Upside for Entrepreneur) Liquidation preferences Fundamentally challenges notion of pre-money value, as values and returns become contingent on future events
Analyzing an actual start-up
VCs Valuation Interactive (1)
To review start-up Income Statement 5 year projection To review start-up Cash Flow Information for 5 year projection NOTE : Please have all the above ready. Coming up with valuation based on Venture Capital approach.
Analyzing an actual start-up
VCs Valuation Interactive (2)
Income Statement (5 year projections)
Income Statement Information (Yr End) Year 1 Revenue Cost of Goods Sold Gross Revenue Growth (%) Gross Margin (%) Profit After Tax Year 2 Year 3 Year 4 Year 5
Analyzing an actual start-up
VCs Valuation Interactive (3)
Cash Flow Information (5 year projections)
Cash Flow Information (Yr End) Year 1 Fund Requirement Fund to Raise Beginning Cash Balance Fund Utilization Cash Invested in Marketable Securities Return on Invested Cash Ending Cash Balance 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Year 2 Year 3 Year 4 Year 5
Closing
Determined methodologies used by venture capitalists and professional investors to estimate the value of a company
Understand how equity proportions are allocated to investors
Analyzing a startup financing
VCs are active investors and bring more to the deal than just money: o spend a large amount of time, o reputation capital, o access to skilled managers, o industry contacts, network, o and other resources. A large discount rate is a crude way to compensate the VC for this investment of time and resources.
Thank You !
