NewCo.

Business Plan: VC-side

valuation

Background
NewCo, a company involved in R&D for medical device, submitted a business plan in 2005
for venture capital financing to APIDC. This document presents an executive summary of the
business valuation, as undertaken by the study group on behalf of the venture capital fund,
and the corresponding recommendations.

Business Valuation
Targets value offering
NewCo, a medical devices company focused on innovations in minimally invasive treatments
for cardio-vascular problems has come up with a product BACE, which allows for mitral
valve repair without cardiopulmonary bypass and without opening the heart. The company
currently has a patented device that is clinically validated with positive follow up data for the
initial prototype.
The prototype device is superior to the existing solutions in that it bypasses the need for
open-chest, open-heart, and on-pump procedures thereby avoiding potential issues like longer
recovery time, risk of infection, post-op complications such as stroke, and a high mortality
rate of ~9%. Additionally, while the traditional solutions cost as high as 80-100 thousand
dollars, NewCos product is expected to be made available at a much cheaper price.

Assumptions for valuation

While arriving at a realistic valuation, the study group has made certain informed
assumptions. A summary of the same, along with their rationale is presented below.
Investment horizon
Considering that the target is still in seed/early stage an investment horizon of 8 years has
been assumed.
Revenue/Sales
In its own estimation, post commercialization, the target has project CAGR of almost 50%.
During the same period, it is estimated that the market for such medical devices is expected
to grow from about USD 1 billion to USD 2 billion1.In the year of exit, this translates to
almost 12.5% of the total market. The study group estimates this to be relatively on the
optimistic side, especially considering a time span of only 3-4 years post commercialization.
1

Source: "Percutaneous Mitral Valve Therapy: The Next Decade" By Mary Stuart, START-UP, February 2012,
Vol. 17, No. 2

While the sales numbers have not been revised for valuation, an attempt has been made to
neutralize the optimism through appropriate risk adjustment.
Valuation multiple
The study group has adopted the sales multiple method for business valuation. As per the
industry research available, during the years 2012-2013, the median revenue multiple for
medical/cardiac devices was about 2.1x while the mean value for the same was about 2.7x2.
The study group has taken the same values and valuation has been done across the median to
mean multiples range.
Risk assessment and discount rates
The products development timeline can broadly be divided into three periods based upon
two key milestones validation & completion of animal studies, and completion of clinical
trial & product launch. Each of these periods has its own risk of product failure associated
with it. As per their analysis, the team has arrived at failure probability numbers of 60%,
40%, and 20% for periods corresponding to pre-animal testing phase, animal studies to
clinical trials, and finally product launch. These numbers are in line with the industry trends3.

Investment Recommendations
Based upon its assessment, the study group estimates that at the time of exit, the business is
expected to be valued around USD 525 675 million. With an initial investment of USD 4
million in the first round and another investment of USD 8 million in the later stages, the VC
fund is expected to exit at an equity stake of about 45%-35%, respectively. This roughly
translates into a multiple (cash on cash) of around 19x-15x.
Hence, based upon our analysis, it is recommended that the VC fund invests in the target
business.
However, it is further recommended that the second stage investment be made subject to
successful completion of animal studies for the device.

2
3

Source: Health Care Sector Update, 2013, Duff & Phelps

Source: Invention Reinvented, 2010, McKinsey and Company

Appendix
Assumption
Investment Horizon (years)
Median industry price to sales ratio
Mean industry price to sales ratio
Revenue (sales) in 2013 (million USD)
Return Expectation (YoY)
Discount Rate Calculation
Year
Probability of Failure
Net Discount Rate
Remark s

8
2.1
2.7
250.0
35%

2006
60%
1.88
Animal Studies

2007
2008 2009 2010 2011 2012 2013
40%
40% 20% 20% 20% 20% 20%
1.58
1.58 1.44 1.44 1.44 1.44 1.44
Clinical Trials

Valuation (Industry Median)

Exit Value
Compound Discount Rate
Investment Amount
Post-Money
Pre-Money
VC Ownership Fraction
Ownership share of Entrepreneurs
Wealth of Entrepreneurs
VC's ownership shares from first round
Trident's wealth from first round
VC's ownership shares from second round
Trident's wealth from second round
Total equity share for VC
Total wealth for VC

Time of Exit
2nd Round 1st Round
525.0
15.39
1.88
8.0
4.0
34.1
13.9
26.1
9.9
23.4%
28.7%
54.6%
286.5
18.6
9.9
22.0%
115.4
7.5
4.0
23.4%
123.1
8.0
45.4%
238.51

Valuation (Industry Mean)

Exit Value
Compound Discount Rate
Investment Amount
Post-Money
Pre-Money
VC Ownership Fraction
Ownership share of Entrepreneurs
Wealth of Entrepreneurs
VC's ownership shares from first round
Trident's wealth from first round
VC's ownership shares from second round
Trident's wealth from second round
Total equity share for VC
Total wealth for VC

Time of Exit
2nd Round 1st Round
675.0
15.39
1.88
8.0
4.0
43.9
19.1
35.9
15.1
18.2%
20.9%
64.7%
339.5
28.4
15.1
17.1%
89.8
7.5
4.0
18.2%
95.7
8.0
35.3%
185.51

Term Sheet
1. Investment and conditional offering: Two rounds of funding comprising of USD 4
million in Series A offering to be disbursed immediately. Subject to successful
completion of animal studies, a second round funding of USD 8 million (in the form
of Series B shares) for the minimally invasive procedures. At the time of closing,
value of series A to increase such that series A and series B have the same conversion
price as well as same terms and rank
2. Use of Proceeds: Working capital, R&D works, and general corporate purposes
3. Anti-dilution: Upon any issuance of subsequent common stock as a price less than
the current investment price, the current investment will be subject to adjustment on a
full-ratchet basis. However, in case of subsequent funding in round 2 or in case the
company achieves a certain minimal target, as mutually agreed upon, the initial
investment will be subject to adjustment on a weighted-average basis upon any
issuance or deemed issuance as previously highlighted.
4. Voting Rights: Except as required by the law or as agreed by the Board, the
investment shares will vote with the common stock as a single class on all matters,
with each share of the preferred (investment) stock entitled to votes equivalent to
common stock conversion of the preferred units.
5. Employment Agreements: On the investors request the company will enter into
written employment agreements with those necessary/critical to successful
development of the previously identified product.
6. Noncompete Agreements: All employees of NewCo, directly or indirectly involved
in the development of the medical device, will enter into non-compete and nonsolicitation agreements with the company prior to the initial closing on terms
reasonably satisfactory to the investor.
7. Proprietary Information: Each existing company stockholder, officer, employee and
consultant of the company will enter into a proprietary information and inventions
agreement satisfactory to the investor.