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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
Growth
Expansion
Funding Needs
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
Corporate Finance Arena of public companies compete in well-established capital markets Have access almost to everything
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.
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
Leadership (CEO) VC Cash Implementation (CMO, CTO, CFO) Idea Ability to implement project is most important
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
VC Maximum Value
Negotiating Space
PE Multiples
Seed 1 to 2x Early 2 to 3x Expansion 4 to 5x Mezzanine 20 50x
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.
New Shares
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
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
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
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 !