Download - CeBIT Presentation v4, 7May15
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The asset method values the assets of a business and does not assume a goingconcern
Source: Eric Tachibana
VALUATION METHODS Theory
You are worthwhat you own
You are worth whatyou own in the future
You are worth whatthe market saysyou are worth
1 2 3
Valuation Approaches
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Valuing a business based on actual assets is the simplest and most intuitive way;however, it doesn’t work for start-ups and is generally used during liquidations
Assets Liabilities
Current AssetsCashAccounts ReceivablesInventory
Total Current Assets
Current LiabilitiesAccounts PayableTax LiabilitiesProvisions
Total Current Liabilities
Non-Current AssetsEquipmentBuildingsIntangible assets
Total Non-Current Assets
Non-Current LiabilitiesLong-term loansLong-term provisions
Total Non-Current Liabilities
Net Assets
Equity
ASSET APPROACH You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
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ValuationApproaches
Theory
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The image part with relationship ID rId8 was not found in the file.Source: Eric Tachibana
VALUATION METHODS Theory
You are worthwhat you own
You are worth whatyou own in the future
You are worth whatthe market saysyou are worth
1 2 3
Valuation Approaches
DCF* models are premised on the fundamental tenet of corporate finance: thevalue of a company today is equal to the present value of future (but uncertain)cash flows
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The discount rate reflects the level of risk and the opportunity cost
NET PRESENT VALUE METHOD
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− � 0 = Initial Investment� = Cash Flow� = Discount Rate� = Time
NPV Formulas
You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
1 2 3
ValuationApproaches
Theory
So what’s the discount rate?
* DCF = Discounted Cash Flow
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Investments in early stage businesses are high risk with more than 50% notreturning the capital initially invested
52%
33%
8%
3% 4%
0%
10%
20%
30%
40%
50%
60%
<1x 1x to 5x 5x to 10x 10x to 30x >30x
3.3 years
3 years
4.6 years
4.9 years 6 years
Distribution of Group-Affiliated Angel Returns
Source: Wiltbank, Returns to Angel Investors in Groups, 2007
INVESTOR RISK You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
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ValuationApproaches
Theory
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A principal cause is the lack of information at the time of the investment
SeedFunding
AngelFunding
SeriesA, B, C
TradeSale /IPO
Available Information
Low High
LACK OF INFORMATION You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
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ValuationApproaches
Theory
BridgeFunding
Source: Efrat Kasznik
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The higher the risk the higher the discount rate
Source: Efrat Kasznik, Harvard Business Review; How Venture Capital Works Harvard Business Review: A Method for Valuing High-Risk Long-Term Investments
80%+Seed
50-70%Angel
40-60%Series A
30-50%Series B
25-35%Bridge
15-25%Mezzanine
DISCOUNT RATE You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
1 2 3
ValuationApproaches
Theory
Discount rate: risk and opportunity cost
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-0.25
00.25
2.5
10.0
Year 1 Year 2 Year 3 Year 4 Year 5
The NPV* of an early stage venture forecasting a year 1 loss of $250 thousandand a $10 million profit in year 5 is $624 thousand
EXAMPLE
NPV = Net Present ValueSource: www.biz.yahoo.com, extract only
Start-Up Profit Profile, NPV and IRR- in million $ -
Seed investment� = 80%
)
You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
1 2 3
ValuationApproaches
Theory
While VC firms regularly use DCF analysis it is best suited for projects
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The price earnings analysis leverages the wisdom of crowds …
Source: Eric Tachibana
Theory
You are worthwhat you own
You are worth whatyou own in the future
You are worth whatthe market saysyou are worth
1 2 3
Valuation Approaches
VALUATION METHODS
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… whereby the value of a business should be similar to the value of similar firms,in similar industries
PRICE EARNINGS RATIO
-0.25
0 0.25
2.5
10
Year 1 Year 2 Year 3 Year 4 Year 5 EV atExit
15x
150
Sector P/E*
Application Software 45.5
Asset Management 15.7
Beverages-Brewers 31.5
Biotechnology 102.8
Food Products 15.9
Medical Equipment 44.9
Waste Management 35.5
IT Services 19.1
Source: www.biz.yahoo.com, extract only
P/E Ratios and EBIT Multiples- in million $ -
You are worthwhat you own
You are worthwhat
you own in thefuture
You are worthwhat
the marketsays
you are worth
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ValuationApproaches
Theory
Method is best suited for (more) mature, profitable businesses
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Convertibles notes defer the cumbersome negotiation of EV to times when morequantitative information is available
Angel Invest?
End
How?
No
Yes
Not Priced Priced
ConvertibleNote
OrdinaryShares
Source: Efrat Kasznik
ANGEL VALUATION APPROACHES Practice
Angel Investment & Valuation
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Angel investors’ valuation of start-ups is driven by the desire to hold a sizeableshareholding
Funds Raised ($)
Valuation ($) Ownership
10%-30%$1.5m*
$300k
* Pre money
Source: Efrat Kasznik
Practice
Angel Valuation Triangle
ANGEL VALUATION APPROACHES
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DAVE MCCLURE’S VALUATION MODEL
Revealed by Dave McClure (500 Startups) at a TechCrunch Disrupt Event (2011)
Each point is worth $1 million (‘million dollar points’)
1. Market
2. Product
3. Team
4. Customers
5. Revenue
Question: is IP considered?
Dave McClure’s approach to valuing start-ups is based on 5 simple criteria eachworth a maximum of $1 million
Max valuation is $5 million
Practice
Source: Efrat Kasznik
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In the US valuations of start-ups have risen from $2.5 million to $3 million in justover 12 months
START-UP VALUATIONS-US
Source: HALO Report
Practice
Start Up Valuations in the US
USD 3.0mMedian
USD 1.5m1st Quartile
USD 4.0m3rd Quartile
USD 0.3m
USD 10mUSD 2.5mMedian
20132014
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Industry
Software 141
Physical 33
Health 11
Other 7
Software (web & mobile)dominates at 73%
Valuation Sought
< $1m 19
$1m - $2.5m 55
$2.5 - $5m 31
Other 88
A large number at 0 or outsideSydney Angels Criteria
Capital Sought
< $300k 51
$300k - $500k 63
$500k - $1m 32
Other 46
3% chance of beingfunded in 2014
START-UP VALUATIONS-SYDNEY ANGELS
At Sydney Angels a majority of entrepreneurs have realistic valuationexpectations of below $2.5 million; angels negotiate valuations down anyway
Practice
Source: Sydney Angels
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Assumption
VC VALUATION APPROACH
The VC approach to valuation is exit driven and combines DCF analysis with theP/E method
Practice
15x =P/E Multiple
80% DiscountRate = 20x ROI
50% futuredilution
$10 million
$150 million
~$8 million
~$4 million
Profit in year 5
EV in year 5
Value today
Fully dilutedvalue today
Shareholding: 33.3%
IRR: 194%
Return: 75x
Investment: $2m
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MISTAKES TO AVOID Lessons
5 per cent of something is better than 100 per cent of nothing
Dos … Don’ts
Do your homework and be prepared tojustify your valuation
Don’t pull a number from thin air
Be realistic Don’t be greedy & alienate investors
Don’t be obsessed and procrastinateFocus on what matters: raise capitalquickly & accelerate growth
No need to raise too muchBalance funding requirement, dilution &time to raise capital
Don’t succumb to a common mistake bythinking: the grass is greener in the US
Concentrate on the environment you aremost familiar with
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Dependent on the level of traction a valuation of $1.5 to $2 million is likely toavoid unpleasant discussions
Scientific approaches to valuing start-ups have limited validity;
Start up valuation of $1.5 to $2 million is a safe bet;
Expedite the capital raise process, minimise disruption and focus on what matters: growing the business.
SUMMARY Lessons
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The comparison of enterprise values for start ups and mature businessesoften lead to counterintuitive results
The Valuation Paradox
Characteristics Electrical ServicesProvider
Start-Up
Year of Establishment 1985 2014
Product/service Well defined Proof of concept
Business model Proven Unproven, big dream
Scalability Low Perhaps
Revenues $10 million None
Cash flow Positive, $1.5 million Burn rate $60 thousand p.m.
Profit $1 million None for the next 4 years
Enterprise Value $2 million $2.5 million
Source: Efrat Kasznik
VALUATION COMPARISON Valuation Methods