Download - Valuation 2010 Final

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VALUATION AND FORECASTING

2

Before we start… 3

Financial Fundamentals Learning the income statement, balance sheet etc

18

Exit Analysis – Nordic VCs Decreasing valuations 8

Financial Performance Key ratios and actual performance vs. plans

27

ValuationRelative and absolute methods. DCF is an absolute method that discounts future cash flows

48

Financial Planning Combine top-down and bottom-up approach and ensure link between plan and budget

34

The VC Method He value of a company is a matter of discussion over a cup of coffee

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3

3BEFORE WE START…

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.. I need three volunteers?

BEFORE WE START…

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Tweet key learnings…

BEFORE WE START…

Control10Password:

MCF10

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Give a hand to the tweeters!

BEFORE WE START…

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Reminder - Assignment for every study group! Deadline - the lecture on Options Every study-group should find 10 tweets that:

You find interesting / funny That can serve as a either a summary of the

lectures or that explores an important topic Upload the Powerpoints at Slideshare and tweet

the link in Twitter in MCF10 account Two groups will present – randomly chosen

BEFORE WE START

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8EXIT ANALYSIS – NORDIC VCS

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Trade sales are most common and the crises has reduced # exits and closed IPO window

EXIT ANALYSIS – NORDIC VCS

Source: VentureXpert

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007 2008

An

tal exit

s

Børsnoteringer Industrielle salg

10

As well as having reduced the values – IPOs are typically larger than trade sales



0

500

1.000

1.500

2.000

2.500

3.000

3.500

2000 2001 2002 2003 2004 2005 2006 2007 2008

Mio

. kr.

Børsnoteringer Industrielle salg

11

Decreasing exit value and increased general risk leads to lower valuation for early-stage



0

100

200

300

400

500

600

700

800

900

1.000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Media

n a

f valu

ations

(mio

. kr.

)

Seed & start-up Early-stage Ekspansion Later stage

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Know your value inflection points...


Pre-venture Venture

Capital Need

Exit Value

Proof-of-concept

Proof-of-business

Proof-of-scale

Market Share

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Have the end in mind…


Start-up Strategic Customer

Competitor

New entrant

Strategic Supplier

IPO

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Approach the exit differently


Trade Sale

Business strategy to fit exit

Identify buyers

Position the

company

Create bid wars

IPO

Business strategy to fit exit

Asses timing – capital

need and market

Prepare organisation setup

Create exposure

15

US exits have higher values – for several reasons


Source: Vækstfonden

0

200

400

600

800

1000

1200

1400

1600

USA Norden Øvrige Europa

Mio

. kr.

16

US VCs participate in the most attractive exits of Nordic companies


Vækstfonden

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

USA Andet land Alle

Mio

. kr.

Med US VC Uden US VC

17

Why do you think that the exit values are higher for the Nordic companies who has a US VC investor on board?


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18FINANCIAL FUNDAMENTALS

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Standard P&L (Income Statement)

FINANCIAL FUNDAMENTALS

Standard Functional P&L AKA

Net Sales 100 Revenue or Turnover

- Cost of Goods Sold 50 COGS, Variable Cost, OPEX

= Gross Earnings 50 Gross Profit

- Marketing Expenses 10 Fixed Cost, OPEX

- Administrative Expenses 10 Ibid.

- Building Rental 10 Ibid.

= Earnings before Interest, Taxes, Depreciation and Appreciation 20 EBITDA

- Depreciation expenses 5

+ Appreciation 3

= Earnings before Interest and Taxes 18 EBIT or Operating Income

- Interest 5 Financial expenses

= Earnings before Taxes 13

- Taxes (@ 25% tax) 3,25

= Net Income 9,75 Net Profit

20

Bill of Material – a nice reality check


Bill of Material - Relevant for COGS

Components Unit Total units Total Costs

Electronic 40 1.200 48.000

Plastic 5 1.200 6.000

Connectors 5 1.200 6.000

Direct labor 15 1.200 18.000

Total 65 1.200 78.000

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The Balance Sheet - Assets


The Balance Sheet - Assets AKA

Cash and Marketable Securities 100

Recievables 50 Debtors

Inventories 50 work-in progress, raw mat.

Total Current Assets 200 Short term assets

Equipment 500

Less: Accumelated Appreciation and Depreciation 10 SUM: Reduction of increas in value

Net Equipment 490

Building 400

Other Long Term Assets 20 E.g. IPR or Goodwill

Long Term Assets 910 Fixed Assets (+1 Year)

Total Assets 1110

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The Balance Sheet – Liabilities and Equity


The Balance Sheet - Liabilities and Equity AKA

Payables 100 Debt to suppliers

Accrued wages 50 Debt to employees

Bank Loans 50

Other Current Liabilities 10 Cathall short term debt

Total Current Liabilities 210 Short Term Debt (<1 year)

Long term liabilities 500

Capital Leases 10 Stein Bagger issue

Total long-term liabilities 510 (>1 Year)

Owner's equity 390Residual (capital stock, trans. Income)

Total Liabilities and Equity 1110

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Cash Flow Statement


Cash Flow Statement AKA / ExplanationNet Income 9,75 +Depreciation 10 Non-cash out-flaw (an adjustment)∆ Working Capital: -Increase in Recievables 10 You fund customers-Increase in Inventories 5 +Increase in payables 2 taking trade credit reduces capital need+Increase in accrued wages 3 borrowing from employeesNet cash flow from operations 9,75 Cash flow from investing activities (CAPEX) - Investments In long-term assets 80

Free Cash Flow -70,25 Cash Generating (>0) / Cash Burning (<0) Cash Flow from financing activities + Increase in short term liabilities (bank credit) 1 Short term bank financing+ Increase in long-term debt 0 Long-term bank financing+ Increase of Equity 10 Investor putting money in the companyNet Change in Cash -59,25 Beginning Cash and marketable securities 100 Ending Cash and Marketable securities 40,75 < 0 and you are dying

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Operational Breakeven


EBDATEBDAT = Earnings before Depriciation, amortization and taxes

EBDAT Breakeven = Amount of revenues to cover cash OPERATING expenses

Breakeven: EBDAT = 0

NOPATEVA = Net Operating Profit After Taxes (NOPAT) – After-Tax Dollar Cost of Financial Capital Used

Seperates a firm’s operating from its financing

NOPAT = EBIT-Tax

NOPAT Breakeven revenues (NR) = TOFC/(1-VCRR)

TOFC = Total Operating Fixed Cost

VCRR = Ratio of Variable cost to revenue

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Real Break Even


Real Breakeven

When there exist Positive Free Cash Flow

FCF = Net Income + (Depriciation/Armortization) - ∆ Working Capital-CAPEX Cash Burn = OPEX + Interest+ Tax + Increase Inventory- ∆ payables and accrued liabilities + CAPEX

Cash Build = Net Sales – Increase in Recievables

Net Cash Burn = Cash Burn – Cash Build

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As an entrepreneur you must know

Burn Rate: Avg. monthly cash burn

Runway: Remaining liquidity / Burn Rate


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27FINANCIAL PERFORMANCE

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Ratios – using common sense and industry benchmarks

FINANCIAL PERFORMANCE

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The use of ratios relates to life cycle


Seed Financing

Startup Financing

A-round

B,C-round

Public & Seasoned

Maturity

RapidGrowth

Survival

Startup

Focus on cash & cost

Broad Focus on ratios

Focus on cash & profitability

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I look at traction in Sales


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and traction in healthy operations


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… as well as CASH


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Critical Success Factors


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34FINANCIAL PLANNING

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The progress for successful venture

FINANCIAL PLANNING

Pre-venture Venture

Capital Need

Exit Value

Proof-of-concept

Proof-of-business

Proof-of-scale

Market Share

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and the cash balance

FINANCIAL PLANNING

High

Cash Balance

Low

Founder and FFF

Seed National Venture

Int. Venture Exit

37

Time fundraising with value inflection points and before cash balance is too low

Pre-venture Venture

Capital Need

Exit Value

Proof-of-concept

Proof-of-business

Proof-of-scale

Market Share

High

Cash Balance

Low

Founder and FFF

Seed National Venture

Int. Venture

38

Tools for financial planning in a growth company

FINANCIAL PLANNING

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Key Problem – Missing link between business plan and financial plan

FINANCIAL PLANNING

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If my company is expecting to have this much revenue – then what is my plan to get there?

FINANCIAL PLANNING

If my plan is this – then what is the likely revenue, cost and capital requirement

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How to work with a business plan / budget /anything in life…

FINANCIAL PLANNING

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Top Down – starting with the potential

FINANCIAL PLANNING

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Buttom Up – Building it up from today

FINANCIAL PLANNING


...clarify to yourself and potential investors what the assumptions for the budget are in relation to revenue drivers, cost drivers, investments etc.

It is always better to make informed and reasonable assumptions than claiming it is difficult to predict the future

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Think contingent scenarios

FINANCIAL PLANNING

• Best case• Base line• Worst Case


As well as using WHAT IF? Scenarios on important paramerters – Revenue, Price, COGS, Funding...

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Forecasting will become easier with maturity and lower risk

FINANCIAL PLANNING

Seed Financing

Startup Financing

A-round

B,C-round

Public & Seasoned

Maturity

RapidGrowth

Survival

Startup

Low HighModerate

Sales Forecasting Accuracy

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48VALUATION

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Four steps of valuation

VALUATION


This makes valuation more ART than SCIENCE

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Two valuation types

VALUATION

52VALUATION

Relative Valuation

• Price / Earnings (P/E)

• Price / Sales (P/S)

• Price / Book (P/B)

• EV / EBIT

• EV / NOPAT

Absolute Valuation

• Discounted Cash Flow (DCF)

• Economic Value Added (EVA)

• Maximum Dividen Method

• Options

The relative and absolute methods

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Evaluating a company or a project

VALUATION

Company

• Price / Earnings (P/E)

• Discounted Cash Flow (DCF)

Project

• Payback

• Net Present Value (NPV)

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In absolute valuation

VALUATION

Value is to generate positive cash flows to the owner…

...and to calculate the present value of those cash flow (DCF and NPC)

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The principle of NPV

VALUATION

Identify future cash flows

Bring cash-flows to present value with discount rate that reflects the risk of cash flows

NPV 0 Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

-$60.00

-$10.00

$40.00

$90.00

$140.00

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The DCF valuation for firms (EV)

VALUATION

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Generic DCF valuation

VALUATION

Aswath Damodaran

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But which cash flows

VALUATION

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Calculating the Free Cash Flow

VALUATION

Free Cash Flow to Equity (FCFE) = Net Income

- Net Capital Expenditure

- ∆ in Net Working Capital

+ New Debt

- Debt RepaymentFree Cash Flow to Firm (FCFF) = EBIT*(1-tax)Unlevered cash flow - CAPEX

- Depreciation

- ∆Working Capital or

Free Cash Flow to Firm (FCFF) = FCFE + Interest Expenditure(1-t)

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Valuing a firm – the discount factor

VALUATION

WACC = Weighted Average Cost of Capital

WACC = Cost of Equity * Equity ratio + Cost of Debt * Debt Ratio

30Y State Bond

4,5%

Measure for how closely

a stock follows the

market

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Valuing firms – Terminal value (two approaches)

VALUATION

Terminal Value = FCFF n * (1+g) / (r-g)Perpetuity Growth method

FCFF = Free Cash Flow to the Firmn = periodsr = WACCg = perpetual growth rate (often 1-3%)

Multiple Terminal Value = EBITDA * Peer MultipleExit multiple Method

(1+WACC)n

FCFF = Free Cash Flow to the FirmPeer Multiple = Enterprise Value (EV) / EBITDA for comparable companyn= Periods

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62THE VC METHOD

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The VC Method = The Exit Multiple Method

THE VC METHOD

Multiple Terminal Value = EBITDA * Peer MultipleExit multiple Method

(1+WACC)n

FCFF = Free Cash Flow to the FirmPeer Multiple = Market Cap / EBITDA or Price / Sales for comparable companiesn= Periods

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We consider

THE VC METHOD

….. IRR, Return Multiple, Absolute Return, Ownership under the different deal terms...

… the case from an overall perspective (team, industry, technology, etc)...

However most often the price of a company comes down to negotiation over a cup of coffee

65

Financial Fundamentals Learning the income statement, balance sheet etc

18

Exit Analysis – Nordic VCs Decreasing valuations 8

Financial Performance Key ratios and actual performance vs. plans

27

ValuationRelative and absolute methods. DCF is an absolute method that discounts future cash flows

48

Financial Planning Combine top-down and bottom-up approach and ensure link between plan and budget

34

The VC Method He value of a company is a matter of discussion over a cup of coffee

62

The Summary

Download - Valuation 2010 Final

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