session 2 - doing vc deals - lecture presentation slides im 5 mar 12 (1)

SESSION 2 - DOING VENTURE CAPITAL DEALS

Alternative InvestmentsMSc Investment Management Programme – 2012 Term 2

Cass Business School

Edgar Miller Senior Visiting Fellow

Lecture Presentation Slides 8 March 2012

2

SESSION 2

I. Problem Set 1 Solutions - Valuing and Structuring Venture Capital Deals

II. Valuing Buyout Deals – The Adjusted Present Value Method

III. Case Discussion – Centex Telemanagement, Inc

IV. Guest Lecturer – Richard Anton: Chairman, BVCA and General Partner, Amadeus Capital Partners

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I – PROBLEM SET 1 SOLUTIONS(Target Return Approach

• 5 Year Excite value = £5m x 20 = £100m• Value required by fund in Year 5 = £5m x (1.5)5 = £37.97m• Required share of Excite = £37.97m/ £100m = 37.97%

Question 1 (Share of Company Required for £5m Financing - 50% IRR?)

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• 0.3797 = x/(x + 1,000,000 shares) • Required shares = x = 612,123 shares


Question 2 (Number of Shares to Purchase?)

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• Share price = £5m/612,123 shares = £8.17 per share



Question 3 (Price per Share?)

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• Post-money valuation = £5m/0.3797 = £13.2m




Question 4 Post-Money Valuation)

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• Post-money valuation = £5m/0.3797 = £13.2m

• Pre-money valuation = £13.2m - £5m = £8.2m




Question 4 Post-Money Valuation)

Question 5 (Pre-Money Valuation?)

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PROBLEM SET 1 (Target Return Approach)

• 7 Year Excite value = £8m x 20 = £160m• Value required by fund in Year 7 = £12m x (1.5)7 = £205m• Required share of Excite = £205m/ £160m = 128%

Question 6 (Share of Company Required for £12m Financing – 7 Years?)

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• Prefer £5m strategy - cannot achieve 50% IRR with £12m strategy


Question 7 (Preferred Strategy?)

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• Prefer £5m strategy - cannot achieve 50% IRR with £12m strategy

• Without options fund must own 37.97% (from Question 1)• When exercised, options will dilute all shareholders by 15% - ie, existing

shareholders share of company will be 85% of what it was before options exercised

• Required ownership on fully-diluted basis – ie, after options exercised = 37.97%/0.85 = 44.67%


Question 7 (Preferred Strategy?)

Question 8 (Share of Company Required for £5m Financing – 15% Options?)

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• Pre-money valuation = £5m/0.4467 - £5m = £6.19m


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• 5 Year Excite value = £5m x 20 = £100m• Value required by Nice Guys in Year 5 = £3m x (1.3)3 = £6.59m• Nice Guys’ required share of Excite on fully-diluted basis = £6.59m/ £100m/0.85 =

7.75%

Question 10 (Nice Guy Ownership for £3m Investment)


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7.75%

• All existing shareholders will be diluted 7.75% by Nice Guys– ie, existing shareholders will own 92.25% of what they owned before Nice Guy investment

• Your funds new ownership = 44.67% x .9225 = 41.21%


Question 11 (Our Ownership if Nice Guy’s Make £3m Investment?)


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7.75%

• All existing shareholders will be diluted 7.75% by Nice Guys– ie, existing shareholders will own 92.25% of what they owned before Nice Guy investment

• Your funds new ownership = 44.67% x .9225 = 41.21%



Question 11 (Our Ownership if Nice Guy’s Make £3m Investment?)

Question 12 (New Pre-Money Valuation?)


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From Basic Principals• If Nice Guys invest £3m, your fund is diluted to 41.27% ownership. You want to

maintain existing 44.67% ownership. Therefore, you must invest enough in the second round to obtain an incremental 3.46% ownership (44.67% - 41.21%)

• Since the total £3m investment buys 7.75%, you must invest 3.46%/7.75% x £3m = £1.34m

General Rule• Note that £1.34m/£3m = 44.67%. Thus, to maintain existing ownership

percentage, one must invest the same percentage of the new investment amount as one’s existing ownership percentage.

• Thus, the Fund’s required new investment to maintain original ownership of 44.67% = 44.67% x £3m = £1.34m (Nice Guys would invest remaining £1.66m)

Question 13 (Investment Required to Maintain Original Ownership?)

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• By definition, your fund owns 44.67%• Before the Year 3 financing, Nigel owned 100% - 44.67% = 55.33%. The Year 3

financing dilutes him by 7.75%, leaving him with 55.33% x 0.9225 = 51.04%• Options cannot be exercised until end of Year 3; therefore, Management has 0%• Nice Guys own the rest = 100% - 44.67% - 51.04% = 4.29%

Question 14 (Ownership Percentages After Year 3 Financing?)

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EVOLUTION OF EXCITE LTD SHAREHOLDING

Shareholders Start Point

Initial £5m Financing

(No Options)

Effect of

Options

Nice Guys Invest £3m

We Avoid Dilution

ByInvesting £1.34m

After Options

Exercised

Nigel Smith 100% 62.0% 55.3% 51.0% 51.0% 43.3%

Our Fund 38.0% 44.7% 41.2% 44.7% 38.0%

Nice Guys 7.8% 4.3% 3.7%

Subtotal 100% 100% 100% 100% 85%

Management Option Pool

(15%) (15%) (15%) 15%

Total 100%

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II – VALUING BUYOUT DEALS(The Adjusted Present Value Method)

1. Use of Industry Comparables

2. Target Return Approach

3. Discounted Cash Flow Analysis

Three approaches often used for valuing private equity companies

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DISCOUNTED CASH FLOW BASICS

1. “The value of an enterprise is independent of its capital structure” (Modigliani & Miller - Nobel Prizes 1985/90)

Company Enterprise Value = Value of Equity + Value of Net Debt

2. Normal DCF approach (as prescribed by CAPM) to calculating Enterprise Value is:a. Calculate forecast annual post-interest, post-tax cash flows

b. Calculate Terminal Value

c. Use weighted average cost-of-capital (WACC) - ie, weighted average cost of equity and debt capital - as discount rate to calculate NPV of cash flows and terminal value

3. But - this approach is awkward to use with leveraged buyouts– High debt level invalidates underlying assumptions of WACC

• Assumed values of Equity Beta are inappropriate• WACC changes every year as debt is paid down

– Value of debt-related interest tax shields vary year-to-year

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“Adjusted Present Value Method” (APV) solves the problem . . .

1. Calculate the NPV of the company’s cash flows as if the company had no debt, using Equity Discount Rate (EDR) instead of WACC

a. Calculate after tax cash flows as if the company were financed entirely by equity

b. Calculate Terminal Value

c. Use EDR to calculate the combined NPV of the all-equity cash flows and Terminal Value

2. Calculate the NPV of Interest Tax Shields using the debt interest rate as the discount rate (same approach can be used for net operating losses)

3. Add (1) and (2) to obtain Enterprise Value

APV = NPV of CF From Assets + NPV of Side Effects From Financial Structure

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ADJUSTED PRESENT VALUE METHODEquity Discount Rate Calculation

Where:

Asset Beta = [ Equity Beta ] x [ Equity/(Equity + Debt) ]

= Equity Beta x Percent Equity in Capital Structure

And:

“Equity” = Balance Sheet Book Value

(Not Market Capitalisation)

Equity

Discount = (Risk Free Rate) + (Asset Beta) x (Equity Market Premium)

Rate

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TERMINAL VALUE

• Terminal Value often calculated using a multiple of profits or cash flows in the last year of the forecast – eg, PE-Ratios, EBIT/EBITDA Multiples

• Terminal Value also can be calculated using the Cash-Flow-in-Perpetuity Model. Useful when good comparables are unavailable. Inputs are:– Cash flow of the last forecasted year– Assumed future growth rate (“Perpetual Growth Rate”)

(Last Year Cash Flow) x (1+ Perpetual Growth Rate)(Cost-of Capital – Perpetual Growth Rate)

Terminal Value =

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EXAMPLE BUYOUT TO VALUE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Revenue Growth = 12.0% 600 672.0 752.6 843.0 944.1 1057.4EBITDA @ 15.0% 100.8 112.9 126.4 141.6 158.6Less: Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5EBIT 79.7 91.1 102.0 113.5 129.1Total Interest Expense @ 9.0% 27.0 26.7 24.8 22.2 18.8Pre-Tax Income 52.7 64.4 77.3 91.3 110.3Taxes @ 40.0% 21.1 25.8 30.9 36.5 44.1After-Tax Income 31.6 38.7 46.4 54.8 66.2

Cash FlowAfter-Tax Income 31.6 38.7 46.4 54.8 66.2Plus: Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5Less: Working Capital Requirements -26.0 -14.5 -16.3 -18.2 -20.4Less: Capital Expenditure -23.0 -25.0 -26.0 -27.0 -28.0After Tax Cash Flow 3.8 20.9 28.5 37.7 47.3

DEBT BALANCESBeginning Debt 300.0 296.2 275.3 246.8 209.1Debt Repayment 3.8 20.9 28.5 37.7 47.3Ending Debt 296.2 275.3 246.8 209.1 161.8

BALANCE SHEET ITEMSNet Working Capital @ 18.0% 95.0 121.0 135.5 151.7 169.9 190.3

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EXAMPLE BUYOUT TO VALUE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Revenue Growth = 12.0% 600 672.0 752.6 843.0 944.1 1057.4EBITDA @ 15.0% 100.8 112.9 126.4 141.6 158.6Less: Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5EBIT 79.7 91.1 102.0 113.5 129.1Total Interest Expense @ 9.0% 27.0 26.7 24.8 22.2 18.8Pre-Tax Income 52.7 64.4 77.3 91.3 110.3Taxes @ 40.0% 21.1 25.8 30.9 36.5 44.1After-Tax Income 31.6 38.7 46.4 54.8 66.2

Cash FlowAfter-Tax Income 31.6 38.7 46.4 54.8 66.2Plus: Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5Less: Working Capital Requirements -26.0 -14.5 -16.3 -18.2 -20.4Less: Capital Expenditure -23.0 -25.0 -26.0 -27.0 -28.0After Tax Cash Flow 3.8 20.9 28.5 37.7 47.3

DEBT BALANCESBeginning Debt 300.0 296.2 275.3 246.8 209.1Debt Repayment 3.8 20.9 28.5 37.7 47.3Ending Debt 296.2 275.3 246.8 209.1 161.8

BALANCE SHEET ITEMSNet Working Capital @ 18.0% 95.0 121.0 135.5 151.7 169.9 190.3

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APV METHODOLOGYStep 1 – Calculate All Equity Cash Flows

STEP 1 - CALCULATE ALL EQUITY CASH FLOWS Year 1 Year 2 Year 3 Year 4 Year 5

EBITDA 100.8 112.9 126.4 141.6 158.6Less Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5EBIT 79.7 91.1 102.0 113.5 129.1Less Taxes at 40% 31.9 36.4 40.8 45.4 51.6After-Tax Income With Equity Financing 47.8 54.7 61.2 68.1 77.5Plus Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5Less: Working Capital Requirements -26.0 -14.5 -16.3 -18.2 -20.4Less: Capital Expenditure -23.0 -25.0 -26.0 -27.0 -28.0Cash Flow With Equity Financing 20.0 36.9 43.4 51.0 58.6

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APV METHODOLOGY Step 2 – Calculate Equity Discount Rate

STEP 2 - CALCULATE EQUITY DISCOUNT RATE Risk Free Rate (10 Year Treasury Bond) 5.2%Asset Beta of comparable companies 1.2 Asset Beta = (Equity Beta) x % Equity in Company Capital Structure)

Equity Market Premium 7.7% (1926-2000 difference betw een stocks and intermediate bond yields)

Equity Discount Rate = 5.2%+1.2 x 7.7% = 14.4%

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APV METHODOLOGYStep 3 – Calculate Present Value of Equity Cash

Flows

Cash Flow With Equity Financing 20.0 36.9 43.4 51.0 58.6

Equity Discount Rate = 5.2%+1.2 x 7.7% = 14.4%

STEP 3 - CALCULATE PRESENT VALUE OF EQUITY CASH FLOWS (Use Equity Discount Rate)Step 3a - Calculate Present Value of Annual Equity Cash flowsEquity Discount Factor 0.874 0.764 0.667 0.583 0.509PV of Year 1-5 Equity Cash Flow 134.2 17.4 28.2 28.9 29.7 29.8

Step 3b - Calculate Present Value of Terminal Value of Equity Cash FlowsGrowth Rate In Perpetuity 5.0%Terminal Value = £58.6m x 1.05%/(14.4%-5%) = 651.5PV of Terminal Value 331.9

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APV METHODOLOGYStep 4 – Calculate Present Value of Interest Tax

Shield

STEP 4 - CALCULATE PRESENT VALUE OF INTEREST TAX SHIELD (Use Interest Rate Discount)Interest Expense 27.00 26.66 24.78 22.21 18.82Interest Tax Shield (Tax @ 40%) 10.80 10.66 9.91 8.88 7.53Interest Rate 9.0% 9.0% 9.0% 9.0% 9.0%Discount Factor 0.917 0.842 0.772 0.708 0.650PV of Interest Tax Shield 37.7 9.91 8.98 7.65 6.29 4.89

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APV METHODOLOGY Step 5 – Sum Present Values to Obtain Enterprise

Value

STEP 5 - SUM PRESENT VALUES TO OBTAIN ENTERPRISE VALUEPV of Year 1-5 Equity Cash Flow 134.2PV of Terminal Value 331.9PV of Interest Tax Shield 37.7Enterprise Value 503.8Less Initial Debt -300.0Equity Value 203.8

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Terminal Value Considerations

• Beware – Terminal Value usually dominates total NPV (50%+) regardless of calculation approach used

• Cash-Flow-In-Perpetuity model can be used when difficult to determine appropriate multiples (eg, PE ratio) but is very sensitive to small changes in assumptions – eg, perpetual growth rate

• Conceptually, the impact of interest tax shields, NOLs, and other effects of the financial structure beyond the forecast period should be calculated and included in APV - but doing so is not straightforward and usually can be ignored– Declining debt balance (theoretically declining to zero) and consequent declining

interest tax shields invalidates normal terminal value calculations– Forecasting tax shields, NOLs beyond forecast period may be unreliable– Fortunately, usually has small impact on total valuation (c 5%)

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III - CENTEX TELEMANAGEMENT

Peter Wendell

Jeff Drazan

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THE PROPOSED DEAL(11 April 1985)

• $350K loan to Centex (convertible into equity) to support immediate cash requirements. Additional VC no longer required

• Centex must agree to following:– Terms of contingent $2m financing - $0.45 per share (54% ownership), private investors

convert warrants at same price as Sierra– Achieve key operating benchmarks – ie, CEO search, recruit CFO & Mktg/Sales VP,

improve key systems, fire marginal sales people, develop business plan– Drazen to join Board and become temporary VP Finance & Development– Wendell/Tobkin have board observation rights– Drazen/Stephens approve all expenditures > $10K and all hire/fire decisions

• When new CEO recruited, Sierra invests $1m equity (converting $350K loan into equity) and provides $1m loan guarantee - thereby obtaining 54% ownership position ($0.45/share)

• If new CEO not recruited by 120 days, Sierra can withdraw from contingent investment– Must loan Centex $115K for 2 months - to be repaid from Reg A financing– Centex to repay $350K loan by 30 Nov (7+ months)

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SIERRA’S PROPOSED VALUATION(Problem Set 1, Question 15)

Considering Loan Guarantee as Debt

• ($1m equity)/0.54 = $1.85m Post-Money Valuation

$0.85m Pre-money Valuation

(Enterprise Valuation = $1.85m + $1m = $2.85m)

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SIERRA’S PROPOSED VALUATION(Problem Set 1, Question 15)

Considering Loan Guarantee as Debt


$0.85m Pre-money Valuation


Considering Loan Guarantee as Equity


$1.7m Pre-Money Valuation


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CENTEX FINANCING HISTORY

Date InvestorNew

MoneySecondary Purchase

Share Price

Shares Purchased

Ownership Purchased

Pre-Money

Post-Money

Jul-83 Three Founders $15.0 539.348 100.00% $0.0 $15.0Oct-83 Three Founders $31.0 1,114.652 67.39% $15.0 $46.01983 Reg A Investors $75.0 $2.2500 33.333 1.98% $3,721.5 $3,796.5Dec-83 Jim Gallaway $1.8 $0.10 18.000 1.06% $168.7 $170.5Mar-84 Jim Gallaway $5.0 $0.0125 400.000 23.46% $16.3 $21.31984 Reg A Investors $403.25 $2.25 179.222 9.51% $3,837.0 $4,240.3Apr-84 Sierra $1,000.00 $0.45 2,222.222 54.11% $848.1 $1,848.1

$0.0278

Amount of Investment Valuation of Round

NB: Above figures do not include exercise of Reg A warrants

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CENTEX INVESTOR OWNERSHIP

Date InvestorJul-83 Three FoundersOct-83 Three Founders1983 Reg A InvestorsDec-83 Jim GallawayMar-84 Jim Gallaway1984 Reg A InvestorsApr-84 Sierra

Founders Gallaway Reg A Sierra Total100.00% 100.00%100.00% 100.00%98.02% 1.98% 100.00%96.99% 1.06% 1.95% 100.00%73.53% 24.51% 1.95% 100.00%66.54% 22.18% 11.28% 100.00%30.53% 10.18% 5.18% 54.11% 100.00%

Ownership

NB: Above figures do not include exercise of Reg A warrants

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DRAZEN’S ADDED VALUE

• Grasped subtleties - understood Centex potential!• Convinced Wendell that deal had merit• Brought Sierra as a customer• Created accounting and financial control system• Met with customers and regulators• Created sales brochure• Rewrote business plan with help from Stanford MBA

students• Convinced Pacific Bell to view Centex as a large

customer rather than as a competitor• Provided realistic view of future financing requirements

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CENTEX SCENARIO A1 Only 3 Switches Installed – No Dilution – Equity=$1m

(Problem Set 1, Question 16)

Switches 3 3 3 3 3Revenue (per switch =) $10.0 $30 $30 $30 $30 $30Net Income 10.0% $3.0 $3.0 $3.0 $3.0 $3.0

Equity Value (PE = ) 20 $60.0 $60.0 $60.0 $60.0 $60.0

Investment $1 $0 $0 $0 $0 $0Sierra Initial Ownership 54.0%Sierra's 5 Year Dilution 0.0%Sierra Year 5 Ownership 54.0%Sierra's Year 5 Equity Value $32.4

Cash Flow -$1 0 0 0 0 $32.4IRR 100%

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CENTEX SCENARIO A2 Only 3 Switches Installed – No Dilution – Equity=$2m



Equity Value (PE = ) 20 $60.0 $60.0 $60.0 $60.0 $60.0


Cash Flow -$2 0 0 0 0 $32.4IRR 75%

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CENTEX SCENARIO B13 Switches Installed Annually – 25% Dilution – Equity=$1m



Equity Value (PE = ) 20 $60.0 $120.0 $180.0 $240.0 $300.0


Cash Flow -$1 -1 -1 0 0 $121.5IRR 138%

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CENTEX SCENARIO B23 Switches Installed Annually – 25% Dilution – Equity=$2m



Equity Value (PE = ) 20 $60.0 $120.0 $180.0 $240.0 $300.0


Cash Flow -2 -1 -1 0 0 $121.5IRR 114%

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Hypothetical Centex Returns (Scenario B2)Sensitivity To Investment & Dilution

Centex Investment

Centex Dilution

1X ($2m)

3X ($6m)

5X($10m)

0% 128% 80% 61%

25% 114% 69% 51%

50% 96% 55% 38%

75% 69% 32% 19%

Net Income =10%

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Hypothetical Centex ReturnsSensitivity To Investment, Dilution & Profit Margin

Centex Investment Factor

Centex Dilution

1X ($2m)

3X ($6m)

5X($10m)

0% 96% 55% 38%

25% 85% 45% 29%

50% 69% 32% 18%

75% 45% 13% 0%

Centex Investment Factor

Centex Dilution

1X ($2m)

3X ($6m)

5X($10m)

0% 128% 80% 61%

25% 114% 69% 51%

50% 96% 55% 38%

75% 69% 32% 19%

Net Income = 10% Net Income = 5%

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MANAGEMENT’S POTENTIAL CAPITAL GAINS

Potential Year 5 Proceeds To Each Founder and Gallaway

(Each Owns Approximately 10% After Proposed Sierra Financing)

DilutionNone 25% 50% 75% 90%

– Scenario A $6m $4.5m £3m $1.5m $0.6m– Scenario B $30m $22.5m £15m $7.5m $3.0m

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DECISION TIME

• Walk away from deal?

• Convince Centex to accept proposed deal? If so, how?

• Improve deal from Centex’s perspective? If so, what changes should be proposed?

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What Happened?

47

What Happened?

A. New financing proposal agreed with Centex

1. Previously offered $350K loan now to be provided up-front on an equity-basis (buying just over 20% of company)

2. An additional $650K of equity to be invested at $0.45 per share and an additional receivable loan guarantee of $1m contingent upon recruitment of a new CEO (Sierra would own approximately 54% after completion of Step 2)

3. Sierra to invest an additional $500K in equity and an additional $500K in loan guarantees if following performance targets are met during the 1 May to 1 November, 1985 period:• Cumulative revenues of $3.3m achieved • Net operating loss not greater than $980K• Maximum drawdown of $150K on receivables guarantee

Plus, all preferred shares purchased by Sierra would be recapitalised retroactively at $0.67 per share (Sierra would own approximately 54% upon completion of Steps 2 and 3)

4. Debt owed to Founders to be repaid after 3 years once Centex profitable for two quarters

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What Happened?

B. Peter Howley recruited as CEO• Successful 8 year period as head of Citizens’ Arizona Telephone Division• MCI National Operations Manager – established first two switches in NYC• AT&T experience in operations, data processing, and sales

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What Happened?


C. IPO on Nasdaq in 1987

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What Happened?



D. First profits in 1988 on sales of $57 million (March quarter revenue of

$13.5m and Net Income of $668K (5%))

51

What Happened?



D. First profits in 1988 on sales of $57 million (March quarter revenue of

$13.5m and Net Income of $668K (5%)

E. Acquired for $198 million in 1994 by MFS Communications (became MCI/Worldcom)– Revenue in excess of $200m– 11,000 clients – Operating in nine states

52

Sierra Ventures

• Sierra - still a successful Silicon Valley VC firm headed by Peter Wendell

– Over $1.5 billion invested - more than 200 successful technology-based companies - 46 current portfolio companies

– 7 Partners, 4 Principals, and 2 Associates– Peter Wendell teaching MBA Entrepreneurship Course at Stanford Business School since 1991(with

Eric Schmidt)

• Jeff Drazen became a mega-successful VC – some of his successes

Centex Telemanagement (CNTX – Acquired by MFS), Stratacom (STRM – Acquired by Cisco), On

Assignment (ASGN), Micromuse (MUSE – Acquired by IBM), ConvergeNet (Acquired by Dell),

Combinet (Acquired by Cisco), Quinta (Acquired by Seagate), Vertel (VRTL), ParAcer (Acquired by

Stratos Lightwave), FrontBridge (Acquired by MicroSoft), Sychip (Acquired by Murata), Micro

Power (Acquired by Westin Presidio) and Digital Generation Systems (DGIT)

• Drazen left Sierra in 2007 to start his own mid-market buyout-oriented fund

(Bertram Capital) offering unusually strong value-added capability

• Vince Tobkin left Sierra shortly after Centex financing - is now a Senior

Partner at Bain & Company

53

TAKE-AWAYS FROM CENTEX

• Start-up funds come from “friends & family” – founders can spend most of their time raising money (or not) rather than ruining business

• VC deals are like getting married – must be based on a feeling of partnership– Entrepreneurs must understand VC money is not just a commodity (assuming the VC is

good) – valuation is not the most important factor– VCs must empathise with strains/angst of (inexperienced) entrepreneurs, foster a

meaningful dialogue, and truly add value to the company – relevant experience vital

• No such thing as a “perfect deal”– All VC deals come with problems– Ability of VCs to recognise “diamonds in the rough” critically important – hard “facts” often

unavailable

• Management, management, management!!

• A calm approach and creative deal structuring often saves the day – emotions are as important as “hard issues”

• Very difficult to predict “winners” vs “losers”

54

How Do VC-Backed Companies Really Get Valued?

IRR and target return methodologies provide a framework and good

discipline but . . .– “Market feel” of VC’s is critical

o “Step-Ups”o Rules-of-Thumb

“Half for capital, half for management” for raw start-ups

o Comparable VC deal provide a guide – current state of equity markets criticalo

– Valuation is an art, not a science – emotions play big role – many factors involved - large egos on both sideso Greed versus fear of losing deal o Different perceptions of risk by both sideso Different perceptions of value to be added by VCo Management’s share ownership - size of management’s option poolo Competition from other VCso Sense of fair play

– Competition and company cash position often the deciding factors

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NEXT CLASS SESSION (15 March)“Doing Buyout Deals”

• Guest Lecturer – Jon Moulton: Founder and Chairman, Better Capital (1210 Sharp!)

• Discuss Solutions to Problem Set 2 – Valuing Buyout Deals

• Explain mechanics of Modelling and Structuring Buyout Deals

• Class discussion of Berkshire Partners: Bidding for Carters - be prepared to present your view of what bid – if any - Berkshire Partners should make for Carters

56

HOMEWORK FOR NEXT TIME

• Pre-Class Reading – The Adjusted Present Value Method for Capital Assets

• Case Preparation and Analysis – Berkshire Partners: Bidding for Carters– Study Guide will be available in Moodle

• Problem Set 2 - Valuing Buyout Deals– Assignment will be available in Moodle– Answers to questions 11-13 to be submitted online via Moodle by 12pm,

Wednesday, March 14th

57

IV – AMADEUS CAPITAL PARTNERS

• Early stage venture fund focused on– Communications– Networking hardware and software– Media– e-commerce– Computer hardware and software– Medtech– Cleantech

• £470m under management, 10 person investment team, about 40 companies in portfolio across Europe and Israel

• £10m Amadeus and Angels Seed Fund plus £10m co-investment

• Offices in London and Cambridge

RICHARD ANTON

• Chairman, BVCA

• Amadeus Capital Partners, General Partner focused on software and IT-related cleantech

• Autonomy, Director Business Development & Finance

• Apax

• Turnaround mamangment, finance/business development, management consulting

• MBA, INSEAD

• BA & MA Mathematics, Cambridge University

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session 2 - doing vc deals - lecture presentation slides im 5 mar 12 (1)

Documents

perpetual

target return

weighted average

peter howley

interest tax

interest tax

working capital

tax cash flows