valuation for startups - art or science?

Valua%on for Startups Art or Science? Author: Eva Hukshorn

1

2

1.  EFactor is a Smart Network that matches entrepreneurs with the very people who can help them grow

2.  Finding Business Partners: from partners to investors, from coaches to customers

3.   Largest Entrepreneurial Network in the World with 1mio members in 185 countries

4.  An online community Offering you a network, knowledge, events, and every business resources you need to succeed @ discount!

5.   GO Online, fix your personal profile & company profile and get MATCHED!

It’s not about connec%ons -‐ it’s about the right ones…

Eva Hukshorn: An introducHon

•  Work Experience -  Current: Partner EFactor

Board of Advisory: TreFoil Energy / CleanDrinks / Global Thinkers / ShowLinq

Coach Startup: Bootcamp Amsterdam / New Venture McKinsey -  2009 – 2010: Dutch BouHque – Marktlink Mergers & AcquisiHons, Amsterdam -  2007 – 2009: Royal Bank of Scotland – Corporate Finance, Amsterdam -  2004 – 2009: ABN AMRO – Corporate Finance New York, Amsterdam -  2003 – 2004: Accenture – ConsulHng London, Amsterdam

•  Educa%on -  1997 – 2002: MSc Economics, Finance – University of Groningen, the Netherlands -  2003: InternaHonal & Asian Studies – NaHonal Sun Yat-‐Sen University, Taiwan -  2009 – 2011: CerHfied Management AccounHng (CMA) – InsHtute of Management Accountants

(IMA), United States -  2009 – 2011: Colloquium General & Modern Art – Academy for History of Art, the Netherlands -  2012: InternaHonal Financial Report Standards (DipIFR) – AssociaHon of Chartered CerHfied

Accountants (ACCA), United Kingdom

3

FUNDING TUESDAY, EVERY TUESDAY

So what can you expect from us each Funding Tuesday?

1.   Webinars on EFactor on Finance & Funding related topics in the EVENT SecHon

2.  Blogs & interviews with informal investors and funded entrepreneurs with Hps & tricks in the BLOGS secHon under NOW

4

3.  Finance & Funding related arHcles on NOW feed

4.  In the Finance & Funding GROUP on our website you will find Q&As of the webinars under NETWORK

5.  In the KNOWLEDGE base you will find more and more presentaHons on Finance & Funding related topics, including the webinar presentaHons

6.  And if you become a VIP MEMBER you will personally be supported on your Finance & Funding related quesHons

Webinar Program Overview 2012

June 19: Business Plan WriHng -‐ A Roadmap to Success July 3: Pitching & PresentaHon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Geing There July 31: BudgeHng & ForecasHng -‐ PredicHng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: Valua%on -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaHve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecHons Dec. 4: MarkeHng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 5

6

Historical value: US$ 2.0mio

Economic value: US$ 1.8mio

Replacement value: US$ 3.5mio

Market value: US$ 5.5mio

What is value?

Although ra%onal reasoning can influence the outcome, the value of a company is never a truth but always some one’s perspec%ve

7

Price does not equal Value

PRICE

-  Supply -  Demand

WILLINGENESS

VALUE

-  Growth & prospects -  Profitability -  Capital intensity -  Risk -  Leverage -  Tax -  Synergies -  EsHmaHons -  Time spend SUBJECTIVE

8

Control your emoHons, or you will lose the poker game!

9

Life cycle of a startup in the early days

REVENUES

PROFIT

IDEA: PRE-‐ SEED

STARTUP: SEED

GROWTH: EARLY / LATER STAGE

No revenues OperaHng losses

Small revenue Increasing losses

Growing revenues 1st signs of profit

10

ValuaHon of Startups: Art or Science?

1 No product validaHon

2 No financial evidence

3 No historical track record

4 No self financing through own revenues & profit

5 No long term guarantee

6 No solid underlying assumpHons yet to use intrinsic valuaHon techniques •  Too much guessing, too less knowing

11

Comparable Analysis: a relaHve valuaHon method

Comparing your company with other companies, transac%ons or relevant items based on comparable rates to determine your (implicit) value EXAMPLES OF MULTIPES: •  EBIT mul%ple = Company Value* DIVIDED BY EBIT

–  how much Company Value is US$ 1 of EBIT worth

•  Equity value per member = Total Equity Value DIVIDED BY Total members –  How much Equity Value is 1 member worth

•  Equity value per Eye Ball = Total Equity Value DIVIDED BY Total website visitors –  How much Equity Value is 1 visitor worth

Note: Company Value = Equity Value + Long Term Liabili@es -‐ Cash

12

Comparable Analysis: example

Startup

Earnings(before(Interest(&(Taxes $10

Total(Members 10,000

Visitors(Website(p/m 30,000

Industry,Average,Multiples

EBIT(Mutiple((Company(Value(/(EBIT) 5.3x

Equity(Value(/(Member 98.0x

Equity(Value(/(Eye(Ball 54.0x

Implied,Value,Startup

Company(Value $53

Equity(Value $980,000

Equity(Value $1,620,000

Ø Note: much more different kinds of mul@ples exist: P/E, EBIT/Sales, Equity Value/Sales etc.

13

Comparable Analysis: problems for startups

•  What do you scale value to?

•  Who are your comparable companies?

•  How do you take survival or other risks into account?

Ø 20% small company discount

Startup

Earnings(before(Interest(&(Taxes $10

Total(Members 10,000

Visitors(Website(p/m 30,000

Industry,Average,Multiples

EBIT(Mutiple((Company(Value(/(EBIT) 5.3x

Equity(Value(/(Member 98.0x

Equity(Value(/(Eye(Ball 54.0x

Implied,Value,Startup

Company(Value $53

Equity(Value $980,000

Equity(Value $1,620,000

14

Venture Capital Approach: Formula & AssumpHons

Post-‐Money Valua%on = Terminal Value or ValuaHon at Exit

DIVIDED BY Return on Investment (ROI)

Post-‐Money Valua%on = Money or Investment PLUS Pre-‐Money ValuaHon SIMPLE VERSION -‐ ASSUMPTIONS: •  No share issuance aoer first round •  % of ownership remains constant unHl exit

15

Venture Capital Approach: Terminology



Post-‐Money Valua%on = Money needed PLUS Pre-‐Money ValuaHon TERMINOLOGY •  Pre-‐Money ValuaHon •  Terminal Value •  Return on Investment (ROI)

16

Venture Capital Approach: Key drivers



Post-‐Money Valua%on = Money needed PLUS Pre-‐Money ValuaHon UNDERLYING DRIVERS TO ESTIMATE •  Net Profit •  P/E RaHo •  Return on Investment (ROI)

17

Venture Capital Approach: Terminal Value

Determina%on Terminal Value: 1.  Revenue in exit year 2.  Industry standard profit as % of revenue 3.  Expected Net Profit 4.  Comparable Price per Share / Profit = P/E raHo

EXAMPLE:

Startup

Revenue&at&Exit $&45mio

Industry&profit&margin 20%

Industry&Equity&Value&/&Profit&(=P/E&ratio) 8x

Expected&profit&at&Exit $&9.0mio

TERMINAL/VALUE $/72mio

18

Venture Capital Approach: Return on Investment (ROI)

ROICash(Invested(

MultiplePre5Seed(Capital 75%+ 20x

Seed(Capital 60% 10x

Early(Stage(Capital 50% 8x

2nd(Stage(Capital 40% 6x

3rd(Stage 30% 4x

Bridge 20% 2x

19

Venture Capital Approach: Pre-‐Money ValuaHon for Seed Capital Startup



Post-‐Money Valua%on = US$ 72mio / 10x = US$ 7.2mio ASSUMPTION: US$ 4mio capital needed Pre-‐Money Valua%on = Post-‐Money ValuaHon MINUS Money needed Pre-‐Money Valua%on = US$ 7.2mio MINUS US$ 4mio = US$ 3.2mio

20

3 things to watch with Venture Capital Approach

1 Valua%on Trend Trap

2 Share Price Trap

3 Value equals Cash Trap

21

Trap 1: ValuaHon Trends

Focus on Post-‐Money Valua%on of Round (n) with Pre-‐Money Valua%on of Round (n+1) to create a steady overall valua%on increase

x"ths"US$ Start Round*1 Round*2 Round*3 Round*4

Ordinary(Shares(with(Founders 500,000

Number(of(Ordinary(Shares(Sold 100,000 100,000 50,000 100,000

Sum*of*Total*Ordinary*Shares*Outstanding 600,000 700,000 750,000 850,000

%"of"total"Ordinary"Shares"in"this"Round 16.7% 14.3% 6.7% 11.8%

Total(US$(value(raised(this(round 250 250 100 360

PostCMoney(Valuation 1,500 1,750 1,500 3,060

PreCMoney(Valuation 1,250 1,500 1,400 2,700

22

Trap 2: The Share Price

Ordinary(Shares Prices Value

Preference(Shares Prices Value TOTAL

Founders 34,000 0.20 6,800 0 0.00 0 6,800

Round(1 25,000 2.00 50,000 2,900 500.00 1,450,000 1,500,000

Round(2 10,000 3.00 30,000 1,140 500.00 570,000 600,000

Round(3 50,000 4.00 200,000 4,400 500.00 2,200,000 2,400,000

23

Trap 2: The Share Price – Cont’d

Ordinary(Shares Prices Value

Preference(Shares Prices Value TOTAL

Founders 34,000 0.20 6,800 0 0.00 0 6,800

Round(1 25,000 2.00 50,000 2,900 500.00 1,450,000 1,500,000

Round(2 10,000 3.00 30,000 1,140 500.00 570,000 600,000

Round(3 50,000 4.00 200,000 4,400 500.00 2,200,000 2,400,000

x"ths"US$ Start Round*1 Round*2 Round*3

Ordinary(Shares(with(Founders 34,000

Number(of(Ordinary(Shares(Sold 25,000 10,000 50,000

Sum*of*Total*Ordinary*Shares*Outstanding 59,000 69,000 119,000

%"of"total"Ordinary"Shares"in"this"Round 42.4% 14.5% 42.0%

Total(US$(value(raised(this(round 1,500,000 600,000 2,400,000

Ordinary(Share(Price 2.00 3.00 4.00

PostFMoney(Valuation 3,540,000 4,140,000 5,712,000

PreFMoney(Valuation 2,040,000 3,540,000 3,312,000

24

Trap 3: Value equals Cash

Valua%on related to momentum –  No cash before exit –  Early exit of founders is restricted in contracts –  Value based on guesHmated future

expectaHons of exit value

I ain’t over un%l the cash is in!”

CORE TECHNOLOGY INFRASTRUCTURE APP’S & BOXES SERVICES

EXAMPLES O/S, Chip Design, Barcode

Databases, routers, telecom networks

Sooware packages, PDA’s, PC’s

ConsulHng, payroll, outsourcers

INTELLECTUAL PROPERTY Huge High Medium Low

TIME TO MARKET Long Less long 12 to 24 months Rapid

EARLY CAPITAL REQ’D Low Moderate to High Moderate Depends

REVENUE GROWTH Sow, then hockey sHck Hockey SHck Hockey SHck Linear

LONG TERM VALUE Extremely high Very High High/Moderate High-‐moderate

IMPORTANT CRITERIA TO SUCCESS

Becoming standard; Closing partners Market Share First mover; Market

Share

ConHnued customer saHsfacHon; Market

share

Decreasing Risk and Reward

CharacterisHcs of a Tech Company

Source: Lorenzo T Geraci L@[email protected]

NEEDS FTE MANAGEMENT MILESTONES

EARLY DEVELOPMENT TO PROTO/BETA (12 MONTHS)

-‐  Tight linkage between devel. & biz goals -‐  Focus -‐  Excellent people

1 to 10 CTO and GM Working prototype, beta installaHons

EARLY CUSTOMER DEPLOYMENTS (24 MONTHS)

-‐  100% dedicaHon to customer saHsfacHon -‐  Cheerleading and endurance

5 to 20

CTO, VP Eng, Dir’s of Sales, Finance, MarkeHng GM à CEO

Customer approval, some revenue

MODERATE PENETRATION (36 MONTHS)

Savvy Management 20 to 50+ CTO, VP’s Sales,

MarkeHng, Finance, Engineering, CEO

Clear target market, Repeatability of business, real product, real customers

RAPID PENETRATION (60 MONTHS) Excellent Management Growth to 100’s All VP’s, CFO, COO if

necessary

1/3 to ½ of all new sales in target

markets

DOMINANCE Greed and ego Big DomesHc and Worldwide Clear #1 player

Phase of Startup development


QUESTION TO ANSWER WITH CAPITAL CAPITAL NEEDED SOURCES Pre-‐Money

SEED Early Development Proto/Beta

Technology: does it work at all? Market: in there a market? Timing: if a market, when does it start?

< $1M usually <500K

-‐  FFF -‐  Angels -‐  Seed Funds

$100K to $1M

1st Round Early Customer Deployment

Technology: does it work in pracHce? Target market: is this the right first place? Timing: if a market, when does it start?

$1M to $4M -‐ Angels -‐ Seed Funds -‐  Early Stage Funds

$2M to $5M

2nd and 3rd Rounds Moderate Penetra%on

Market %ming: is the market happening fast enough (or too fast)? Execu%on: can we grow, develop, sell, manage, etc.?

$5M to $15M

-‐ Early Stage Funds -‐ Later Stage Funds -‐  Corporate Investors -‐  Venture Leasing

$10M to $50M

Mezzanine and IPO Rapid Penetra%on

Execu%on: can you grow fast enough without loosing control? $0 to $100M

-‐ Corporate Investors -‐  Mezzanine Funds -‐  iBanks -‐  Leasing

$40M to $100M+

Dominance Complacency: with so much success can you conHnue being paranoid? Corp. finance

-‐  iBanks -‐  Commercial Banks -‐  Et al.

Public Market

QuesHons, Capital, ValuaHons


BUSINESS RISKS INVESTMENT RISKS Expected Returns

SEED Early Development Proto/Beta

Technology: does it work at all? Market: in there a market? Timing: if a market, when does it start?

-‐  No “dry power” for more investment -‐  Risk that there is NO market, bad technology and NO value -‐  High risk of total loss

20% to 50% more than Series A

1st Round “Series A”

Technology: does it work in pracHce? Target market: is this the right first place? Timing: if a market, when does it start?

-‐  Risk that there is NO value -‐  High risk of total loss -‐  Huge opportunity cost id enterprise develops slowly

6 to 10x total investment over 5 to

7 years

2nd and 3rd Rounds “Series B, C, D, etc..”

Market %ming: is the market happening fast enough (or too fast)? Execu%on: can we grow, develop, sell, manage, etc.?

-‐  Big opportunity cost if enterprise develops slowly -‐  Investment in markeHng and sales yields no assets if done poorly

4 to 6x total investment over 2 to

5 years

Mezzanine, Bridge and IPO Series D, E, etc..”

Execu%on: can you grow fast enough without loosing control?

-‐  Opportunity cost if enterprise develops slowly -‐  Risk of public markets closing or changing rules

2x within 12 to 24 months

IPO Complacency: with so much success can you conHnue being paranoid?

-‐  Market percepHons impact stock price -‐  Fat, dumb and happy management

15% per year?

Risks and ExpectaHons


Conclusion

Golden Rule in Valua%on – “he who has the gold makes the rules”

•  The closer it is to an idea, the less it is worth •  You are the biggest investor of them all •  Manage expectaHons when dealing with FFF •  ValuaHon isn’t everything •  Seed capital: High Risk = High Return •  Don’t worry too much about diluHon: DIVIDED BY 2 TIMES 3 •  No exit, is no liquidity, is no value

Webinar Program Overview 2012

June 19: Business Plan WriHng -‐ A Roadmap to Success July 3: Pitching & PresentaHon -‐ 3 Minutes, 1 Impression July 17: Strategy -‐ A Vision for the Future, A Strategy for Geing There July 31: BudgeHng & ForecasHng -‐ PredicHng the Outcome Aug 14: Working Capital -‐ An Unknown Key to Success Aug. 28: Capital Management -‐ Playing with Risk Sept 11.: Funding & Investments -‐ Some Sources are More Equal then Others Sept. 25: ValuaHon -‐ Art or Science Oct 9: Exit Strategy -‐ Nice to Have or Need to Have? Oct. 23: Bootstrapping -‐ An AlternaHve Answer to Funding Nov 6: Crowdfunding -‐ The Power of Friends, Family and Fools Nov. 20: Networking -‐ Nice You have 3000 Friends, I have 30 Relevant ConnecHons Dec. 4: MarkeHng & (Social) Media -‐ Noise or Value? Dec. 11: No Sales, No Glory Dec. 18: Most Common Mistakes of Entrepreneurs 30

BECOME A VIP MEMBER WITHIN 1 WEEK AND GET YOUR PLAN CHECKED!

SPECIAL OFFER, ONLY USD 12!

1.   FREE checking of final drar business plan 2.   FREE discussion on next steps and how & where to find funding in your

region 3.   FREE to ask addi%onal ques%on related to funding & investment related

topics 4.   FREE documenta%on of all webinars so far, presenta%ons + notes! 5.   Send me an email on: www.efactor.com/hukshorn 6.   Follow me on: www.efactor.com/hukshorn 31

HTTP://WWW.EFACTOR.COM/VIP

Thank you!

This document was prepared by Eva Hukshorn. Several people and organiza%ons have inspired

her to write this presenta%on, amongst which are, but not limited to the Founders of EFactor,

ABN AMRO/RBS, University of Groningen, Ins%tute for Management Accountants

valuation for startups - art or science?

Business

company value

historical value

economic value

market value

total equity value

mio replacement value

ebit worth equity value

member worth equity