Valuation 2010 Final

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  • Whenwilltherebe a break
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  • Valuation 2010 Final

    1. 1. Valuation and forecasting<br />
    2. 2. Before we start…<br />3<br />Exit Analysis – Nordic VCs<br />Decreasing valuations<br />8<br />Financial Fundamentals<br />Learning the income statement, balance sheet etc<br />18<br />Financial Performance<br />Key ratios and actual performance vs. plans<br />27<br />Financial Planning<br />Combine top-down and bottom-up approach and ensure link between plan and budget<br />34<br />Valuation<br />Relative and absolute methods. DCF is an absolute method that discounts future cash flows<br />48<br />The VC Method<br />He value of a company is a matter of discussion over a cup of coffee<br />62<br />
    3. 3. Before We Start…<br />
    4. 4. .. I need three volunteers?<br />Before We Start…<br />
    5. 5. Tweet key learnings… <br />Before We Start…<br />MCF10<br />Control10<br />Password:<br />
    6. 6. Give a hand to the tweeters!<br />Before We Start…<br />
    7. 7. Reminder - Assignment for every study group!<br />Deadline - the lecture on Options<br />Every study-group should find 10 tweets that:<br />You find interesting / funny<br />That can serve as a either a summary of the lectures or that explores an important topic<br />Upload the Powerpoints at Slideshare and tweet the link in Twitter in MCF10 account<br />Two groups will present – randomly chosen<br />Before We Start<br />
    8. 8. Exit Analysis – Nordic VCs<br />
    9. 9. Trade sales are most common and the crises has reduced # exits and closed IPO window<br />Exit Analysis – Nordic VCs<br />Source: VentureXpert<br />
    10. 10. As well as having reduced the values – IPOs are typically larger than trade sales<br />Exit Analysis – Nordic VCs<br />Source: VentureXpert<br />
    11. 11. Decreasing exit value and increased general risk leads to lower valuation for early-stage<br />Exit Analysis – Nordic VCs<br />Source: VentureXpert<br />
    12. 12. Know your value inflection points...<br />Exit Analysis – Nordic VCs<br />Market Share<br />Exit Value<br />Proof-of-scale<br />Proof-of-business<br />Proof-of-concept<br />Capital Need<br />Pre-venture<br />Venture<br />
    13. 13. Have the end in mind…<br />Exit Analysis – Nordic VCs<br />IPO<br />Competitor<br />Start-up<br />Strategic Supplier<br />Strategic Customer<br />New entrant<br />
    14. 14. Approach the exit differently<br />Exit Analysis – Nordic VCs<br />Business strategy to fit exit<br />Trade Sale<br />Identify buyers<br />Position the company<br />Create bid wars<br />Asses timing – capital need and market<br />Business strategy to fit exit<br />Prepare organisation setup<br />Create exposure<br />IPO<br />
    15. 15. US exits have higher values – for several reasons<br />Exit Analysis – Nordic VCs<br />Source: Vækstfonden<br />
    16. 16. US VCs participate in the most attractive exits of Nordic companies<br />Exit Analysis – Nordic VCs<br />Vækstfonden<br />
    17. 17. Why do you think that the exit values are higher for the Nordic companies who has a US VC investor on board?<br />Exit Analysis – Nordic VCs<br />
    18. 18. Financial Fundamentals<br />
    19. 19. Standard P&L (Income Statement)<br />Financial Fundamentals<br />
    20. 20. Bill of Material – a nice reality check<br />Financial Fundamentals<br />
    21. 21. The Balance Sheet - Assets<br />Financial Fundamentals<br />
    22. 22. The Balance Sheet – Liabilities and Equity<br />Financial Fundamentals<br />
    23. 23. Cash Flow Statement<br />Financial Fundamentals<br />
    24. 24. Operational Breakeven<br />Financial Fundamentals<br />NOPAT<br />EVA = Net Operating Profit AfterTaxes (NOPAT) – After-Tax Dollar Cost of Financial CapitalUsed<br />Seperates a firm’s operating from itsfinancing<br />NOPAT = EBIT-Tax<br />NOPAT Breakevenrevenues (NR) = TOFC/(1-VCRR) <br />TOFC = Total Operating FixedCost<br />VCRR = Ratio of Variable cost to revenue<br />EBDAT<br />EBDAT = Earnings before Depriciation, amortization and taxes<br />EBDAT Breakeven = Amount of revenues to cover cash OPERATING expenses<br />Breakeven: EBDAT = 0<br />
    25. 25. Real Break Even<br />Financial Fundamentals<br />Real Breakeven<br />Whenthereexist Positive FreeCash Flow<br />FCF = Net Income+ (Depriciation/Armortization) - ∆ WorkingCapital-CAPEX<br />Cash Burn = OPEX + Interest+ Tax + IncreaseInventory- ∆ payables and accruedliabilities + CAPEX<br />Cash Build = Net Sales – Increase in Recievables<br />Net Cash Burn = Cash Burn – Cash Build<br />
    26. 26. As an entrepreneur you must know<br />Burn Rate: Avg. monthly cash burn<br />Runway: Remaining liquidity / Burn Rate<br />Financial Fundamentals<br />
    27. 27. Financial Performance<br />
    28. 28. Ratios – using common sense and industry benchmarks<br />Financial Performance<br />
    29. 29. The use of ratios relates to life cycle<br />Financial Performance<br />Maturity<br />Public & Seasoned<br />Rapid<br />Growth<br />B,C-round<br />A-round<br />Survival<br />Startup Financing<br />Startup<br />Seed Financing<br />Focus on cash & cost<br />Broad Focus on ratios<br />Focus on cash & profitability<br />
    30. 30. I look at traction in Sales<br />Financial Performance<br />
    31. 31. and traction in healthy operations<br />Financial Performance<br />
    32. 32. … as well as CASH<br />Financial Performance<br />
    33. 33. Critical Success Factors<br />Financial Performance<br />
    34. 34. Financial Planning<br />
    35. 35. The progress for successful venture<br />Financial Planning<br />Market Share<br />Exit Value<br />Proof-of-scale<br />Proof-of-business<br />Proof-of-concept<br />Capital Need<br />Pre-venture<br />Venture<br />
    36. 36. and the cash balance<br />Financial Planning<br />High<br />Cash Balance<br />Low<br />Founder and FFF<br />Seed<br />Exit<br />National Venture<br />Int. Venture<br />
    37. 37. Time fundraising with value inflection points and before cash balance is too low<br />Market Share<br />Exit Value<br />Proof-of-scale<br />Proof-of-business<br />Proof-of-concept<br />Capital Need<br />Pre-venture<br />Venture<br />High<br />Cash Balance<br />Low<br />Founder and FFF<br />Seed<br />National Venture<br />Int. Venture<br />
    38. 38. Tools for financial planning in a growth company<br />Financial Planning<br />
    39. 39. Key Problem – Missing link between business plan and financial plan<br />Financial Planning<br />
    40. 40. If my company is expecting to have this much revenue – then what is my plan to get there?<br />Financial Planning<br />If my plan is this – then what is the likely revenue, cost and capital requirement<br />
    41. 41. How to workwith a business plan / budget /anything in life…<br />Financial Planning<br />
    42. 42. Top Down – starting with the potential<br />Financial Planning<br />
    43. 43. Buttom Up – Building it up from today <br />Financial Planning<br />
    44. 44. Financial Planning<br />...clarify to yourself and potential investors what the assumptions for the budgetare in relation to revenue drivers, cost drivers, investments etc.<br />It is always better to make informed and reasonable assumptionsthan claiming it is difficult to predict the future<br />
    45. 45. Think contingent scenarios<br />Financial Planning<br /><ul><li> Best case
    46. 46. Base line
    47. 47. Worst Case</li></li></ul><li>Financial Planning<br />As well as usingWHAT IF? Scenarios onimportantparamerters – Revenue, Price, COGS, Funding...<br />
    48. 48. Forecasting will become easier with maturity and lower risk<br />Financial Planning<br />Maturity<br />Public & Seasoned<br />Rapid<br />Growth<br />B,C-round<br />A-round<br />Survival<br />Startup Financing<br />Startup<br />Seed Financing<br />Low<br />High<br />Moderate<br />Sales Forecasting Accuracy<br />
    49. 49. Valuation<br />
    50. 50. Four steps of valuation <br />Valuation<br />
    51. 51. Financial Planning<br />Thismakesvaluation more ART than SCIENCE<br />
    52. 52. Two valuation types<br />Valuation<br />
    53. 53. Valuation<br />The relative and absolute methods<br />Relative Valuation<br />Absolute Valuation<br /><ul><li> Price / Earnings (P/E)
    54. 54. Price / Sales (P/S)
    55. 55. Price / Book (P/B)
    56. 56. EV / EBIT
    57. 57. EV / NOPAT
    58. 58. Discounted Cash Flow (DCF)
    59. 59. Economic Value Added (EVA)
    60. 60. Maximum Dividen Method
    61. 61. Options</li></li></ul><li>Evaluating a company or a project<br />Valuation<br />Company<br />Project<br /><ul><li> Price / Earnings (P/E)
    62. 62. Discounted Cash Flow (DCF)
    63. 63. Payback
    64. 64. Net Present Value (NPV)</li></li></ul><li>In absolute valuation<br />Valuation<br />Value is to generate positive cash flows to the owner…<br />...and to calculate the present value of thosecash flow (DCF and NPC)<br />
    65. 65. The principle of NPV<br />Valuation<br />Identify future cash flows<br />Bring cash-flows to present valuewith discount rate thatreflects the risk of cash flows<br />
    66. 66. The DCF valuation for firms (EV)<br />Valuation<br />
    67. 67. Generic DCF valuation<br />Valuation<br />AswathDamodaran<br />
    68. 68. But which cash flows<br />Valuation<br />
    69. 69. Calculating the Free Cash Flow<br />Valuation<br />Free Cash Flow to Equity (FCFE) =Net Income<br /> - Net Capital Expenditure<br /> - ∆in Net Working Capital<br /> + New Debt<br /> - Debt Repayment<br />Free Cash Flow to Firm (FCFF) = EBIT*(1-tax)<br />Unleveredcash flow - CAPEX<br /> - Depreciation<br /> - ∆WorkingCapital<br />or<br />Free Cash Flow to Firm (FCFF)= FCFE + InterestExpenditure(1-t)<br />
    70. 70. Valuing a firm – the discount factor<br />Valuation<br />WACC = Weighted Average Cost of Capital<br />WACC = Cost of Equity * Equity ratio + Cost of Debt * Debt Ratio<br />30Y State Bond<br />4,5%<br />Measure for how closely a stock follows the market<br />
    71. 71. Valuing firms – Terminal value (two approaches)<br />Valuation<br />Terminal Value=FCFF n * (1+g)/ (r-g)<br />Perpetuity Growth method<br />FCFF = Free Cash Flow to the Firm<br />n = periods<br />r = WACC<br />g = perpetual growth rate (often 1-3%)<br />Multiple Terminal Value=EBITDA * Peer Multiple<br />Exit multiple Method (1+WACC)n<br />FCFF = Free Cash Flow to the Firm<br />Peer Multiple = Enterprise Value (EV) / EBITDA for comparable company<br />n= Periods<br />
    72. 72. The VC Method<br />
    73. 73. The VC Method = The Exit Multiple Method<br />The VC Method<br />Multiple Terminal Value=EBITDA * Peer Multiple<br />Exit multiple Method (1+WACC)n<br />FCFF = Free Cash Flow to the Firm<br />Peer Multiple = Market Cap / EBITDA or Price / Sales for comparable companies<br />n= Periods<br />
    74. 74. We consider<br />The VC Method<br />….. IRR, Return Multiple, AbsoluteReturn, Ownership under the different deal terms...<br />… the case from an overall perspective (team, industry, technology, etc)...<br />However most often the price of a companycomesdown to negotiation over a cup of coffee<br />
    75. 75. The Summary<br />Exit Analysis – Nordic VCs<br />Decreasing valuations<br />8<br />Financial Fundamentals<br />Learning the income statement, balance sheet etc<br />18<br />Financial Performance<br />Key ratios and actual performance vs. plans<br />27<br />Financial Planning<br />Combine top-down and bottom-up approach and ensure link between plan and budget<br />34<br />Valuation<br />Relative and absolute methods. DCF is an absolute method that discounts future cash flows<br />48<br />The VC Method<br />He value of a company is a matter of discussion over a cup of coffee<br />62<br />

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