Avoid The High Valuation Trap To Bcit Nov 09 Beta Draft

Entrepreneurship & Strategy Class

My Bio
Entrepreneur – 3 meaningful startups
Corporate Finance – negotiated over 100 transactions, CIBC Investment Banking
Boards
Chair of a pre-revenue start-up
Founding director of MetroBridge, recent IPO
Director of award-winning local VC, BCAF

About Stirling Mercantile Divestitures M&A Advisory Expansion Capital Fairness Opinions Early-Stage Finance FAIRNESS OPINIONS Director comfort & legal protection from independent, expert valuation EXPANSION CAPITAL Multiple industry experience Seasoned corporate financiers EARLY-STAGE FINANCING Full-service approach throughout process Aligned interests likely to secure funding DIVESTITURES Corporate financier involvement can improve price, simplify process M&A ADVISORY Sage advice in times of need or growth opportunity .

About Stirling Mercantile Divestitures M&A Advisory Expansion Capital Fairness Opinions Early-Stage Finance FAIRNESS OPINIONS Director comfort & legal protection from independent, expert valuation EXPANSION CAPITAL Multiple industry experience Seasoned corporate financiers EARLY-STAGE FINANCING Full-service approach throughout process Aligned interests likely to secure funding DIVESTITURES Corporate financier involvement can improve price, simplify process . M&A ADVISORY Sage advice in times of need or growth opportunity

Experience

www.stirlingmercantile.com

Diverse Portfolio - Successful Exits 7 Technology IRR 342% 23x Cash 5x Cash 3x Cash Life Science

Perspectives Advisor Investor Exit Transactions . Founder

Funding Road Map Confidential F, F & E Seed, Angel Series A Series B Year 1 2 3 4 5 Early Adopters Crossing the Chasm Mainstream Growth Develop Scale Expand Phases Funding Roadmap Investor Exit Revenue today Launch .

What happens when you bring in equity investors?
Dilution
More governance and oversight
Additional management
Capital to accelerate development
Access to broader network
Added business insight
Background .

What Do VCs Need?
Strong team, with integrity
Clear, lucrative and sustainable value proposition
Large market opportunity and the ability to scale into it
Realistic valuation and deal terms
.

What Do VCs Want?
Traction from the target market
2 or 3 independent board candidates
Appropriate deal size for their fund
Appropriate market sector for their fund
Transaction ready due diligence binder/site
Close proximity
.

What Should You Look For in a VC?
More than money
Strong team, with integrity
“Been there, done that” management
Exit strategies
.

What Should You Look For in a VC?
More than money
Contacts
for additional management
for customers
for partnerships
.

Why VCs Need ‘Home Runs’
40% return on a fund, which lasts about 7 to 10 years

One in Ten
Some make a break-even or make a modest gain. Others die.
$40m $100m

Objectives

Murphy’s Law

High Valuation Trap
Problem:
Follow-on investors value lower than last
Forced to “cram down” last investors or no deal
Solution:
Understand downstream valuations
.

Valuation
Consider the post $ cap table for the next round
And subsequent rounds to the exit
.

Exit Valuations
Multiple of
Revenue (eg. $10m x 2 = $20m)
Profit or EBITDA (eg. $3m x 6 = $18m)
Discounted Cash Flow (can be lame)
All are better when company is growing
(Importance of timing)
.

Relative Valuations
Big Co
Experienced management, board
Large revenues
Diversified customer base
Scaled Infrastructure
Worth 3 x Revenues
Small Co
Great founder, some holes on team
Small growing revenues
Concentrated customer base
Scalable infrastructure
Worth 1.5 x Revenues
.

Deal Drivers
Accretive acquisitions
You must add to buyer’s valuation
For example:
Buyer: $100m Revenues x 3 = $300m market cap
Buys $10m Revenues x 1.5 = $15m
Adds $10m x 3 to valuation or $30m
Accretive value is 2x cost
.

Deal Drivers
Strategic
Add value to other products or assets
Adds customers
Keep away from competitors
Product or geographic expansion
.

Marketing the Exit
Plan the exit from the outset
Get to know your potential buyers early
Get to know your service providers early
.

Think Like A Buyer
Strategic
Market share, keep away from competitor
Financial
Earnings, valuation multiples, accretive value to a stock price
Entrepreneur
Lifestyle
.

Think Like A Buyer
Spend money to…
… make money, or
… save money
.

Reading
Fred Wilson www.avc.com
Brad Feld www.feld.com
Chris Dixon www.cdixon.org
Mark Suster www.bothsidesofthetable.com
Legal www.startupcompanylawyer.com
Bootup Labs http://blog.bootuplabs.com/
News www.techcrunch.com
.

Thank you
A copy of this presentation is available at:
www.stirlingmercantile.com/ speakers.htm
[email_address] [email_address] davidshore

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Avoid The High Valuation Trap To Bcit Nov 09 Beta Draft

by David Shore on Nov 27, 2009

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Avoid The High Valuation Trap To Bcit Nov 09 Beta Draft — Presentation Transcript