Start-up Valuation Clinic Venture Capital Series   Roydean Osman, Vice President SEED Investment – CRADLE Fund Sdn. Bhd 17...
Agenda  <ul><li>Arts & Craft of Valuation </li></ul><ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Valuation Methodol...
Where we are ? – Funding ECO System  Growth  & Profit Funding Needs Point Zero Other Grants,  SME Loans &  Incubators, Gov...
Arts & Craft of Valuation (1)   <ul><li>Differences between the entrepreneur’s/ private investor’s finance and corporate f...
Arts & Craft of Valuation (2)   <ul><li>In the VC eyes, determination of a company’s value is elusive and it’s more art th...
Arts & Craft of Valuation (3)   <ul><li>Valuation Methodologies </li></ul><ul><li>Net Present Value </li></ul><ul><li>Comp...
Valuation Methodologies  used by VCs (1)   Understanding the Venture Capital investment process Biz Plans  Kicks-In Produc...
Valuation Methodologies  used by VCs (2)   VC Cash Leadership (CEO) Implementation (CMO, CTO,  CFO) Idea Idea has limited ...
Valuation Methodologies  used by VCs (3)   Cash Investment  :  $3 million Proposed Investor Share:  66.7% Post-Money Valua...
Valuation Methodologies  used by VCs (4)   Negotiation with VCs   $ Company Value VC Maximum Value Entrepreneur Minimum Va...
Valuation Methodologies  used by VCs (5)   Venture Capital Method (1)   <ul><li>Post-money valuation:  The valuation of th...
Valuation Methodologies  used by VCs (5)   Venture Capital Method (2)   <ul><li>Identify the company’s forecasted net inco...
Valuation Methodologies  used by VCs (6)   Financial Engineering <ul><li>To overcome valuation or incentive issues, VC’s w...
Analyzing an actual start-up  VCs Valuation Interactive – (1) <ul><li>To review start-up Income Statement 5 year projectio...
Analyzing an actual start-up  VCs Valuation Interactive – (2) <ul><li>Income Statement (5 year projections)   </li></ul>
Analyzing an actual start-up  VCs Valuation Interactive – (3) <ul><li>Cash Flow Information (5 year projections)   </li></ul>
Closing <ul><li>Determined methodologies used by venture capitalists and professional investors to estimate the value of a...
Thank You ! [email_address]   [email_address]
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Valuation Clinic 17 Apr2008 Roydean

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A peek of one of the method which VCs use to evaluate seed and early stage companies.

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  • Valuation Clinic 17 Apr2008 Roydean

    1. 1. Start-up Valuation Clinic Venture Capital Series Roydean Osman, Vice President SEED Investment – CRADLE Fund Sdn. Bhd 17 th April 2008 MSC Incubation Center, Multimedia University, Cyberjaya
    2. 2. Agenda <ul><li>Arts & Craft of Valuation </li></ul><ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Valuation Methodologies </li></ul></ul><ul><li>Valuation methodologies used by Venture Capitalist (VCs) </li></ul><ul><ul><li>Understanding the Venture Capital process </li></ul></ul><ul><ul><li>What are you worth? </li></ul></ul><ul><ul><li>First hand valuation by a VC </li></ul></ul><ul><ul><li>Negotiation with VCs </li></ul></ul><ul><ul><li>Venture Capital Method </li></ul></ul><ul><ul><li>Financial Engineering </li></ul></ul><ul><li>Analyzing actual start-up companies </li></ul>
    3. 3. Where we are ? – Funding ECO System Growth & Profit Funding Needs Point Zero Other Grants, SME Loans & Incubators, Government Incentives, Angels & Corp Investors Project Financiers, Commercial Banks, Venture Capitals, Private Equity, Credit Guarantee Corporation, Leasing & Factoring Providers, Govt. Agencies Cradle Investment Programme Institutional & Foreign Investors, Public Funds, Merger & Acquisitions, Merchant Banks MDeC Maturity Expansion Production & Commercialisation Market Entry Production Enhancement New Markets Scaling & Expansion Commercial Success Pre IPO Listing & Go Global Design & Conceptualisation Idea Birth Product Prototype & Proof of Concept Seed Pre Seed Growth
    4. 4. Arts & Craft of Valuation (1) <ul><li>Differences between the entrepreneur’s/ private investor’s finance and corporate finance </li></ul><ul><li>Entrepreneur’s / Private Investor’s Finance </li></ul><ul><ul><li>More volatile </li></ul></ul><ul><ul><li>Imperfect </li></ul></ul><ul><ul><li>Less accessible than corporate capital markets </li></ul></ul><ul><ul><li>Obtain source of capital differently </li></ul></ul><ul><ul><li>Companies are younger, more dynamic </li></ul></ul><ul><ul><li>Environment are more rapidly changing and uncertain </li></ul></ul><ul><ul><li>Liquidity & timing are everything </li></ul></ul><ul><li>Corporate Finance </li></ul><ul><ul><li>Arena of public companies compete in well-established capital markets </li></ul></ul><ul><ul><li>Have access almost to everything </li></ul></ul>
    5. 5. Arts & Craft of Valuation (2) <ul><li>In the VC eyes, determination of a company’s value is elusive and it’s more art than science </li></ul><ul><li>So, what’s a start-up company worth ? </li></ul><ul><ul><li>It all depends! </li></ul></ul><ul><ul><li>Very imperfect market capitalization unlike public companies where market capitalization is readily determined. </li></ul></ul><ul><li>Entrepreneurial valuation are cash, time and risk. </li></ul>
    6. 6. Arts & Craft of Valuation (3) <ul><li>Valuation Methodologies </li></ul><ul><li>Net Present Value </li></ul><ul><li>Comparables </li></ul><ul><li>Real Options </li></ul><ul><li>Turkish Bazaar </li></ul><ul><li>Adjusted Present Value </li></ul><ul><li>First Chicago Method </li></ul><ul><li>DCF </li></ul><ul><li>Golden Handcuff </li></ul>Venture Capital Method
    7. 7. Valuation Methodologies used by VCs (1) Understanding the Venture Capital investment process Biz Plans Kicks-In Products /Services Concepts/Ideas Analysis Entrepreneur Analysis Business/ Venture Analysis Conditional Termsheet Approval Deal Sources Due Diligence Deal Terms Investment Decision Go/No-Go Screening Evaluation Continues
    8. 8. Valuation Methodologies used by VCs (2) VC Cash Leadership (CEO) Implementation (CMO, CTO, CFO) Idea Idea has limited value Ability to implement project is most important What are you worth ?
    9. 9. Valuation Methodologies used by VCs (3) Cash Investment : $3 million Proposed Investor Share: 66.7% Post-Money Valuation : $ 4.5 million Pre-Money Valuation : $1.5 million Exit Valuation (Yr 5): $30 million (PAT) Return to Investor (IRR): 46% Cash-on-Cash Return Investor 6.7x First hand valuation by VCs – expected Return on Investment
    10. 10. Valuation Methodologies used by VCs (4) Negotiation with VCs $ Company Value VC Maximum Value Entrepreneur Minimum Value Negotiating Space
    11. 11. Valuation Methodologies used by VCs (5) Venture Capital Method (1) <ul><li>Post-money valuation: The valuation of the company immediately after a round of investment is closed. </li></ul><ul><li>Pre-money valuation: The valuation of the company just before closing a new round of investment, including the value of the idea, the intellectual property, the assembled management team, and the opportunity. </li></ul><ul><li>Terminal value: The valuation of the company at exit; that is, the proceeds of the sale of the company via a merger or acquisition or an initial public offering and at which time the investors' ownership can be liquidated. </li></ul><ul><li>ROIn: The cash-on-cash return on investment expected for such an investment in the year of the harvest, or exit. This ROI is commonly expressed as a multiple of invested cash—that is, 10x, for example—regardless of the time since investment (n years). </li></ul>If the terminal value of a company seeking seed/start-up capital is estimated to be $60 million and we assume the stage of the company is appropriate for investors to expect 30x ROI in year of harvest, then the post-money valuation of this company can be estimated at $2 million. If the required investment is $0.5 million, then the pre-money valuation would be $1.5 million.
    12. 12. Valuation Methodologies used by VCs (5) Venture Capital Method (2) <ul><li>Identify the company’s forecasted net income within n years up to exit year. Estimate normally based on sales and margin projections. </li></ul><ul><li>Assign appropriate P/E ratios to the company based on current multiples for companies within similar economic characteristics. </li></ul><ul><li>Derived at a Terminal Value . E.g. Terminal Value (t) = Net Income x P/E ratio. </li></ul><ul><li>Terminal Value can be discounted. Normally VCs discount rates range from 30% - 80% due to the risks involved in the type of investments. </li></ul>Required Investment Ownership (%) = Required Total Terminal Value Ownership Required (%) New Shares = 1 – Ownership Required x old shares
    13. 13. Valuation Methodologies used by VCs (6) Financial Engineering <ul><li>To overcome valuation or incentive issues, VC’s will engage in ‘financial engineering’ </li></ul><ul><ul><li>Debt </li></ul></ul><ul><ul><li>Preferred Shares </li></ul></ul><ul><ul><li>Preferred Convertible Securities </li></ul></ul><ul><ul><li>Mixed Debt and Equity </li></ul></ul><ul><ul><li>Ratchets or Clawbacks (Downside for Investor, Upside for Entrepreneur) </li></ul></ul><ul><ul><li>Liquidation preferences </li></ul></ul><ul><li>Fundamentally challenges notion of pre-money value, as values and returns become contingent on future events </li></ul>
    14. 14. Analyzing an actual start-up VCs Valuation Interactive – (1) <ul><li>To review start-up Income Statement 5 year projection </li></ul><ul><li>To review start-up Cash Flow Information for 5 year projection </li></ul><ul><ul><li>NOTE : Please have all the above ready. </li></ul></ul><ul><li>Coming up with valuation based on Venture Capital approach. </li></ul>
    15. 15. Analyzing an actual start-up VCs Valuation Interactive – (2) <ul><li>Income Statement (5 year projections) </li></ul>
    16. 16. Analyzing an actual start-up VCs Valuation Interactive – (3) <ul><li>Cash Flow Information (5 year projections) </li></ul>
    17. 17. Closing <ul><li>Determined methodologies used by venture capitalists and professional investors to estimate the value of a company </li></ul><ul><li>Understand how equity proportions are allocated to investors </li></ul><ul><li>Analyzing a startup financing </li></ul><ul><li>VCs are active investors and bring more to the deal than just money: </li></ul><ul><ul><li>o spend a large amount of time, </li></ul></ul><ul><ul><li>o reputation capital, </li></ul></ul><ul><ul><li>o access to skilled managers, </li></ul></ul><ul><ul><li>o industry contacts, network, </li></ul></ul><ul><ul><li>o and other resources. </li></ul></ul><ul><li>A large discount rate is a crude way to compensate the VC for this investment of time and resources. </li></ul>
    18. 18. Thank You ! [email_address] [email_address]
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