Venture Clinic 29 30 Apr2008 Roydean

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Getting ready for entrepreneurs at MDEC for a VC pitch.

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  • Venture Clinic 29 30 Apr2008 Roydean

    1. 1. Venture Clinic Venture Capital Series Roydean Osman, Vice President SEED Investment – CRADLE Fund Sdn. Bhd 29-30 th April 2008 MSC Incubation Center, Multimedia University, Cyberjaya
    2. 2. Agenda <ul><li>Funding ECO System </li></ul><ul><li>What VCs look for in a company ? </li></ul><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 (1) 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. Where we are ? – Funding ECO System (2)
    5. 5. What VCs look for in a company ? (1) VC Check Points Market Attractiveness : • Size of Market • Market Need • Market Growth Potential • Access To Market Product Differentiation : • Uniqueness of Product • Technical Skills • Profit Margins • Patentability of Product Managerial Capabilities : • Management Skills • Marketing Skills • Financial Skills • References of Entrepreneurs Resistance to Environmental Threat: • Protection from Competition • Protection of Obsolescence • Protection against Downside Risk • Resistance to Economic Cycles EXPECTED RETURN PERCIEVED RISK <ul><li>The value proposition of what is offered to the market; </li></ul><ul><li>The target customer segments addressed by the value proposition; </li></ul><ul><li>The communication and distribution channels to reach customers and offer the value proposition; </li></ul><ul><li>The relationships established with customers; </li></ul><ul><li>The core capabilities needed to make the business model possible; </li></ul><ul><li>The configuration of activities to implement the business model; </li></ul><ul><li>The partners and their motivations of coming together to make a business model happen; </li></ul><ul><li>The revenue streams generated by the business model constituting the revenue model; </li></ul><ul><li>The cost structure resulting of the business model. </li></ul>
    6. 6. What VCs look for in a company ? (2) List the most important points about your company.  Strong management team.  Patents and unique technology or model.  Use of Proceeds  Attractiveness of the venture for investment.  Market trends, market growth rates.  Size of the target market.
    7. 7. What VCs look for in a company ? (3) 1. What is the market potential for your company's product or service offering(s)? What is the revenue potential for the industry, and what is its growth rate? 2. How did you calculate market potential? How do you determine industry sales and growth rate? 3. What makes your business different or unique? 4. Why would someone be &quot;compelled&quot; to purchase your product or service? What specific needs does it address? 5. How do you know that your business has high growth potential? 6. What is it about your management team that makes them uniquely capable of executing on this business plan?   7. What are the primary risks facing this opportunity? 8. Who are your competitors? 9. What gives your company a competitive advantage? 10. Does the company have proprietary intellectual property in the form of patents, trademarks, copyrights, etc.?
    8. 8. What VCs look for in a company ? (4) 11. When will your company break even in terms of profitability and cash flow? 12. How do you plan to acquire customers? 13. How do you plan to keep customers? 14. What drives customer satisfaction for this industry and for the product? And, how do you know? 15. Who is the end user of the product or service offering? 16. What alliances or partnerships have you entered (e.g. joint ventures, marketing alliances, licensing arrangements, selling/distribution agreements, channel partnerships, software agreements, etc.)? 17. What is the anticipated lifecycle of your product or service offering? What are your current and future plans for R&D investments? 18. How do you plan to expand your labor force? 19. What are the probable exit scenarios? 20. What is the planned &quot;Use of Proceeds&quot;?
    9. 9. 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>
    10. 10. 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>
    11. 11. 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
    12. 12. 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
    13. 13. 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 ?
    14. 14. Valuation Methodologies used by VCs (3) Cash Investment : $3 million Proposed Investor Share: 22.5 % Post-Money Valuation : $ 10.7 million Pre-Money Valuation : $ 7.7 million Exit Valuation (Yr 5): $10 million (PAT) Return to Investor (IRR): 46% Cash-on-Cash Return Investor 3.3x First hand valuation by VCs – expected Return on Investment
    15. 15. Valuation Methodologies used by VCs (4) Negotiation with VCs $ Company Value VC Maximum Value Entrepreneur Minimum Value Negotiating Space
    16. 16. 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.
    17. 17. 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
    18. 18. 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>
    19. 19. 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>
    20. 20. Analyzing an actual start-up VCs Valuation Interactive – (2) <ul><li>Income Statement (5 year projections) </li></ul>
    21. 21. Analyzing an actual start-up VCs Valuation Interactive – (3) <ul><li>Cash Flow Information (5 year projections) </li></ul>
    22. 22. 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>
    23. 23. Thank You ! [email_address] [email_address]

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