Venture2014 epfl financing

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Financing in the start-up phase in Switzerland
»venture» 2014, Founder's Knowledge Seminar – Financing covers financing in the start-up phase, including financial planning, due diligence and selection criteria usually applied by investors. We also included a tutorial on some of the financial valuation approaches.
»venture» 2014 is a Swiss business plan competition to supports young entrepreneurs. It is an initiative of the ETH Zurich, Knecht Holding, the Swiss innovation promotion agency CTI and McKinsey & Company. A3 Angels is a mentoring and seed investment club founded in 2008 by Alumni of the Federal Institute of Technology EPFL to help support startups in Switzerland. Over 30 companies have benefited from this support.

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Venture2014 epfl financing

  1. 1. Claude Florin, A3 Angels Financing in the startup phase www.venture.ch Commission for Technology and Innovation CTI V.2
  2. 2. Outline      Start Up Stages and Financing Requirements Business Angels and Venture Capital Company Valuation Equity Share, Dilution & Exiting Getting started www.venture.ch Commission for Technology and Innovation CTI
  3. 3. Start Up and Funding Stages Entrepreneurs and investors perspectives www.venture.ch Commission for Technology and Innovation CTI |2
  4. 4. Revenue / EBITDA Funding sources Grants Crowd funding BA network syndication Business Angels > CHF 50M/year in CH Banks Venture Capital > CHF 100M/year in CH Source: EBAN, BBAA NESTA-BBAA “Siding with the Angels”- 2009 www.venture.ch Commission for Technology and Innovation CTI
  5. 5. What Type is your Start-up ? CHF1 B CHF500M CHF100M Annual Sales CHF50M CHF10M CHF5M  Acquisition  Venture capital  Strategic partner  Business Angels  Grants  FFF CHF1M “Investable” business  Born to be big  Born to Flip  Driven to make a difference “Life-style” business  Work to feed the family  Work to live their passion  Social startups  Bootstrap  Self-funded Adapted from Newwork LLC www.venture.ch Commission for Technology and Innovation CTI 4
  6. 6. Funding stages and amounts Seed Startup Efficiency Pre-Seed 0.5M Banks Acquisition Venture capital Testing required 9000 6000 3000 50-150k 0 100k, 300k + 50-150k FFF www.venture.ch 10-50 M+ 0.5 – 10 M+ Grants Adapted from Neworks, LLC; VC funding $M 1M, 5M+ Angel Self-funded x % assets + y % A/R Special funds Strategic partner Bootstrap Investment (CHF) Alternative product 30-60% margins 10-50k Startup Genome, Silicon Valley investments Commission for Technology and Innovation CTI 5
  7. 7. Business Angels and Venture Capital www.venture.ch Commission for Technology and Innovation CTI |7
  8. 8. Early-stage investment motivation Institutional investors  VCs : return on investment to investors  Corporate VCs : strategic business development Business Angels :  Return on Investment is the metric  Staying involved (sense of usefulness)  Give back to community  Affection for entrepreneurs Includes altruistic motivations Source: Bill Payne www.venture.ch Commission for Technology and Innovation CTI |8
  9. 9. Early-stage investment in Switzerland (M CHF) 300.0 250.0 +40% 200.0 50M -50% 150.0 130M 100.0 50.0 0.0 2007 2008 VC start-up (growth) 2009 VC seed 2010 2011 Business Angels Source: EVCA/PEREP Analytics, conversion €=1.22 CHF / EBAN 2007-2008 / CTI for 2013, A3 Angels 2009-2012 www.venture.ch Commission for Technology and Innovation CTI 2012
  10. 10. Swiss Business Angels Networks and members Networks BA Investment per capita CHF / hab 15 10 5 0 > 300 investors >30-50 million CHF / year >40 funded startups / year Multi-disciplinary € M/ M Source : A3 Angels ; Nelson Gray, EBAN www.venture.ch # deals/ M Claude Florin claude@a3angels.ch Commission for Technology and Innovation CTI 10
  11. 11. Financing and entrepreunarial risks Survival rate US ~40% Survival rate EU ~40% US Bureau of Labor Statistics, TechStars, Y Combinator. Quoted by Mars data accelerator http://data.marsdd.com/accelerators-worth-the-hype/#sthash.cXov6K8B.dpuf www.venture.ch Commission for Technology and Innovation CTI
  12. 12. Investment portfolio model Portfolio Multiple Company 5-Year IRR Portfolio Multiple Company 5-Year IRR 1 0.0 0% 6 1.6 10% 2 0.0 0% 7 1.6 10% 3 0.0 0% 8 7.6 50% 4 1.3 5% 9 20.0 82% 5 1.3 5% 10 Unknown Unknown Return on Portfolio Investments (1-9) is 3.7X = 26% IRR over 5 Years Assuming survival rate of 60% and 1 big success – reality is often lower www.venture.ch Commission for Technology and Innovation CTI | 15
  13. 13. Internal rate of return (IRR) IRR % 1 2 3 4 5 6 7 1 Years 3 4 5 2 6 Multiple 7 Years 1 2 3 4 5 6 7 - - - - - 0% 1.00 1.00 1.00 1.00 1.00 1.00 1.00 100 41 26 19 15 12 10 5% 1.05 1.10 1.16 1.22 1.28 1.34 1.41 200 73 44 32 25 20 17 300 100 59 41 32 26 22 10% 1.10 1.21 1.33 1.46 1.61 1.77 1.95 400 124 71 50 38 31 26 15% 1.15 1.32 1.52 1.75 2.01 2.31 2.66 500 145 82 57 43 35 29 20% 1.20 1.44 1.73 2.07 2.49 2.99 3.58 600 165 91 63 48 38 32 25% 1.25 1.56 1.95 2.44 3.05 3.81 4.77 1.30 1.69 2.20 2.86 3.71 4.83 6.27 35% 1.35 1.82 2.46 3.32 4.48 6.05 8.17 40% 1.40 1.96 2.74 3.84 5.38 7.53 10.5 IRR % - 30% Multiple - .xls function = IRR(values, guess) e.g.: IRR(D1:D:60,0.3/12) monthly or annual compounding www.venture.ch Commission for Technology and Innovation CTI | 16
  14. 14. Understanding VCs Who are VCs?  Business managers and entrepreneurs turned fund managers; professional investors What do VCs do?  Invest “other peoples money”  Analyze hundreds of potential investments  Choose only a few per year  After investing, VCs become active in the venture – take seat on the Board of Directors – some take interim executive management positions – get involved in strategic planning or oversight www.venture.ch Commission for Technology and Innovation CTI
  15. 15. AT BE BG CH CY CZ DE DK EE EL ES FI FR HU IE IT LT LU LV MT NL PL PT RO SE SI SK UK 100.0 www.venture.ch Commission for Technology and Innovation CTI 1.3 0.0 5.2 15.4 0.0 4.3 3.0 0.4 0.0 103.2 84.8 55.9 63.8 56.3 300.0 273.9 354.7 400.0 50.3 8.7 0.0 69.9 65.3 130.0 200.0 0.0 0.1 29.5 60.7 0.1 million € 500.0 477.0 VC investments in seed and start-up M€ EU countries data; 2012 600.0 0.0 Source : EVCA | 19
  16. 16. VC + BA model today “Tougher times for VCs” CHF 100K Founders +FFF + Grants Start CHF <2M @ CHF 1-2M Business Angels + Loans >6 mo CHF 1-2M @ <CHF 5M VC + BAs 0.5-5X multiple CHF >2M @ >CHF 5M VC B >12 mo  Increased financing requirements  European VCs struggling to raise new funds  Stronger BA co-investment … Trade sale IPO >3 year >8 year  Decreasing exit valuations  Limited trade sale opportunities  Closed IPO markets  Longer cycles before exit Source : Diego Braguglia, CTI Start-UP, Angel Days 2012 www.venture.ch Commission for Technology and Innovation CTI
  17. 17. VC-funded exits : only few succeed 25’000 funded 6’400 exit 1:4 980 >€ 100M wins 1:26 35 >€1B winners 1:700 Other wins 23% Winners 77% € 290B exit value Source: Quilvest, 2000-2010 quoted by Jean-David Chamboredon, ISAI www.venture.ch Commission for Technology and Innovation CTI | 21
  18. 18. Company Valuation www.venture.ch Commission for Technology and Innovation CTI | 26
  19. 19. Valuation outline The background  Alignment of investors and founders  Different perspectives The numbers !!  Current early-stage financing trends  Business Angels methods for Seed valuation The Math ….  Comparables, Sales Multiple  Discounted Cash Flow  Product Assets, Replacement Value www.venture.ch Commission for Technology and Innovation CTI
  20. 20. The two perspectives  Align investors with entrepreneurs (drives the subsequent scalability of the business)  Roadmap and targets for investor  Provides incentives for entrepreneurs Motivation and control of Founders www.venture.ch Valuation based on experience and intuition Risk / reward of Business Investors Commission for Technology and Innovation CTI | 28
  21. 21. Capital payment Investor‘s return Dividends + capital „Venture Capital “ method „BA“ methods www.venture.ch Cash Outflow Cash Inflow Operating costs Operating revenues expenses earnings Customers Investor‘s expenses Company Investor Investor and Company views •Discounted cash-flow , •Multiples (comparables) Commission for Technology and Innovation CTI | 29
  22. 22. The Maths – Methods of Valuation Market data Market cap, similar in the market www.venture.ch VC methods, Business Angels empirical ratios Performance based Multiples financial indices EBIT, … Net assets, Commission for Technology and Innovation CTI Discounted Cash-Flow (DCF) | 30
  23. 23. Valuation trends Europe $ 2.6M USA $ 2.75  Switzerland average= $4.2 M  50% = $1.5 - $8 M  Business Angels :  Western EU average= $2.6 M  50% = $1.2 - $3.5 M – Median valuation = $2.75 M – Two-thirds $1.0 - $3.0 M – 50% = $1.5 - $3.6 M  VC median = $15M <1M 1M 2M 3M 4M 5M 6M 7M+ 1Q’12 1Q’12 1Q’12 1Q’12 1Q’13 Source : Bill Payne, Angel List, Halo report, www.venture.ch Commission for Technology and Innovation CTI | 33
  24. 24. Business Angels methods Bill Payne Worksheet Management team 0-30% 25-40% Size of opportunity 0-25% 20-30% Product & technology 0-15% 10-30% Sales channels 0-10% 5-20% Competitive advantage 0-10% 5-20% Size of this round 0 - 5% 0-5% Need for funding 0 - 5% 0-5% Don’t make product/technology 95% www.venture.ch Commission for Technology and Innovation CTI
  25. 25. BA Methods : worksheet 0-30% Strength of Management Team What is founder’s experience? Many years business experience Experience in this business sector Experience as a CEO Experience as a COO, CTO, CFO Experience as a product manager Experience only as a salesperson of technologist Straight out of school Is the founder willing to step aside, if necessary, for a Impact new CEO? deal killer Unwilling Difficult to convince 0 Neutral + Willing ++ Key part of the plan Impact Is the founder coachable? 0 Yes deal killer No Impact How complete is the management team? -Very incomplete (none identified) Somewhat incomplete 0 Good start + Rather complete team ++ A complete and experienced management team 0-15% Competitive Landscape Impact 0 + ++ +++ Impact -0 + ++ Impact -- Impact + ++ +++ ++ + -- + ++ 0-10% Impact -0 + +++ 0-10% Impact -0 ++ +++ 0-25% Size of the Opportunity - What size is the specific market for the company’s Impact product/service? deal killer <CHF50,000,000 0 CHF100,000,000 ++ >CHF500,000,000 Impact What is the potential for revenues in five years? <CHF30,000,000 0 CHF50,000,000 ++ >CHF100,000,000 www.venture.ch 0-10% Impact ++ + 0 What is the status of the IP (intellectual property)? Trade secrets only Core patents pending Core patents issued Complete patent estate What is the strength of competitors in this market? Very strong Strong Fragmented Weak Very weak How large are the barriers to entry? Very low Low 0 Modest High Very high Sales Channels What channels of sales are in place? Haven’t even considered Many possibilities identified Narrowed to one or two channels Initial channels verified Channels established Business Stage In what stage of business is the company? Only have a plan Writing code/in product development Product ready for customer evaluation Positive, verifiable customer acceptance by beta site Customer lined up Funding Required What amount of funding is required? CHF250,000 to CHF750,000 CHF750,000 to CHF1,500,000 CHF1,500,000 to CHF20,000,000 (depends on availability of VC capital in region) Commission for Technology and Innovation CTI
  26. 26. Business Angel methods Berkus Method Sound idea Prototype Quality mgt team Quality board Any roll-out, sales Value Range: www.venture.ch Meier Method CHF 0.5 Mio. + CHF 0.5 Mio. + CHF 1-2 M. + CHF 0.5 Mio. + CHF 0.5 Mio. CHF 1 - 6 Mio. 1 Manager 2 Managers Value Range: Commission for Technology and Innovation CTI CHF 1.5 Mio. + CHF 1.5 Mio. CHF 1.5 - 6 Mio.
  27. 27. Discounted cash flow (DCF) Discounted by capital costs Company Value = Sum of discounted FCF + discounted CV 0 1 2 3 CV Continuing Value 4 5∞ t Discount (WACC) CAPM Seed stage 70-100% 4-14% Start-up stage 50-70% 4-14% First stage 50-70% Second stage 35-50% Later stage 25-40% Stage Source: Patrick Frei & Benoît Leleux ; Jean-Pierre Vuilleumier, Angel Days www.venture.ch Commission for Technology and Innovation CTI | 43
  28. 28. DCF valuation issues  DCF is not a suitable method to value start-ups –Valuation >80%derived from Continuing Value –Cumulated FCF negative for planning period –Cost of capital hard to estimate (>40 %) –Discount rates too low ⇒ valuations too high  Helps analyze company’s value drivers Source : Jean-Pierre Vuilleumier, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 44
  29. 29. Comparable ratios “multiples” P&L Turnover - material expenses - personnel expenses - other operating expenses = operative cash flow - Depreciation = result of operations Ratio Revenue EBITDA - Net interest paid = EBIT - Tax = annual surplus / annual loss  Valuation ≈ 1X revenue EBIT  Valuation ≈ 5X EBIT Net Income EBIT = earnings before interest, taxes, depreciation and amortization www.venture.ch Commission for Technology and Innovation CTI | 45
  30. 30. Comparable ratios Industry Biotechnology Communications Equipment Computer Hardware Consumer Electronics Consumer Finance Electronic Components Electronic Equipment and Instruments Health Care Technology Home Entertainment Software Integrated Telecommunication Services Internet Retail Internet Software and Services Semiconductor Equipment Semiconductors Systems Software Business software Application software Wireless Telecommunication Services EV/EBITDA* NA 5.33 4.91 3.44 42.67 3.70 5.62 5.51 4.17 5.17 13.73 8.03 4.65 6.31 6.27 EV/EBIT* NA 7.75 7.40 6.35 49.19 6.39 8.01 10.45 31.04 10.28 18.41 22.55 6.37 NA 8.90 EV/Revenue** 4 2.4 2.6 3 6.61 12.17 Source: Damodoran on-line (Europe * ), http://startupvaluation.com (USA **) www.venture.ch Commission for Technology and Innovation CTI | 46
  31. 31. Adjust valuation using “multiples” Today Actual Projected sales (earnings) What “multiple” would you buy these businesses? B A C F G time D E © 2004-2010 Neworks, LLC www.venture.ch Commission for Technology and Innovation CTI 47
  32. 32. Every method gives a different valuation  Often over estimates real value  Uncertain assumptions  Not applicable for growth companies  Simple– no negative numbers  Time value not considered  Just a high-level forecast 15% 6,135 4,048 2,766 1,926 1,351 EBIT-Multiple 35% 40% 45% 50% 55% annual growth of the residual value 8% 10% 4,850 5,144 3,351 3,517 2,359 2,458 1,675 1,737 1,190 1,230 turnover multip Multiples risk ratio Discounted Cash-Flow 0.5 1.0 1.5 2.0 2.5 year 2011 0 0 0 0 0 2012 250 500 750 1,000 1,250 5.0 6.0 7.0 8.0 9.0 year 2011 neg. neg. neg. neg. neg. 2012 neg. neg. neg. neg. neg. Source : A3 Angels www.venture.ch Commission for Technology and Innovation CTI 2013 2014 2015 1,000 2,500 5,000 2,000 5,000 10,000 3,000 7,500 15,000 4,000 10,000 20,000 5,000 12,500 25,000 2013 neg. neg. neg. neg. neg. 2014 2,500 3,000 3,500 4,000 4,500 2015 10,000 12,000 14,000 16,000 18,000 2016 10,000 20,000 30,000 40,000 50,000 2016 25,000 30,000 35,000 40,000 45,000
  33. 33. Need to adjust valuation for Debt Assets capital assets Liabilities Equity Equity market value (number of shares X share price) + working capital (assets) liquid assets www.venture.ch Debt working capital (liabilities) Net Debt (+ net interest bearing financial liabilities – liquid assets ) = Enterprise Value (adjusted market value) Commission for Technology and Innovation CTI | 49
  34. 34. Valuation: VC method Investor’s View (Venture Capital Method) IRR (Internal rate of return) Sum discounted CF = 0 Value 1 2 3 4 5 6 t  Define the target Internal Rate of Return (IRR)  Estimate capital requirement (FCF analysis)  Estimate time to exit (5-7 years)  Estimate exit value (transactions or multiples)   Backward calculation of the required share Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest www.venture.ch Commission for Technology and Innovation CTI | 52
  35. 35. Venture Capital Method Method Specification of required IRR  Rate of return objective, e.g. 30%. or  Target multiple of the investment e.g. 7.5X Evaluation of exit  Time  Anticipated valuation at exit e.g. 25’000 Required share of equity Investment targeted return (7.5 X) 500 3,750 share of the Business Angels valuation in Seed financing round 15% 3,333 total proceeds at exit - return preference of VCs return at pro rata allocation return share of Business Angels Source : A3 Angels www.venture.ch Commission for Technology and Innovation CTI 27,500 2,500 25,000 3,750
  36. 36. On-line tools for startup comparison Equidam Equitynet Worthworm Source : http://www.equidam.com/ : https://www.equitynet.com/crowdfunding-tools/startup-valuation-calculator.aspx ; www.worthworm.com www.venture.ch Commission for Technology and Innovation CTI
  37. 37. Equity Share, Dilution & Exiting www.venture.ch Commission for Technology and Innovation CTI | 59
  38. 38. Definitions : pre / post money valuations Company stage Entrepreneur ownership Seed investor ownership for CHF 250K Pre-Seed 100% Seed A-round B-round 80% 64% 51% 20% 16% 13% 20% 16% A-round investor ownership for CHF 1M B-round investor ownership for CHF 3M 20% Pre-money valuation CHF 1M CHF 4M CHF 12M Post money valuation CHF 1.25M CHF 5M CHF 15M Entrepreneur value CHF 1M CHF 3.2M CHF 7.7M Dramatic increase in the value of the company and value of your share The relevant question is not “how much of the pie do I own?” rather “how big is the pie?” www.venture.ch Commission for Technology and Innovation CTI | 64
  39. 39. Dilution and returns at Exit Company stage Investment Ownership Value Multiple Entrepreneur ownership - 51.2% CHF 26M - Seed investor ownership CHF 250K 12.8% CHF 6M 26X A-round investor ownership CHF 1M 16% CHF 8M 8X B-round investor ownership CHF 3M 20% CHF 10M 3X CHF 4.25M 100% CHF 50M - Total •No investors subsequent to Round B • 7 years after seed investment, Company acquired for CHF50M •Seed Investor’s IRR is ~60% • Depending on time of investment, Round A & B investors likely IRR 30-50% • Everyone happy! www.venture.ch Commission for Technology and Innovation CTI | 65
  40. 40. Valuation & Dilution scenario The hypothetical high-tech start-up company Dilution of ownership and Increase in Valuation from idea through cash-flow positive company. Time zero The beginning At founding Valuation pre-money investment post-money Share price (rounded) Authorized shares Common $500,000 $ 100.0% 0.27 6-12 months Milestone 1 Pre-seed round $ 750,000 $ 150,000 $ 900,000 $ 10,000,000 83.3% 16.7% 100.0% 0.40 Year 1 $ 1,500,000 $ 500,000 $ 2,000,000 $ 10,000,000 Year 2 or 3 Milestone 3 VC Round A Milestone 2 Seed round 75.0% 25.0% 100.0% 0.67 $ 10,000,000 93,750 1,781,250 5.0% 95.0% 93,750 1,781,250 375,000 4% 79% 16.7% 93,750 1,781,250 375,000 750,000 3% 59% 12.5% 25.0% 1,875,000 100.0% 2,250,000 100.0% 3,000,000 100.0% Value of holdings UniversityInventors Founders Pre-seed investors Seed investors VC round A investors VC round B investors Total $25,000 $475,000 $0 $0 $0 $0 $500,000 Deliverables at the end of the stage: Small team Plan Family collateral IP assessment License Tech transfer Seed collateral 60.0% 40.0% 100.0% 1.00 $ 10,000,000 $ 5,000,000 $ 15,000,000 $ $62,500 $1,187,500 $250,000 $500,000 $0 $0 $2,000,000 Space A few key milestones (Prototype, market indicators) VC collateral 93,750 1,781,250 375,000 750,000 2,000,000 5,000,000 93,750 1,781,250 375,000 750,000 2,000,000 2,500,000 7,500,000 100.0% $93,750 $1,781,250 $375,000 $750,000 $2,000,000 $0 $5,000,000 100.0% 7.47 10,000,000 1.3% 23.8% 5.0% 10.0% 26.7% 33.3% 100.0% $187,500 $3,562,500 $750,000 $1,500,000 $4,000,000 $5,000,000 $15,000,000 The remaining key milestones OEM partner collateral $56,000,000 $ 10,000,000 1.9% 35.6% 7.5% 15.0% 40.0% Seven to ten years later Milestone 5 "Peak Sales" 66.7% 33.3% 100.0% 2.00 10,000,000 Issued shares University/Inventors Founders Pre-seed investors Seed investors VC round A investors VC round B investors Total $37,500 $712,500 $150,000 $0 $0 $0 $900,000 $ 3,000,000 $ 2,000,000 $ 5,000,000 Year 3 or 5 Milestone 4 VC Round B Design freeze Manuf'g scale up Market'g & Sales ready Distribution 93,750 1,781,250 375,000 750,000 2,000,000 2,500,000 7,500,000 1.3% 23.8% 5.0% 10.0% 26.7% 33.3% 100.0% $700,000 $13,300,000 $2,800,000 $5,600,000 $14,933,333 $18,666,667 $56,000,000 4 or 5 years of sales growth: Sales of $30 M Earnings of $7 M 8 x Earnings multiplier Adapted from Neworks, LLC www.venture.ch Commission for Technology and Innovation CTI 66
  41. 41. How to maximize value  Target equity at exit is not  The name of the game … a function of initial equity is not to minimize dilution stake but the reflects of the at each stage of a company strategy company’s existence  Equity at exit depends on: – – – – Technology success, Negotiation power, Market, Competition. Source : Diego Braguglia, CTI Start-UP, Angel Days 2012 www.venture.ch  But to maximize the value of your share at the end of the process. Harvard Business School, Financing Entrepreneurial Ventures Commission for Technology and Innovation CTI
  42. 42. Creative Negotiations Let the Market Set Price  Take “convertible note”  Offer anti-dilution clauses Performance Based Valuations  If pre-determined milestones achieved, valuation is CHF xM  If not, valuation is CHF yM Offset high valuation with preference  Preferred shares with liquidation preference www.venture.ch Commission for Technology and Innovation CTI
  43. 43. Convertible Loan  Subordinated convertible loan –Mandatory conversion upon equity round –Same terms as equity round with x% discount  Avoids valuation when –company is young –fair valuation difficult –Bridge loan required  Easy to implement  Generally not well received by future equity investor Source : Peter Pfister, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 69
  44. 44. Anti-Dilution Provisions  Principle: –Shareholders agreement clause –In case of a down round the dilution is absorbed by the founders (Common Shareholders).  Several ways to calculate (full rachet, weighted average)  Adds responsibility on the founders to create value Source : Peter Pfister, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 70
  45. 45. Liquidation Preference  Principle: – Shareholders agreement exit clause : – Preferred Shareholders = investors – Get paid x times (usually 1X ) investment before other payouts.  Improves returns  Saves a % of investment in case of failure  A question of fairness Source : Peter Pfister, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 71
  46. 46. Liquidation preference example Investment Pre-Money Founders share Investor share Exit value Liquidation preference Payout founders Payout investor Multiple Liquidation preference Payout founders Payout investor Multiple Liquidation preference Payout founders Payout investor Multiple CHF 300 K CHF 1,200 K 80% 20% CHF 600 K 1,200 2,400 3,600 4,800 0X 0X 0X 0X 0X CHF 480 K 960 1,920 2,880 3,840 CHF 120 K 240 480 720 960 0.4 X 0.8 X 1.6 X 2.4 X 3.2 X 1X 1X 1X 1X 1X CHF 240 K 720 1,680 2,640 3,600 CHF 360 K 480 720 960 1,200 1.2 X 1.6 X 2.4 X 3.2 X 4.0 X 2X 2X 2X 2X 2X CHF -K 480 1,440 2,400 3,360 CHF 600 K 720 960 1,200 1,440 2.0 X 2.4 X 3.2 X 4.0 X 4.8 X Source : Peter Pfister, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 72
  47. 47. Getting started www.venture.ch Commission for Technology and Innovation CTI | 73
  48. 48. Investment process 50% Screening Evaluation 4-6 Months Due diligence Investment 1% www.venture.ch Commission for Technology and Innovation CTI
  49. 49. Early early stage investors Swiss-based VCs International VCs Swiss-based BANs Aravis Atlas Venture Mountain Partners Group Biomed Invest BV group Core Capital Baytech Venture Creathor Venture Drapper Investment Go Beyond Ltd Business Angels Suisse (BAS) Bio Valley BAC EPS value plus Invision New Value Redalpine Venture Partners Vi Partners Dpixel Earlybird Emertec NBGI Ventures Index Ventures Start Angels Network b-to-v A3 Angels Club Valaisan des BA Blue Ocean Ventures Aventic BSI health Capital Eurofin Capital / Polytech ventures OCAS Ventures Sofinnova Swarraton Partners Defi gestion Fongit Jade invest Polytech Ventures Tschudin+Heid Vinci Capital Target Partners Wellington www.venture.ch Commission for Technology and Innovation CTI
  50. 50. Steps in the BA investment process Entrepreneur Business Angel Introduction Pitching Negotiations of business opportunity Deal flow identification Business plan Due diligence Valuation discussions Investment readiness Shareholder agreement Financing Source: fiban.org www.venture.ch Commission for Technology and Innovation CTI
  51. 51. Steps in the VC investment process Stage Entrepreneur Evaluating B. Plan Prepare Business Plan Due diligence Negotiation Provide information Disclose all relevant business information Meet to discuss BP Build relationship Outline terms Liaise with external consultants and accountants Negotiate final terms Document constitution and voting rights Contact investors Entrepreneur & investor Monitoring Provide periodic management accounts Communicate with investors Investor Review the Business Plan Conduct enquiries Value the business Consider financing structure Initiate external DD Draw up completion documentation Seat on board ? Monitor investment Constructive input Involvement in major decisions Reports Business Plan Offer letter Consultants reports Accountant reports Disclosure letter Warranties and indemnities Memorandum and articles of association Shareholder agreement Management accounts Minutes of boards and other meetings Source : Guide to private equity, BVCA / PWC, 2003 www.venture.ch Commission for Technology and Innovation CTI EXIT
  52. 52. Negotiations Why do deals fall through?  entrepreneur struggling to let go of control  limited role models (investor-backed companies)  inexperienced counsel  “shoppers”, there’s a better deal out there  two sides of the table can’t agree on “valuation www.venture.ch Commission for Technology and Innovation CTI
  53. 53. Select an investor who understands your business www.venture.ch Commission for Technology and Innovation CTI
  54. 54. Your questions ? Or case study Thank you 80 www.venture.ch Commission for Technology and Innovation CTI
  55. 55. Case study  Real Start-up Company  Founded in 2009  First financing in 2011 (BA)  Successful market entry  Closed financing round in spring 2013  Financial planning as well as valuation performed with Fintool 8.0 Source : Jean-Pierre Vuilleumier, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 81
  56. 56. Case study Source : Jean-Pierre Vuilleumier, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 82
  57. 57. DCF calculation CV Growth rate and Return on invested capital (ROIC) estimated after the planning period (Copeland) Continuous value (CV) represents 80 % of total Present value (PV). Source : Jean-Pierre Vuilleumier, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 83
  58. 58. WACC cost of capital calculation Source : Capital asset pricing method (CAPM); , Jean-Pierre Vuilleumier, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 84
  59. 59. Valuation sensitivity Source : Jean-Pierre Vuilleumier, Angel Day 2013 www.venture.ch Commission for Technology and Innovation CTI | 85

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