Lunch and Learn: Valuation of Early Stage Companies

VA LUAT I O N

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AGENDA

FAIR MARKET VALUE

INTRODUCTION

REVENUE COMPANIES

BUSINESS VALUATIONS

INVESTOR EXPECTATIONS

PRE-COMMERCIALIZATION


INTRODUCTION

The Valuation of a company is the price to buy the entire company whether it is public or private. It is usually quoted in the price of a share; however, for a private company you need to know the total value usually stated as Pre- Money Valuation before investment and Post- Money Valuation or Market Capitalization after investment.


FMV-FAIR MARKET VALUE

``The price , expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in a open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.``


REVENUE COMPANIES

1. Multiple of EBITDA 2. Discounted Cash Flow3. Comparable transaction method4. Book Value5. Total Enterprise Value6. Market Value7. Liquidation Value: Forced or Orderly


BUSINESS VALUATIONS

• Every valuation and Pricing is unique

• In a M&A Transaction price or valuation comes down to the strategic value the acquirer brings to the transaction & the portion paid to the target

• 65% of business owners don’t know what their company is worth

• 85% have no exit strategy

• 75% of their worth is tied up in their business



• , the most active M&A buyer paid < 20 mil with <20 people for 90 % of it`s targets

• An Angel Investor has an expectation of 10X

• Survey conducted among USA angel groups by Bill Payne in 2012. Average Pre-Money valuation is 2.96m & Median is 2.75m an increase over`11

• The usual range of valuation for an pre- commercialized company 1 to 3 mil

• A Convertible Debenture (last weeks lunch and learn) is a way to take the valuation discussion off the table



• At the end of the day valuations are subjective• Many VC`s will not discuss investment until a price is set• A high valuation may create an orphaned financing or even worse a future

down round• Businesses are sold not bought, a business should be preparing for an exit

from the start• A company needs to understand the potential buyers universe (Financial vs.

Strategic buyers) and what they are looking for.



• A USA with concerning terms will have negative pressure on valuation• Valuation is calculated on a Fully Diluted Basis – all options, warrants,

convertible debentures, vesting, etc. are converted for the purposes of presenting the `Capitalization Table` referred to as `Cap Table`

• Valuation is caveat emptor – buyer beware. More investors have lost more money because they overpaid for a stock than has been lost due to fraud. (Warren Buffett and Benjamin Graham = Value Investing)

• Concentrated sales is negative for valuation• Bootstrapping and obtaining traction will assist a company build valuation


PRE-COMMERCIAL IZATION METHODS

1. Venture Capital Method (ARI)

2. Scorecard Method (David Berkus)

3. Risk Factor Method (ARI)

4. The Shamrock Method (Buckley)


VENTURE CAPITAL METHOD


SCORECARD METHOD

Management - quality team in place, except sales

Opportunity - appears to be a huge opportunity

Product – disruptive technology, prototype done

Sales – team not in place , channels unclear

Competition – many small players, lack technology

Other Factors – foreign Market, partners

30%25%15%10%10%10%


RISK FACTOR METHOD

• Stage of the business• Legislation/Political risk• Manufacturing risk• Sales and marketing risk• Funding/capital raising risk• Competition risk• Technology risk• Litigation risk• International risk• Reputation risk• Potential lucrative exit


SHAMROCK METHOD

• Credit for Actual Invested Capital (no sweat equity)

• Up to 250K for Management Team

• Up to 250K for Proof of Concept or Product Validation

• Up to 250K for Disruptiveness of Technology & Patents

• Up to 250K for Business Model, pricing, etc.

• Up to 250K for other including advisors, governance, financials, company infrastructure, etc.

• Up to 250k for go to market strategy, traction, growth…

• Credit for 2 years of revenue run rate up to 3 years


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Lunch and Learn: Valuation of Early Stage Companies

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