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LUNCH AND LEARN:VALUATION OF EARLY STAGE COMPANIESPresented by: Gerard Buckley, Jaguar Capital

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Who Am I

• Founder and CEO of Jaguar Capital an Advisory Practice for Growth Stage Companies

• Chairperson of BOD, Maple Leaf Angels• Entrepreneur in Residence with Incubes• Member of SME Committee of OSC• Investment Comm of MSV University, Hfx• 32 yr. Career with Scotia Capital as a

Financial Risk Management Advisor to Fortune 200 Companies: Rogers, Irving Gr, Empire Co., Four Seasons, Bruce Power, Ford, CAE etc.

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Valuation - Agreement of Price to Buy & Sell

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Valuation - 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.

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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.``

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Valuation – Revenue Companies

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Valuation Methods – Revenue Companies

1. Multiple of EBITDA2. Discounted Cash Flow3. Comparable transaction method4. Book Value 5. Total Enterprise Value6. Market Value7. Liquidation Value: Forced or Orderly

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Valuation – 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

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Valuation – Business Valuations

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Valuation – Pre - Commercialization

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Valuation – Pre - Commercialization

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Valuation – Investor Expectations• Google, 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

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Valuation – How subjective is it?

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Valuation – Investor Expectations

• 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.

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Valuation – Investor Expectations

• 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`

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Valuation – Investor Expectations

• 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

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Valuation Methods - Pre- Commercialization

1. Venture Capital Method (ARI)2. Scorecard Method (David Berkus)3. Risk Factor Method (ARI)4. The Shamrock Method (Buckley)

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Valuation Methods – Venture Capital Method

2.3mil Pre Money Valuation = Post Money Valuation - Investment

Post – Money Valuation – Valuation at InvestmentTerminal Value – Valuation at Exit (is estimated)ROI – Cash on HandAssume no dilution

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Valuation Methods – Scorecard Method

30% Management - quality team in place, except

sales

25% Opportunity - appears to be a huge

opportunity

15% Product – disruptive technology, prototype

done

10% Sales – team not in place , channels unclear

10% Competition – many small players, lack

technology

10% Other Factors – foreign Market, partners

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• Management

• 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

Valuation Methods – Risk Factor Method

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Valuation Methods – 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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Contact Information

Gerard Buckley, BBA, FICB, ICD.DPresident and CEO Jaguar Capital Inc.(C) 416-884-9522(W) 416-646-6789

g.buckley@jaguarcapital.ca

www.jaguarcapital.ca

Twitter: @jaguarcapital Twitter: @gerardbuckley