powerpoint presentations
DESCRIPTION
TRANSCRIPT
Growth Funding
Patterns of EntrepreneurshipChapter 7
Session 6: Financial Alternatives for Debt and Equity Capital
copyright 2003 Jack M. Kaplan
Session Outline
• Understand the Venture Capital Process
• Private Placement Process
• Value the Venture
• Select the Valuation Method
• Prepare a Presentation to Investors
copyright 2003 Jack M. Kaplan
Venture capital firms
Investment banking firms
Insurance companies
Large corporations
Growth Equity Investors
copyright 2003 Jack M. Kaplan
Understand the Venture Capital Process
Specialized Industries for the ventureThe Location of the VentureStage of DevelopmentEarly Stage Financing Expansion FinancingAcquisioion/Buyout Financing
copyright 2003 Jack M. Kaplan
VC firms want returns of 30% or more Only for high-growth companies Require deals over $2 million to invest Most often, VC is not available until the
company is ready for commercialization of the product or services
Most want a exit strategy in 3-5 years
Venture Capitalists
copyright 2003 Jack M. Kaplan
The Venture Capital Process
EntrepreneursVenture
CapitalistsInvestment
Bankers
PrivateInvestors
Public Market•Corporations•Angles
Funds
Ideas
Funds
IPO’s
Money Stock
copyright 2003 Jack M. Kaplan
The Logic of the Deal
• Typical start-up - Venture Capital Fund will invest 2-3 million for 40% preferred equity ownership position.
• This gives V.C. a liquidation preference over common shares until the 2-3 million is returned.
• If Venture fails, they have first claim to assets and technology.
• Also blocking rights over key decisions including sale of the company and IPO.
copyright 2003 Jack M. Kaplan
• Antidilution clauses or “Rachets” - This protects against equity dilution of additional rounds of financing at lower values take place.
• This preferential treatment comes at the expense of all common shareholders.
• If company does well, V.C. enjoys upside provision by having right to put additional money at a set price.
• Limit risk by co-investing with other firms.
copyright 2003 Jack M. Kaplan
The VC “LANDSCAPE” in 2000
# of VC Firms in Existence
# of Professionals
# of First Time VC Funds Raised
# of VC Funds Raised This Year
VC Capital Raised This Year ($B)
Avg VC Fund Size Raised This Year ($M)
Source: NVCA Yearbook 2001; Venture Economics
1980
87
1035
24
57
2.08
36.5
1990
375
3794
14
82
3.20
39.0
2000
693
8368
164
497
105.05
211.4
copyright 2003 Jack M. Kaplan
The Committed Capital Bubble
0
5
10
15
20
25
30
35
40
1995 1996 1997 1998 1999 2000 2001
0
1
2
3
4
5
6Uninvested VentureCapital
Years of UninvestedCapital
Years of UninvestedCapital at 1995Investment Pace
Source: VentureOne
Years
Accu
mu
late
d C
ap
ital
Over-
com
mit
men
ts (
$B
)
copyright 2003 Jack M. Kaplan
The Illiquid Bulge
From 1995-2000:
14,463
978
1,529
1,180
10,776
Companies funded
Went public
Were acquired
Went out of business
Remaining
Source: Venture Economics; Venture Source
--
-
copyright 2003 Jack M. Kaplan
A Generic Late 90’s Model
Round Type Date
Amount Raised (MM)
Pre-Money Valuation
(MM) IRR Multiple
1 Seed Jan-97 $ 5 $ 35 79% 18.37
2 1st Jan-98 $ 10 $ 100 65% 7.35
3 2nd Jan-99 $ 25 $ 200 59% 4.04
4 3rd Jan-00 $ 60 $ 600 52% 1.52
5 IPO Jan-01 $ 1000
$ 100 Million
copyright 2003 Jack M. Kaplan
A Generic Early 90’s Model
Round Type Date
Amount Raised (MM)
Pre-Money Valuation
(MM) IRR Multiple
1 Seed Jan-90 $ 0.50 $ 2 101% 32.53
2 1st Jan-91 $ 3.00 $ 10 70% 8.13
3 2nd Jan-92 $ 8.00 $ 32 50% 3.30
4 3rd Jan-94 $ 13.50 $ 100 32% 1.32
5 IPO Jan-95 $ 150
$ 25 Million
copyright 2003 Jack M. Kaplan
Why It’s Great To Be An Entrepreneur - TODAYUS Venture Capital Partnership ReturnsVersus Public Market Returns
Funds Formed 1969-1999 (quarterly returns)
-30
-20
-10
0
10
20
30
40
50
60
Quarter
Qu
arte
rly
Ret
urn
VC Partnerships
Nasdaq
Source: Venture Economics/NVCA
copyright 2003 Jack M. Kaplan
The opportunity is considered “hot” area The venture delivers scalable technology There are client references The team is diligent and goal The entrepreneur is skilled in finance, capital
and deal structures Realistic expectations are incorporated into
goals of the company
Profile of the Ideal Entrepreneur from a VC Perspective
copyright 2003 Jack M. Kaplan
Two Formal Methods:
• Private placement• Public stock offering Private placement controlled by Regulation D of the
Federal Securities Act
Rule 504
• Up to $1,000,000• 12 month completion period• No restrictions on the number of investors
Equity Financing
copyright 2003 Jack M. Kaplan
Rule 505• Up to $5 million• 12 month completion period• No more than 35 non accredited investors and
unlimited number of accredited investors
Rule 506• Unlimited amount of raising funds• No more than 35 unaccredited but sophisticated
purchasers.and to unlimited number of accredited investors.
• must be able to evaluate merit and risks.
Equity Financing
copyright 2003 Jack M. Kaplan
First: Determine motive for valuing the business
– Selling stock or buying a business
Second: Define what is to be valued– Entire company, product line or a unit
division– Income stream determination
Third: Set a point in time for valuation
Valuation Process
copyright 2003 Jack M. Kaplan
Recent profit history
General conditions of company
Market demand and competition -- at time of offering
Ability to transfer goodwill
Future profit potential
Management team
Factors to Assess a Company’s Value
copyright 2003 Jack M. Kaplan
Valuation: Select the valuation method– Apply the methods and compute valuation
Weight the Values: Apply a percentage allocation to each value (E.G.: 40% to adjusted book value, 30% price earnings, and 30% to discounted value)
Determine Value and Weight
copyright 2003 Jack M. Kaplan
Asset Valuations
Earnings Valuations
Discounted Cash Flow Valuation
Valuation Techniques
copyright 2003 Jack M. Kaplan
No single valuation captures the real value of the firm. Value is the perception of opportunity, risk, and financing resources available.
Difference is determined by vision, market analysis, time pressures, and negotiating.
Valuation Statement
copyright 2003 Jack M. Kaplan
Asset Valuation
– Book Value– Adjusted Book Value– Liquidation Value– Replacement Value
What is the Business Worth?
copyright 2003 Jack M. Kaplan
Book value – Current assets + property + equipment (net of depreciation)
– Total net worth
Used primarily for accounting purposes
Asset Valuation
copyright 2003 Jack M. Kaplan
Current assets + market value of property + equipment + intangible assets
Adjusts for large discrepancies (land, equipment)
Better reflects actual market value
Adjusted Book Value
copyright 2003 Jack M. Kaplan
If the business is sold
Value of assets - quick sale
Asset valuation does not consider intangible factors such as reputation, talent, or goodwill
Liquidation Value
copyright 2003 Jack M. Kaplan
Historical Earnings
Future Earnings
– Projected earnings
– Nature of industries and similar companies
– Anticipated economic conditions
Earnings Valuation
copyright 2003 Jack M. Kaplan
Prepare Executive Summary
– Company, market potential, marketing strategy, competitive position, milestones, product position, financial summary
Prepare Forecast: 1-3 Years
– Monthly: year 1
– Quarterly: year 2 and 3
Choose Valuation Process
Earning Valuation for Start-Up Companies
copyright 2003 Jack M. Kaplan
Determine P.E. Ratio
– Select similar public companies if available
– Use S&P quarterly industry analysis handbook for your P.E. ratio
– Reduce P.E. by 50%, if your size is smaller and illiquidity factor (holder may not be able to sell shares without considerable effort).
Earning Valuation
copyright 2003 Jack M. Kaplan
Use Factors for Rating Scale of 1-6 – Risk assessment
– Competitive position
– Industry and company
– Growth opportunity
– Desirability
– Total and average
How to Calculate P.E. Multiple
copyright 2003 Jack M. Kaplan
Form a corporation Authorize 2 million shares Issue 1million shares Projected P&L is $200,000
Profit after 3 years (EBIT) Projected P.E. is 12 for your industry
(after careful analysis)
Guidelines Using Earning Valuation
copyright 2003 Jack M. Kaplan
Value company at 2.4 million today
Each share is $2.40 outstanding
Determine amount you require to raise
– Sell 100,000 shares @ $2.40
– You are offering 10% of the company for $240,000
Value Guidelines
copyright 2003 Jack M. Kaplan
Select adviser(s) Complete business plan Define use of funds Seek qualified advise from lawyer Select a mentor to advise you Target investor group
– Personal, family, angels, professional
Guidelines
copyright 2003 Jack M. Kaplan
Prepare a Presentation to Investors
– Non-Disclosure / Non-Compete Agreement
– Demo of product
– Hand-outs
– PowerPoint presentation
– Determine if you want qualified or determine if you want qualified or non-qualified investors
– Subscription Agreements
Guidelines
copyright 2003 Jack M. Kaplan
Is useful to investors who are attempting to appraise a return on investment and return on time
Forecasts cash flows and discounts them back to the business
Must have positive cash flow - Calculate
Discounted Cash Flow Valuation
copyright 2003 Jack M. Kaplan
Terminal value – Return of capital via sale
Tax benefits Operating cash flows
– Business related expenses (car, club membership)
– Salary and dividends
Discounted Cash Flow Valuation