prof. vittorio de pedys for discussion how business angel and venture capital evaluate investments...
TRANSCRIPT
Prof. Vittorio de Pedys
FOR DISCUSSION
How Business Angel and Venture Capital evaluate investments
LESSON 6
WOULD YOU HAVE INVESTED?
MICROSOFT CORPORATION, 1978
2
START SMALL AND THINK BIG
3
START SMALL AND THINK BIG
4
GRANDFATHER OF SILICON VALLEY
5
GRANDFATHER OF SILICON VALLEY
6
PRIVATE EQUITY AND VENTURE CAPITAL
7
VENTURE CAPITAL INVESTMENT PROCESS
8
99
U.S. VENTURE CAPITAL IN 2010
• 26 B$ into 2800 deals; up 11%
• 800 firms have 6.000 partners
• Average partner manages 223 M$ of investments, sits on 6 company boards
• 72 IPO’s vs 12 in 2009 & 160 average 1990-1994
• 1° California ; 2° Massachusettsss ; 3° NY
Source: UCLA
1010
ITALIAN VENTURE CAPITAL IN 2010
• 90 M€ investments in 30 companies (early stage)
• 13 players
• 2-3 disinvestments
• Exit generally through selling to other companies
• Italian venture capital & private equity association www.aifi.it
Source: AIFI
1111
Introduction to raising capital
1212
Capital raising sequence
1. Personal savings & credit card debt
2. Friends, families and “fools”
3. Business Angels
4. Venture capital
5. IPO or acquisition
1313
Stages
• Seed = product developed & launched, CEO in place, some early sales, not profitable
• Early stage = paying customers, proven business model, management team in place, break even revenue
• Expansion = needs investment for sales & marketing investments to sell more
1414
Business Angels
• Typically retired or semi-retired, successful professionals who have investment cash
• Many want to mentor CEO’s• To be considered “accredited investors” need
> 500.000 € net worth• Typical angel investment 40-60k per year• Like Venture Capitals, do not sign NDA
agreements• Normally invest locally & for themselves
1515
Angels groups
• Angel groups in almost every city• Most are non-profit organizations• Each member invests individually• Use standard deal term sheets• All investors sign same term sheet• Investors may invest different amounts
1616
The Italian Business Angels organization is called IBAN (Italian Business Angels Network)
http://www.iban.it/
1717
Typical angel deal in U.S. (2010)
• 1.7 B$ total investment*
• 400 K$ investment
• 1.5 M$ pre-money valuation
• 20-25% equity
• One seat on the board of directors
Source: ACA 2010
1818
Typical angel deal in Italy (2010)
• 33 M€ total investment
• 145 K€ average investment in each company
• 40-60 K€ average investment per Business Angel
• Consider 1-5 investment opportunities during the year
• One seat on the board of directors
Source: IBAN
1919
Venture Capital vs Business Angels
Venture Capital’s have:
• Expensive offices & high overhead costs (vs. angel’s home office)
• High labour costs (vs. angels work solo)
• Investors who expect high profits (vs. angels have lower profit expectations)
• VC board of directors (vs. no board)
2020
Club degli investitori
• Group of entrepreneurs of the Piemonte region that invests in new or recent constitution companies that are innovative, with highly growth potential
• Investments realized: Arenaways – Authix – Caspertech - Lachesi – Microcinema – Microwine – Skuola.net – Nicanti
• The club is formed by 40 members
Source: clubdeglinvestitori.it
21
Evaluation process 1/2
• Entrepreneur sends Business Plan to the club
• Every member can examine the Business Plan
Source: clubdeglinvestitori.it
Selection is based on : • Innovation level of the product or the service proposed
• Credibility of the entrepreneur and the management
team
• Target market and selling strategy
• Headquarters in the Piemonte region
22
• Club reviews plan & decides if appropriate to present to all members
• Entrepreneur makes 15 minute presentation & 20 minute Q&A
• If 4-6 Angels investors express interest, due-diligence team formed & meets with entrepreneur for 2-3 hours to learn more
• Typical pre-money valuation = 500K€ - 1M€
Evaluation process 2/2
Y1
Competitor 1
Competitor 2Competitor 3
Competitor 4Competitor 5
Competitor 6
Competitor 7
Competitor 8
Competitor 9
Competitor 10
Competitor 11
Y2
X1 X2
New Co
VCs AND ANGELS LOOKS FOR CREDIBLE DIFFERENTIATION…
23
3.PRODUCT&TECHNOLOGY
TECHNOLOGY
PARTNERSHIPS
SIMPLICITY
BUSINESS PROCESS
DOMAIN KNOWLEDGE
NETWORK
…AND DEFENSIBLE BARRIERS
24
METHODS TO EVALUATE A VC DEAL
It is important to know the meaning of post-money and pre-money valuation in Venture Capital or
Private Equity
25
PRE MONEY VALUATION
A pre-money valuation refers to the valuation of a company
26
POST MONEY VALUATION
Post-money valuation is the value of a company after an investment has been made. This value is equal to the sum of
the pre-money valuation and the amount of new equity
If a company is worth $100 million (pre-money) and an investor makes an
investment of $25 million, the new, post-money valuation of the company will be $125 million. The investor will now own
20% of the company. 27
METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
28
METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
29
TIPICAL ANGEL VALUATION (1/2)
NO REVENUES?
500K-1M€ STANTARD PRE-MONEY VALUATION
30
TIPICAL ANGEL VALUATION (2/2)
….or bridge loan to A round Venture capital investment:
Angels can buy A round shares at 75% share price
31
METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
32
VC METHOD
POST = V/ (1+r)t
V= EBITDA x multiple exit
R= required annual return of the fund
t= time to exit
33
EXAMPLE
POST = 25/ (1+50%) 4
= 4.9 M€
EBITDA Year 4 = 5M€
Value in 4 years= 5 M€ x 5 = 25M€
Required annual return: 50%
Time to exit = 4 years
Investment = 3 M€
PRE = 4.9 - 3 = 1.9 M€
VC QUOTA = 3/ 4.9 = 60% 34
Single period NPV method Base Model Variatio 1 Variation 2Exit value V 25.000.000,00$ 22.500.000,00$ 25.000.000,00$ Time to exit t 4 4 4Discount rate r 50,00% 50,00% 60,00%Investment amount I 3.000.000,00$ 3.000.000,00$ 3.000.000,00$ Numeber of existing shares x 1.000.000 1.000.000 1.000.000 Post-Money POST 4.938.272$ 4.444.444$ 3.814.697$ Pre-Money PRE 1.938.272$ 1.444.444$ 814.697$ Ownnership fraction of investors F 60,75% 67,50% 78,64%Ownnership fraction of entrepreneurs 1-F 39,25% 32,50% 21,36%Number of new shares y 1.547.771 2.076.923 3.682.349Price per share p 1,94$ 1,44$ 0,81$ Final wealth of investors 15.187.500,00$ 15.187.500,00$ 19.660.800,00$ Final wealth of entrepreneurs 9.812.500,00$ 7.312.500,00$ 5.339.200,00$ NPV of investors` wealth 3.000.000,00$ 3.000.000,00$ 3.000.000,00$ NPV of entrepreneurs` wealth 1.938.272$ 1.444.444$ 814.697$
Single period NPV method Variation 3 Variation 4 Variation 5Exit value V 25.000.000,00$ 25.000.000,00$ 25.000.000,00$ Time to exit t 4 4,4 4Discount rate r 50,00% 50,00% 50,00%Investment amount I 3.300.000,00$ 3.000.000,00$ 3.000.000,00$ Numeber of existing shares x 1.000.000 1.000.000 2.000.000 Post-Money POST 4.938.272$ 4.198.928$ 4.938.272$ Pre-Money PRE 1.638.272$ 1.198.928$ 1.938.272$ Ownnership fraction of investors F 66,83% 71,45% 60,75%Ownnership fraction of entrepreneurs 1-F 33,18% 28,55% 39,25%Number of new shares y 2.014.318 2.502.235 3.095.541Price per share p 1,64$ 1,20$ 0,97$ Final wealth of investors 16.706.250,00$ 17.861.700,15$ 15.187.500,00$ Final wealth of entrepreneurs 8.293.750,00$ 7.138.299,85$ 9.812.500,00$ NPV of investors` wealth 3.300.000,00$ 3.000.000,00$ 3.000.000,00$ NPV of entrepreneurs` wealth 1.638.272$ 1.198.928$ 1.938.272$
35
METHODS TO EVALUATE A VC DEAL IF THE COMPANY EXISTS
¶ DCF
¶ MULTIPLES
36
DCF MODEL
Sum of all future cash flows that are estimated and discounted to give their present values
WACC: Kd (no debt) + ke (35%-50%)
Used by VC to check
37
METHODS TO EVALUATE A VC DEAL IF THE COMPANY EXISTS
¶ DCF
¶ MULTIPLES
38
MULTIPLESEV/EBIDTA
EV/REVENUES
EV/CASH FLOW
EV/EBIT
P/E
Private comparable companies + AIM companies
Very simple but easy to make mistakes
39
AVERAGE EBITDA MULTIPLE = 5 X EBITDA
40