the art and science of valuation
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The Art and Science of Valuation. Prepared for Faegre & Benson April 19, 2006. Overall Agenda. Part 1: Capturing the Attention of the Venture Capitalist Part 2: Understanding the state of the Venture Capital Industry Part 3: Valuation Overview. Part 1 Agenda. - PowerPoint PPT PresentationTRANSCRIPT
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The Art and Science of Valuation
Prepared for Faegre & Benson April 19, 2006
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Overall Agenda Part 1: Capturing the Attention of the
Venture Capitalist Part 2: Understanding the state of the
Venture Capital Industry Part 3: Valuation Overview
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Part 1 Agenda Part 1: Capturing the Attention of the
Venture Capitalist Finding the right VC Courting the right VC Management Team Market Characteristics How hard can it be?
Part 2: Understanding the state of the Venture Capital Industry
Part 3: Valuation Overview
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Finding the Right VC
Do Your Homework
Buying Criteria Just Like a
Customer
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Courting the Right VC
Online Dating Anonymous Highly
Competitive 1 Chance
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“As a founder, think hardest about the team. Are these the people I want to be in trouble with for the next 5, 10, 15 years of my life? Because as you build a new business, one thing’s for sure: you will get into trouble.”John Doerr, Kleiner Perkins Caufield & Byers
Management Team
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Investing In TalentFactors considered most important by investment professionals(Weighted importance out of 100*)
Management Team
Market Sector
Business Model
Proprietary Product/Service
37
24
20
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Source: Spencer Stuart/NVCA VC-backed Leadership survey
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Market Characteristics Worth Winning
$250 million Sustainable
Drivers Y2k
Well Defined Sub-segment
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How Hard can it Be?
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A Rapidly Evolving World
Yahoo raises $2 million Amazon goes live Netscape goes public 45% heard of www AltaVista 16 million
pages
1995
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Technology is only the Ante
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Sustaining vs. Disruptive Technologies Sustaining Technology
Foster improved product performance Disruptive Technology
Bring to the market a very different value proposition
The Innovator’s Dilemma – Clayton Christensen
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Sustaining vs. Disruptive TechnologiesSustaining
Technology Improves
performance along an existing utility curve
A
BSustaining Technology
Cost
Performance
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Sustaining vs. Disruptive Technologies
Disruptive Technology Moves the market
to new utility curve A
Disruptive Technology
B
Cost
Performance
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Explicit Need / Compelling ROI
IT Budgets and ROI:“Purse strings are loosening ever so slightly, but that won’t slow the quest for better metrics”
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Part 2 Agenda Part 1: Capturing the Attention of the
Venture Capitalist Part 2: Understanding the state of the
Venture Capital Industry Locations: East Coast / West Coast and everywhere else State of Emerging Market Funding US Market Trend Minnesota Market Trend Pre-Bubble Normal
Part 3: Valuation Overview
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Locations: CA, MA and then the Rest
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State of Emerging Company Funding(Hint: Small VC Funds are Disappearing )
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U.S. Venture Capital Market Trend Info
% of U.S. VC
0%
10%
20%
30%
40%
50%
60%
70%
1995
-1
1996
-1
1997
-1
1998
-1
1999
-1
2000
-1
2001
-1
2002
-1
2003
-1
2004
-1
2005
-1
Expansion Later StageEarly Stage Seed Stage
Group Median Expansion – 53% Later Stage –
18% Early Stage – 22% Seed Stage – 4%
Source: PWC MoneyTree
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Minnesota vs. U.S. Venture Capital Market Trend Info
Source: PWC MoneyTree
% of MN VC vs. U.S. VC
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1995
-1
1996
-1
1997
-1
1998
-1
1999
-1
2000
-1
2001
-1
2002
-1
2003
-1
2004
-1
2005
-1
Average MN vs. U.S VC Investment = 1.54%
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A Pre-Bubble NormalValution Trends
0
20
40
60
80
100
120
140
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$ in
Mill
ions Seed
EarlyExpansionLaterBuyOut
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Part 3 Agenda Part 1: Capturing the Attention of the
Venture Capitalist Part 2: Understanding the state of the
Venture Capital Industry Part 3: Valuation Overview
Valuation Start-Up Stages Equity Financing Food Chain Sherpa Guide to Success Valuation Methodology A Lesson from Charles Darwin
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Valuation is Chess Not Checkers
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Stages of a Startup Definition and
Validation Prove Solution is
Repeatable Grow the Channel
to Capture Opportunity
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Seed Stage100% –
30% IRR
Early Stage – (Sherpa)
50% - 20% IRR
Expansion Stage25% - 15% IRR
Late Stage20% - 12%
IRR
Early Adopter Customers
Early Majority Customers
Late Majority Customers
Innovation Customers
Friends/Family
Angels Institutional - VCs Public Market
Equity Financing Food ChainReturn Expectations
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Return Expectations
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Return Expectations
5-10x your investment
or30%+ IRR
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Sherpa Pocket Guide to Success
Quick Go vs. No Go Decision
(4x in 5 Years = 32% IRR)
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Valuation Methodology1. Determine valuation
in an out year
Revenue in year 5 is $20 million
Use a multiplier (i.e., revenue, operating income, earnings, subscribers, locations, etc.) to determine value
A revenue multiple of 2x would make the company value $40 million in year 5
2. Compare future value with current value
Divide the future value ($40 million) by the post-money valuation
Post-money value of $10 million means this investment increased in value by 4x ($40 million / $10 million)
4x in 5 years equals a 32% IRR
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“It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change.”
- Charles Darwin, British Naturalist
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Recap Part 1: Capturing the Attention of the
Venture Capitalist Part 2: Understanding the state of the
Venture Capital Industry Part 3: Valuation Overview
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Rick BrimacombFounder, Brimacomb & AssociatesGeneral Partner, Sherpa PartnersBoard Member, Minnesota Venture Capital
Association
Jason VoiovichPrincipal, Ecra Creative [email protected]