Transcript Introduzione alla raccolta di capitali (raising capital

FOR DISCUSSION
LESSON 6
How Business Angel and Venture Capital evaluate
investments
Prof. Vittorio de Pedys
WOULD YOU HAVE INVESTED?
MICROSOFT CORPORATION, 1978
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START SMALL AND THINK BIG
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START SMALL AND THINK BIG
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GRANDFATHER OF SILICON VALLEY
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GRANDFATHER OF SILICON VALLEY
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PRIVATE EQUITY AND VENTURE
CAPITAL
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VENTURE CAPITAL
INVESTMENT PROCESS
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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 19901994
• 1° California ; 2° Massachusettsss ; 3° NY
Source: UCLA
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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
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Introduction to raising
capital
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Capital raising sequence
1. Personal savings & credit card debt
2. Friends, families and “fools”
3. Business Angels
4. Venture capital
5. IPO or acquisition
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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
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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
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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
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The Italian Business Angels organization is
called IBAN (Italian Business Angels Network)
http://www.iban.it/
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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 201017
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
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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)
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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
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Evaluation process 1/2
• Entrepreneur sends Business Plan to the club
• Every member can examine the Business Plan
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
Source: clubdeglinvestitori.it
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Evaluation process 2/2
• 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, duediligence team formed & meets with
entrepreneur for 2-3 hours to learn more
• Typical pre-money valuation = 500K€ - 1M€
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VCs AND ANGELS LOOKS FOR
CREDIBLE DIFFERENTIATION…
Competitor 10
Y1
New Co
Competitor 9
Competitor 11
Competitor 7
Competitor 1
Competitor 6
Y2
Competitor 2
Competitor 3
Competitor 8
Competitor 5
Competitor 4
X1
X2
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…AND DEFENSIBLE BARRIERS
3.
PRODUCT
&TECHNOLOGY
PARTNERSHIPS
NETWORK
SIMPLICITY
TECHNOLOGY
DOMAIN KNOWLEDGE
BUSINESS PROCESS
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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
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PRE MONEY VALUATION
A pre-money valuation refers to
the valuation of a company
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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.
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METHODS TO EVALUATE A VC
DEAL IF THE COMPANY IS A
START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
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METHODS TO EVALUATE A VC
DEAL IF THE COMPANY IS A
START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
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TIPICAL ANGEL VALUATION (1/2)
NO REVENUES?
500K-1M€ STANTARD PRE-MONEY
VALUATION
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TIPICAL ANGEL VALUATION (2/2)
….or bridge loan to A round Venture
capital investment:
Angels can buy A round shares at 75%
share price
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METHODS TO EVALUATE A VC
DEAL IF THE COMPANY IS A
START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
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VC METHOD
POST = V/ (1+r)t
V= EBITDA x multiple exit
R= required annual return of the fund
t= time to exit
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EXAMPLE
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€
POST = 25/ (1+50%)
4
= 4.9 M€
VC QUOTA = 3/ 4.9 = 60%
PRE = 4.9 - 3 = 1.9 M€
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Single period NPV method
Exit value
Time to exit
Discount rate
Investment amount
Numeber of existing shares
Post-Money
Pre-Money
Ownnership fraction of investors
Ownnership fraction of entrepreneurs
Number of new shares
Price per share
Final wealth of investors
Final wealth of entrepreneurs
NPV of investors` wealth
NPV of entrepreneurs` wealth
Single period NPV method
Exit value
Time to exit
Discount rate
Investment amount
Numeber of existing shares
Post-Money
Pre-Money
Ownnership fraction of investors
Ownnership fraction of entrepreneurs
Number of new shares
Price per share
Final wealth of investors
Final wealth of entrepreneurs
NPV of investors` wealth
NPV of entrepreneurs` wealth
Base Model
V
$ 25.000.000,00
t
4
r
50,00%
I
$
3.000.000,00
x
1.000.000
POST $
4.938.272
PRE $
1.938.272
F
60,75%
1-F
39,25%
y
1.547.771
p
$
1,94
$ 15.187.500,00
$
9.812.500,00
$
3.000.000,00
$
1.938.272
Variatio 1
$ 22.500.000,00
4
50,00%
$
3.000.000,00
1.000.000
$
4.444.444
$
1.444.444
67,50%
32,50%
2.076.923
$
1,44
$ 15.187.500,00
$
7.312.500,00
$
3.000.000,00
$
1.444.444
Variation 3
V
$ 25.000.000,00
t
4
r
50,00%
I
$ 3.300.000,00
x
1.000.000
POST $
4.938.272
PRE $
1.638.272
F
66,83%
1-F
33,18%
y
2.014.318
p
$
1,64
$ 16.706.250,00
$ 8.293.750,00
$ 3.300.000,00
$
1.638.272
Variation 4
$ 25.000.000,00
4,4
50,00%
$ 3.000.000,00
1.000.000
$
4.198.928
$
1.198.928
71,45%
28,55%
2.502.235
$
1,20
$ 17.861.700,15
$ 7.138.299,85
$ 3.000.000,00
$
1.198.928
Variation 2
$ 25.000.000,00
4
60,00%
$ 3.000.000,00
1.000.000
$
3.814.697
$
814.697
78,64%
21,36%
3.682.349
$
0,81
$ 19.660.800,00
$ 5.339.200,00
$ 3.000.000,00
$
814.697
Variation 5
$ 25.000.000,00
4
50,00%
$ 3.000.000,00
2.000.000
$
4.938.272
$
1.938.272
60,75%
39,25%
3.095.541
$
0,97
$ 15.187.500,00
$ 9.812.500,00
$ 3.000.000,00 35
$
1.938.272
METHODS TO EVALUATE A VC
DEAL IF THE COMPANY EXISTS
¶ DCF
¶ MULTIPLES
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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
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METHODS TO EVALUATE A VC
DEAL IF THE COMPANY EXISTS
¶ DCF
¶ MULTIPLES
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MULTIPLES
EV/EBIDTA
EV/REVENUES
EV/CASH FLOW
EV/EBIT
P/E
Private comparable companies + AIM companies
Very simple but easy to make mistakes
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AVERAGE EBITDA MULTIPLE
= 5 X EBITDA
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