Transcript E145/STS173 Workshop C Staged Venture Financing Professor Tom Byers Stanford University Special Thanks to Scott Bowie and Mike Rosenbluth Copyright © 2004 by the Board of.

E145/STS173
Workshop C
Staged Venture Financing
Professor Tom Byers
Stanford University
Special Thanks to Scott Bowie and Mike Rosenbluth
Copyright © 2004 by the Board of Trustees of the Leland Stanford Junior University
and Stanford Technology Ventures Program (STVP). This document may be
reproduced for educational purposes only.
Agenda
1. Valuing public companies (Ratios)
2. Dilution + Growth: The exploding pie
3. Chemdex financing
Ratios & Valuing Public Companies Today
• Market Cap = # shares outstanding x Share price
– Answers “what does the market think the company is worth?”
• Ratios
– EPS = Earnings per share
• An indicator of value created for shareholders
– P/E = Market Cap / Annual Earnings or Stock Price / EPS
• How much does $1 of earnings cost an investor?
– P/S = Market Cap / Annual Sales
• Similar companies facing similar risks should have similar
ratios
Metrics in Action
Market Cap
Net Income: $10 M
Share Price: $15
Sales:
P/E:
# Shares:
P/S:
30
$300 M
20 M
$300 M
$100 M
3
$300 M
A Sampling of Public Companies
Stock Price
($/share)
Ebay
66.93
Microsoft
47.32
Walmart
47.15
Coca Cola
40.33
Sony
39.39
GE
23.05
Yahoo!
17.75
Palm
14.81
Gap
14.7
Alkermes
7.35
Sun
3.11
Handspring
0.79
BioTransplant
0.319
Market Cap
EPS
($B)
($/share)
43.24
0.68
253.2
1.74
208.1
1.73
99.983
1.68
36.229
1.885
229.4
1.51
10.488
0.18
430.6M
-9.57
12.993
0.22
475.8 M
-2.39
9.687
-0.74
114.4M
-0.46
8.1M
-1.89
P/E
98.43
27.91
27.79
23.9
21.22
15.66
99.83
66.86
P/S
8.44
0.88
4.62
0.57
1.79
11.14
0.46
0.94
11.3
0.82
0.56
4.81
Metrics Calculation
Public Company Info:
We can calculate:
(must be filed with SEC)
Sales:
Net Income:
Shares Outstanding:
Stock Price:
$100 M
$10 M
20 M
$15
EPS:
P/E:
P/S:
Market Cap:
Metrics Calculation
Public Company Info:
We can calculate:
(must be filed with SEC)
Sales:
Net Income:
Shares Outstanding:
Stock Price:
$100 M
$10 M
20 M
$15
EPS:
P/E:
P/S:
Market Cap:
$0.50
30
3
300
The Venture Financing Game
(1) Founding:
An entrepreneur begins with a vision and shares of stock in the new venture.
Value has been
successfully created.
Entrepreneur trades stock for
ideas, money, and people
(2) Seed Stage:
•Venture capitalists provide
money in return for stock
•Employees join via friends &
associates in return for cash
salary and stock options
•Ideas become intellectual
property which represents the
initial value in the company
Further growth is delayed
until milestones are
reached and risk of failure
is reduced
Reference: Start-Up by Jerry Kaplan
Kaplan’s Startup
Game:
A race against time to
create value and
reduce risk
(3) Growth Stage:
More money, ideas, and people are
obtained, but for much less stock than
in the earlier stage due to lower risk
(4) Exit Stage:
•Company files for IPO
•Entrepreneur, investors, and
employees can cash in stock
for money
•A viable public company has
been created
•Each party continues to build
the company, retires, or starts
the game again
Company balances earning
cash, taking investment, and
spending cash to create value
The Exploding Pie
• The smaller slice of the bigger pie
–
–
–
–
–
–
Goal: Trade shares to grow the pie
Is more fun and rewarding for most entrepreneurs
Is worth more than the whole pie that never grows
Requires high growth rates
Is not easy to achieve, even with lots of financing
Requires a good relationship between entrepreneur and investors
A Real Life Example: Chemdex*
•
•
•
•
How much money do the founders need?
How long until significant revenue?
How long until profitability?
What’s the going rate for 1st round deals?
 Valuation is an art, not a science.
*Chemdex is now called NexPrise (NXPS)
Chemdex in 1997: Series A
1. How much does the company need to
raise?
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Series A
2. Negotiate a pre-money valuation
post $ = pre $ + amount raised = $2.7 M + $1.9 M
% of company sold = amount raised / post $ valuation = $1.9 M / $4.6 M
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Series A
3. Determine share price and total number of
shares
In Round A, share price is set so total shares = 5-10 million
Total Shares = post $ / share price = $4.6 M / $0.54 = 8.5 M shares
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Series B
1. How much does the company need to
raise?
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Series B
2. Negotiate a pre-money valuation
post $ = pre $ + amount raised = $11 M + $13 M
% of company sold = amount raised / post $ valuation = $13 M / $24 M
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Series B
3. Determine new share price
Share price = (pre-money valuation) / (total pre-money shares)
= $11M / 8.5 M
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Series B
4. Determine total number of shares
Total Shares = pre $ shares + amount raised / share price
= 8.5 M + $13 M / $1.29
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
$2.7
$1.9
$4.6
41%
Series
B
$11
$13
$24
54%
Share
Price*
Total
Shares*
$0.54
8.5
$1.29
18.6
Chemdex - Series C
1.
2.
3.
4.
Decide how much you need to raise
Negotiate a valuation
Determine new share price
Calculate total number of shares
PrePost% of
money Amount money Company
Round Valuation Raised Valuation
Sold
Series
A
Series
B
Series
C
Share
Price*
Total
Shares*
$2.7
$1.9
$4.6
41%
$0.54
8.5
$11
$13
$24
54%
$1.29
18.6
$100
$30
$130
23%
$5.38
24.2
Chemdex Financing
PrePost% of
money Amount money Company Share
Date Round Valuation Raised Valuation
Sold
Price
Series
9/97
A
$2.7
$1.9
$4.6
41%
$0.54
Series
5/98
B
$11
$13
$24
54%
$1.29
Series
3/99
C
$100
$30
$130
23%
$5.38
7/99
IPO *
$358
$113
$471
24%
$14.82
$7.7B
2/00
$243.50
Today
$103M
$2.38
* based on data from Hoover's Online
valuations and share numbers in millions
Total
Shares
8.5
18.6
24.2
31.8
31.8
45.8
Calculating Dilution
Percentage owned = owned shares / total shares
Founders’ shares = 59% of 8.5M = 5.02M shares
Series B Dilution: 5.02M / 18.6M = 27%
Series C Dilution: 5.02M / 24.2M = 21%
IPO Dilution: 5.02M / 31.8M = 16%
Series A Series B Series C
IPO
Founders &
employee
pool
59%
27%
21%
16%
Total
Shares
8.5
18.6
24.2
31.8
Chemdex and Dilution
SHAREHOLDERS
Series A Series B Series C
IPO
Founders &
employee
pool
59%
27%
21%
16%
Series A
VCs
41%
19%
15%
11%
Series B
VCs
54%
42%
32%
Series C
VCs
23%
18%
Public
24%
Total
100%
100%
100%
100%
* Assumes equal sharing of dilution every round
return @
value @
IPO
return in
IPO ($M) (times) Feb-00
return
now
$74.08
$52.13
27.4
450.9
4.4
$149.17
11.5
188.6
1.8
$82.62
$113.00
$471.00
2.8
45.3
0.4
Lessons Learned
• Know what public company metrics mean
• Most financings done in multiple rounds
• A smaller piece of a big pie is better than a big piece of a
small pie
• Know how to work out multiple stage financings