Download - IGNITE 2008
IGNITE 2008
“How Investors Value Technology Companies”
Art, Science, Maths and Realities
What Entrepreneurs Need to Know
Professor Alan Barrell and Peter Phillips
Slide 2
Agenda – Welcome to the Real World
• Valuation – when and why is it important ?• Thinking about INVESTORS – they have the ££££/$
$$$• Deciding on best sources of Finance• The Background – Economics, Markets and Values• Case Based discussions – the art of the possible • Valuation calculations and methods – where do they
fit ?• Special problems of Emerging Technologies• Valuing the Future….Crystal Balls vs PCs
Slide 3
Slide 4
Stay Cool!Stay Cool!
Dilbert - Scott Adams
Slide 5
Stay Cool!Stay Cool!
Dilbert - Scott Adams
Slide 6
Stay Cool!Stay Cool!
Dilbert - Scott Adams
Slide 7
Valuation – how and why?
• To indicate value to potential investors
• What is a company worth?
- What someone will pay for it
• What is this determined by?
- Other investment choices
(there are usually MANY !)
Slide 8
A Search for Fair Value – see any Science here?
Issue date Value at
issue
1 Year On
Bookham April 2000 £1.2 billion
£231 million
Lastminute.
Com.
March 2000
£571 million
£54 million
Orchestream June 2000 £212 million
£52 million
Just2clicks Feb 2000 £130 million
£ - - - -
Slide 9
The Changing Horizon – World Economics affects Company Valuations
EnvironmentIssues
The death ofdeference
New employmentpatterns
Organisations
Globalisation
Technology
Slide 10
The Changing Face of Globalisation – Realities for Europe, US and The World
• Two fifths of the Worlds people live in the two fastest growing large economies – China and India – FACT
• Education, Wealth Creation and New Knowledge are at the heart of Economic Planning in Asia
• Growth in Asia is far ahead of Europe.
• The desire to LEAD is strong in Asia
• CASH is in place in the Asian economies – as well as brainpower.
• Growth of FDI and VC.
Slide 11
Slide 12
Some Economic Indicators – How are key Countries doing? How does it affect investing?
• Can the trend continue? China’s $s growing at 200billions a quarter!• Inward and outbound investing – trends• Sovereign Wealth Funds• Chinese and Indian VC investing• Chinese and Indian Angel Investors are growing in number and getting organised
GDP % Change Ind. Prod. % Trade Balance
US $ Bn
Foreign Reserves
US $ Bn
China + 9.5 + 8.9 +60 1.65 Trillion
And growing!
India + 8.6 + 8.0 - 25 130
Britain + 2.9 + 0.1 - 49
Euro Area + 2.1 + 1.0 + 86
USA + 3.9 + 3.5 - 679
Slide 13
The Phenomenon of Ancient China – Creativity and Inventiveness – some of the Inventions – many NOT financed or exploited – little return for inventors…
• The first lamps• Magnetic Compass• The Camera• Gunpowder• Paper for writing• Printing• Iron and Steel Smelting• Copper and Bronze ware• Oil Drilling and Production• Coal Mining• Pottery and Porcelain• Wine making and tea and tea culture• Early Astronomy• Sericulture – gave us Silk• Seismography• Traditional Medicine and Anaesthetics• Acupunture• Vaccination against Smallpox• The Hot Air Balloon• The Soushi Calendar• Decimal and Binary Mathematics
Slide 14
When a market “BOOMS” - Venture Capital Investments in E-Commerce (U.S.A.) “When Greed overcame Fear”
Source: Venture Economics
Netscape IPONetscape IPO33rdrd largest in largest inNasdaq HistoryNasdaq History
Amazon.com IPOAmazon.com IPO
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
To
tal I
nv
est
ed (
$ m
illio
n)
Slide 15
Cambridge Venture Capital Scene – Estimated total value of funds: in excess of £1.5billions
Venture Capital Funds with Regional Associations – at the height of a “boom”
- UK and Europe
- Cambridge Region only- UK only
Less than £1.0 million
More than £3.0 million
INVESTMENT SIZE
CRIL Generics Prelude 3i
ICT
Life Sciences Avlar
FNIVenture Capital
Merlin
Amadeus
PrimeTechnologyVentures
Pall MallVentures
Alta Berkeley
ETCapital
SiemensVC
Abingworth
CreateVentures
CambridgeGateway
TTPVentures
Slide 16
1990 1995 2000 2005 2010 1990 1995 2000 2005 2010
ExpectationsExpectations
WWW InventedWWW Invented
NetscapeNetscape
Amazon.comAmazon.com
Christmas 1999Christmas 1999
Christmas 1998Christmas 1998
E-tailers shakeout beginsE-tailers shakeout begins
Internet inInternet inevery businessevery business
Investor disillusionmentInvestor disillusionment
Business disappointmentBusiness disappointment
Robust e-businessesRobust e-businessessurvive & thrivesurvive & thrive
PioneerPioneer investorsinvestors
LateLateInvestorsInvestors
Early investorsEarly investors
But….Boom can lead to BUST- valuation implications? “Return of Fear….” “Down Rounds” ....Discuss….
R&DR&D MarketingMarketing ProfitabilityProfitability Cash FlowCash Flow
Peak ofPeak ofIrrationalIrrational
ExpectationsExpectations
Bygrave; GartnerGroup, 11/99
IPO FeverIPO Fever
RationalRationalExpectationsExpectations
Slide 17
US Angels – The REAL early stage funders !
• In 2000 US business Angels invested more than $200billions in early stage companies
• This was much more than the so called “venture capital industry” which did not reach investment levels that year of $150 billions.
• In the difficult year of 2002 – when VCS “sat on hands” – Cambridge Angels kept the early stage and emerging business sector alive and well
• Cambridge Angels are adopting the US success model and working more closely together.
Slide 18
The Competitive Threat“Today’s Peacock is tomorrow’s feather duster” –
There is ALWAYS competition….
Slide 19
Sources of Competitiveness
Creativity Risk
Speed Reputation
Cost Values
Learning Information
Slide 20
Valuations and Technology Development – “Survival of the Fastest…”
All international phone calls1971
All airline passengers1975
All mobile phones 1984
All emails 1992
All SMS1998Source: Analysys, World Bank and ITU
Slide 21
Three Converging RevolutionsThree Pervasive Technology Platforms
BIO TECHPharmaceuticals
DiagnosticsResearch/Info
ToolsIndustrial
GenomicsBioinformatics
Proteomics
INFO TECHHardwareSoftware
Communications
NANO TECHElectricalStructural
BiomedicalEnergy & Environment
BiosensorsBiochipsBioelectronics
MicrofluidicsNanobiotechnology
Drug Delivery
NanodevicesNanosensors
Nanoelectronics
Slide 22
• Universities and centres of academic excellence• Exploitable, converging Technologies• Entrepreneurs with marketable ideas and products
• Business angels and established seed funds
• Sources of early stage venture capital
• Core of successful large companies
• Quality management teams and talent
• Supportive infrastructure
• Affordable space for growing businesses
• Access to capital markets
• Attractive living environment and accommodation
source :- Gibbons - Stanford University 1998
Characteristics of high technology regions- Catalysts for Growth – Centres of Investment – is
this the environment where most of us are?....
Slide 23
Slide 24
The emergence of high-technology clusters in Greater Cambridge
1971 1981 1991 2001 The future?
ScientificInstruments
Nanomaterials
Drugs delivery
Sensors/actuators
Informatics
Instrumentation
Medical engineering
LEPs
Drug modelling
Bluetooth
Sentient computing
Telecoms
Industrial inkjet
Biosciences
Computing
Software
ScientificInstruments
Wirelesscommunications
Telecoms
Industrial inkjet
Computing
Biosciences
Software
ScientificInstruments
Hi-tech 20,200 25,100 34,900 46,200jobs:
Computing
Software
ScientificInstruments
Industrial inkjet
1971 1981 1991 2001 The future?
ScientificInstruments
Nanomaterials
Drugs delivery
Sensors/actuators
Informatics
Instrumentation
Medical engineering
LEPs
Drug modelling
Bluetooth
Sentient computing
Telecoms
Industrial inkjet
Biosciences
Computing
Software
ScientificInstruments
Telecoms
Industrial inkjet
Biosciences
Computing
Software
ScientificInstruments
Wirelesscommunications
Telecoms
Industrial inkjet
Computing
Biosciences
Software
ScientificInstruments
Wirelesscommunications
Telecoms
Industrial inkjet
Computing
Biosciences
Software
ScientificInstruments
Hi-tech 20,200 25,100 34,900 46,200jobs:
Computing
Software
ScientificInstruments
Industrial inkjet
Computing
Software
ScientificInstruments
Industrial inkjet
50,000
Slide 25
Slide 26
Overlapping Technologies support Overlapping Business Clusters
HEALTH
KNOWLEDGE CREATION
INFORMATION and COMMUNICATIONS
TECHNOLOGY
Basic Research
Sound & vision
Bio-pharmaceuticalsComputing
Publishing
Medicalservices
Bio-informatics
Medical devices and scientific instruments
University/ Research Institutes
Inkjet printing
Wireless
Telecoms
Networking
Technology ConsultingMedicalresearch
Education
Slide 27
“Show Me The Money!”
• Basics – Investment Readiness• How organised are we ?• Company structure ?• Management Team?• Intellectual Property?• Vision, Purpose,Plans and Positioning Ideas?• Advisors ? “Greyhairs and Wisdom” ? Basics –
eg Accounts and Controls ?• “Rumsfeld Questions” – “What we DON’T
know?”
Slide 28
Sources Of Business Finance
Maturity
Risk
“Our Money”“Our Money”
Family and FriendsFamily and Friends
Business AngelsBusiness Angels
Early Stage VCEarly Stage VC
Expansion CapitalExpansion Capital
B
A
N
K
F
I
N
A
N
C
E
??
Seed FundsSeed Funds
Pre-IPOPre-IPO
Slide 29
Converging Interests and InfluencesInnovating in the Overlap and Adding Value – working together – across
functions as well as across borders – public funds are available
EDUCATION&
RESEARCHincluding Universities
INDUSTRY&
BUSINESS
GOVERNMENTNational & Local
Slide 30
Stages Of Investment (1)
3. Early stageCompanies that have completed the “proof of principle”, own some IPR, have a management team substantially in place, requiring funds for manufacturing and/or licensing, and sales
1. Seed
Developing IPR, unlikely to have full time employees, and may well have no business premises. Working on “proof of principle”
2. Start up
Companies in the process of being set up, with limited trading. Involved in product development and initial marketing
Slide 31
Stages Of Investment (2)
4. ExpansionEstablished companies, with a full management team and generating sales, and require further finance to break into new markets. The definition “Expansion” often creates confusion
6. Later stage
Many variants – M and A, MBO, MBI etc.
5. Pre IPO
Final round prior to a listing on a recognised Stock Exchange. Can be referred to as “Expansion” funding
Slide 32
“Show Me The Money” – It’s more than “valuation”
• Understanding the “Money Supply Chain”• Research and Help – and where to find it• What’s Best for Our Business ?• “Money on its own may not bring the Value you need”• Friends, Banks, “Angels”, VCs et al.• Grants – including DTI R & D Grants• Resourcefulness, Resilience and Recovery”• Learning from encounters with investors• Attention to detail – “nitty gritty”
Slide 33
The Early Stage Business Balance – what do investors look for and see? When “valuing” ?
The role of Chairman and NXDs
Inspired Leadership
Enthusiasm
Bullshit
Courage
OptimismVision
Creativity
Management
Research & Analysis
Caution
Process
Financial Control
Market Knowledge
Slide 34
1) The “Bibles” – BVCA and EVCA Handbooks and Websites2) VCs can be small, large, regional,national, international,privately
held or publicly quoted. UCFs growing in number.3) RDA and Govt supported VCs are emerging to fund up to £250K
or £500K4) VCs can be “general” or industry focussed5) All VCs have clear investment criteria.6) VCs are firmly regulated by the FSA, or other National
Regulatory bodies.7) Some are regulated in the Channel Islands. 8) Corporates make direct investments AND some have free
standing VC operations.
Sources Of Business FinanceThe Venture Capital Jungle – where Valuations are a
“specialty”
Slide 35
Engaging The Funders
• Preparing the case - how to start -”Do we need help ?” -
Intermediaries-Corporate Finance.
• Is the Business Model Clear?
• Keep Business Plans Simple!
• Targeting funders - Investors have specific criteria
• ?Angels, Banks, Seed Fund, Corporates or VCs – or a “mix”
• Matching agendas
• Sponsors for spin-outs
• Organisations and people - the forward plan
Slide 36
One Fund’s Investment Criteria Cambridge Gateway Fund
• Innovative core technology• Protected/protectable I.P.• Sectors - I.T., Telecomms, Life Sciences• Beyond proof of concept - not seed, not start-up• Management team, Business Model and Plan in
place• Potential to exploit global markets• Ready for “roll out”
Slide 37
• Investors due diligence agenda:-– Technology and I.P.– Market - is it really there?– People - can they do it?– Exit options and drive
• Due Diligence on Investors:-– Investment criteria– Track record– People, relationships, references– Clarity of expectations– Available finance - including “follow on”– Willingness to syndicate and to participate
Due Diligence is a two way thing: it will affect valuation get it RIGHT !
Slide 38
Exploring the Spirit of Adventure and Discovery – and on to Entrepreneurs
• An early case of an “Angel Investment”
• Adversity and achievement – rewards for persistence
• Investors look for “special people”
• Inspiration and Passion show in different ways
• Investors invest in…People mostly
• Knowing the Investor mindset
Slide 41
A “Brainpower Hero”
Slide 42
Einstein on IMAGINATION….
“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world”
Albert Einstein 1879 - 1955
Slide 43
Slide 44
“You look at things and ask - why?
but I dream of things that never
were and ask -
George Bernard Shaw
why not?”
Why MINDSET matters – what’s an Entrepreneur ?
Slide 45
Schumpeter (1911) on Entrepreneurs
“Entrepreneurs blow gales of creative destruction.”
Role of the entrepreneur in transforming economies by developing:
New products New methods of production New ways of organizing Untapped raw materials Enhanced competitive performance
Josef Schumpeter Vienna 1911
Slide 46
Is there RISK involved?....Oh dear….How do we manage risk ?....
Slide 47
As an Investor - Would you invest in this team ?
Slide 48
If you or I had done so in 1978 – we wouldn’t be working here now !
Microsoft Corporation, 1978
Slide 49
Time for a final little story, about a bright little boy….
Slide 50
Who became a brilliant young man….
Slide 51
Inventor and champion of Intellectual Property Rights……..
Slide 52
NOT just the inventor of the Electric Light…..Thomas Edison – he built an Empire on Intellectual Property –
“Capturing Imagination and creating / adding value”
Slide 53
Let’s look at some Realities – Cases we have known
• Contrasting financing means and valuation – Ink Jet Printing
• Technology, Passion and Energy don’t always prove sufficient – Active RF
• A Funding Fable – “Valuation Obsession” almost killed the company
Slide 54
Contrasting Case Studies – same business sector – similar companies – similar valuations. Equity finance is not the ONLY way – but valuation
counts any way
Domino
Venture Capital
IPO – LSE 43 X oversubscribed
Growth financed by rights issues
Significant acquisitions to buy new technology (e.g. laser coders)
Always profitable
Half yearly reporting
1,500 shareholders
Regular dividends
Shareholder driven – business ratios and “bottom line” focus
Founder realised £21 millions
Willett
Organic growth & bank borrowing
No equity investments
No public offerings
New technology “developed within” – at controlled costs (e.g. laser coders)
Always profitable
No public reporting other than annual accounts
No Dividends for first 10 years
Growth and ambition driven
Owners’ re-investment policy minimise reported bottom line and taxes
Founder realised £60millions – cash.
Slide 55
“Pilgrim’s Progress” – A true story…
Slide 56
Pilgrim’s History
• Born Cambridge 1967 • Educated London &
Cambridge
• BSc Computer Engineering
• Early work - Cambridge & Oxford
Slide 57
Pilgrim’s History
Then…
• To Silicon Valley
• Euphonix Inc – Palo Alto
• Atari Corporation – Sunnyvale
• Chromatic Research Inc – Sunnyvale
Slide 58
Pilgrim’s Experience
• Project Management
• Real Time Systems
• ASIC Design
• Systems Architecture
• Digital Multimedia
• User Interface Design
• Technical Leadership
Slide 59
Pilgrim’s Company in UK – activeRF Ltd
• Back to Cambridge in 1997
• Passion to start own company
• Bitten by the Entrepreneurial bug!
• A “One man band” …
• or more correctly – “One man & his dog”
Slide 60
Tagging Crumpet
Slide 61
Tagging Crumpet
• Dog collars to security systems
Slide 62
The original concept (Jan 1999)
Slide 63
Early Chronology –Post Dog Collar!
• October 1998 – Incorporation
• October 1998 - February 1999 – “One man & his dog”
• Angels to the Rescue!
Slide 64
Commercial micro-location
Slide 65
Share class
board
board
board
Power Evolution at active RF – valuation implications
Founder
Angels
Employees
VC’s
CEO
OrdinaryOptions
Preferred
Founder
Angels
Passive Shareholders
Slide 66
CEOT
heC
ompa
ny
Factions in Conflicts of Interest – value and control diminish….
Founder Angels
Chairmanand Board
VC
Employees
OrdinaryShareholders
Slide 67
activeRF Limited – slippery slope
• Dog collars to security systems• The leap from Lab to Industry• Cultural success• Technical failure• What happened to the revenues?• Management evolution and the CEO• Valuation from zero to £250K to £5.5m to
£250K to zero.
Slide 68
VentureAdventure vs.
Slide 69
antenova Limited – how it started – Pilgrim again….
• IP acquired and brought to Cambridge
£120k Angels, Family & Friends
Slide 70
Case Study: Antenova – a funding fable
• Disruptive technology which could change the world – from University collaboration
• Outstanding management – technical and operations• Inexperienced in fundraising• Valuation obsession• Where has all the money gone?• Salvation, adequate funding and continued progress
Slide 71
Thinking Of Angels! – we keep referring to them !
Slide 72
Some Angel Groups Active in Cambridge
• Cambridge Angels - Serial Entrepreneurs, Cambridge locations
• Cambridge Capital Group – geographically more spread – Cambridge centric investors
• I.Q. Capital – was Great Eastern Investment Forum
• Glen House Capital Strategies Ltd• Sophia Business Angels
Slide 73
Connections
• www.cambridgeangels.net
• www.cambridgecapitalgroup.co.uk
• www.iqcapital.co.uk
• www.glenhouse.uk.com
• www.sophiabusinessangels.fr
Slide 74
Financing Tomorrow’s Businesses – Optimizing your value
• Technical Expertise • Marketing Expertise• Contacts• Decision Making skills• Presentation skills• Dealmaking skills• Money-raising skills• Other Financial skills• Possible exit routes and practical help with
exit
7
What else you get from
Business Angels….
Slide 76
Slide 77
If at first you don’t succeed….try again….but learn from the mistakes!
Slide 78
Slide 79
Inspiration SHOWS – investors have Inspiration SHOWS – investors have emotions!emotions!
“Excellence can be achieved, if we:Care more than others think is wise,Risk more than others think is safe,
Dream more than others think is practical,Expect more than others think is possible.”
Deborah Johnson-Ross
VALUATION is a major topic – serious study needed !
For more information……
www.alanbarrell.com