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Prof. Vittorio de Pedys
FOR DISCUSSION
How Business Angel and Venture Capital evaluate investments
LESSON 6
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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 1990-1994
• 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 2010
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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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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
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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
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• 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
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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…
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3.PRODUCT&TECHNOLOGY
TECHNOLOGY
PARTNERSHIPS
SIMPLICITY
BUSINESS PROCESS
DOMAIN KNOWLEDGE
NETWORK
…AND DEFENSIBLE BARRIERS
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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 $125 million. The investor will now own
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METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
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METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
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TIPICAL ANGEL VALUATION (1/2)
NO REVENUES?
500K-1M€ STANTARD PRE-MONEY VALUATION
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TIPICAL ANGEL VALUATION (2/2)
….or bridge loan to A round Venture capital investment:
Angels can buy A round shares at 75% share price
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METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
¶ ANGEL VALUATION
¶ VENTURE CAPITAL METHOD
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VC METHOD
POST = V/ (1+r)t
V= EBITDA x multiple exit
R= required annual return of the fund
t= time to exit
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EXAMPLE
POST = 25/ (1+50%) 4
= 4.9 M€
EBITDA Year 4 = 5M€
Value in 4 years= 5 M€ x 5 = 25M€
Required annual return: 50%
Time to exit = 4 years
Investment = 3 M€
PRE = 4.9 - 3 = 1.9 M€
VC QUOTA = 3/ 4.9 = 60% 34
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Single period NPV method Base Model Variatio 1 Variation 2Exit value V 25.000.000,00$ 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$
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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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MULTIPLESEV/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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