IstanbulOctober 18, 2019
The Venture Capital Method for Conducting Valuation
Guillem Laporta, CFAPrincipal, Ysios Capital
2Ysios Capital
Disclaimer
This presentation has been prepared by YSIOS Capital Partners, S.G.E.I.C., S.A.U. (“YSIOS).
This presentation is only provided for information purposes. This presentation does not
constitute a public offer or marketing in accordance with the Spanish legislation in force,
neither is part of the legal documentation of the Fund.
This presentation does not constitute investment advice, so the recipient of this presentation
should form their own assessment and take consequences and risks of doing so in the light
of his/her or its personal circumstances. Neither YSIOS nor any third party or entity will
accept any liability regarding the accuracy of the information contained in this presentation.
The information and/or opinions are subject to change without notice.
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Initial Remarks
Guillem Laporta, CFA
Experience
2018-Currently
Principal, Ysios Capital (Barcelona, Spain)
2013-2018
Associate, Edmond de Rothschild (Paris, France)
2011-2013
Analyst, Caixa Capital Risc (Barcelona, Spain)
Education
Chartered Financial Analyst (CFA)
BSc, MSc, Biotechnology, Universitat Autònoma de Barcelona
BA, MA, Business Administration, Universitat Pompeu Fabra
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Introduction to Venture Capital
Venture Capital Is an Alternative Form of Investment with High Risk and High Reward Potential
Venture Capital (VC)
Type of alternative investment whereby
financing is provided by funds to small, early-
stage, emerging firms in exchange for a
portion of their capital
General Characteristics
• Lack of liquidity
• High risk, difficult to estimate
• Low/No revenues
• Growth through subsequent funding
• Weak asset base
• Low leverage
• New team
• But…High potential reward
Investable Markets
Source: Own Analysis
Public Equities
Fixed Income
AlternativeInvestments
Real EstatePrivate EquityVenture CapitalCommoditiesDerivativesDistressed Assets…
Bonds (Corporate, Government)Money MarketsAsset Backed Securities…
Corporate StocksIndices…
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Risk
Retu
rn
Risk-Reward Line
Source: Own Analysis
Introduction to Venture Capital
“No Hay Duros a Cuatro Pesetas”
In efficient markets, all investments
are in the risk/reward line
Time and arbitrage eliminate outlier
opportunities
Hence it is very difficult to
consistently obtain outsized risk-
adjusted returns
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Risk
Retu
rn
FixedIncome
PublicEquities
VC
VCBiotech
Assets on the Risk-Reward Line
Source: Own Analysis
Biotech VC Characteristics
• Binary outcomes (safety, efficacy…)
• High scientific specialization
• Blockbuster potential
• Intangible assets (R&D)
• Dealing with animal & human lives (positive
externalities, but also costs/regulations)
Introduction to Venture Capital
Venture Capital in Biotech Involves Very High Risk Investments with Block Buster Potential
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Introduction to Venture Capital
VCs Mitigate Risk by Investing in a Handful of Companies
Example of Portfolio Performance
Source: Own Analysis
Company 1
5x
Company 2
0x
Company 3
3x
Company 4
2x
Company 5
1x
Company 6
10x
Company 7
2x
Company 8
0x
Company 9
1x
Company 10
6x
Company 11
0x
Company 12
5x
Company 13
8x
Company 14
2x
Company 15
0x
Company 16
4x
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Discounted CF Method
The Price of an Asset Depends on the Future Cash Flows It Can Generate
The price of an asset can be determined by
the “utility” it will provide in the future
If such utility can be measured in cashflows
(CF), then a price can be established TODAY
The translation of future utility to current price
needs to account for at least 1) the passing
of time, 2) the risk involved in the realization
of the CFs
Asset Pricing: Discounted CFs Method (dCF)
Source: Own Analysis
ALERT!
There’s no such thing as an “objective price”.
All we can do is calculate a “rational price”
based on assumptions, which will always
involve a degree of subjectivity
ASSET 1
t=0
ASSET 1
t=n
CF 1 CF 2 CF n
Future Cash Flowsplus
Future Asset Value
Price Today
Account for passing of time and risk
“discount”
“Rational” Price Today
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Discounted CF Method
The Problem of Assets in R&D Stage Is That CFs Are Difficult to Estimate
Asset Pricing: Discounted CFs Method (dCF)
Source: Own Analysis
ASSET 1
t=0
ASSET 1
t=n
CF 1 CF 2 CF n
Future Cash Flowsplus
Future Asset Value
Price Today
Account for passing of time and risk
“Rational” Price Today
? ? ? ?
?
When CFs are difficult to measure, dCF can
still be used, but many more assumptions will
need to be made, leading to a worse price
estimate
When can be CFs difficult to measure?
• CFs occur far in the future
• CF amounts are not easily predictable
• Risk cannot be estimated
Then What?
dCF is still a useful method. It is a powerful
tool used in corporate negotiations
Alternative methods based on the same
concept: Venture Capital Method
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Pre-Money Valuation
Value given to the company before the investment
Post-Money Valuation
Value given to the company after the investment. It equals the pre-money plus the amount invested
VC Valuation Concepts
Pre-Money and Post-Money
+ = Post-Money Valuation
“new value”
Pre-money
Value of the Company
Total Amount Invested
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VC Valuation Concepts
Post-Money Determines the Ownership
Post-Money Valuation
Individual Amount Invested=% in a Company
20 (pre-money) + 30 (total investment)
5 (individual investment)
= 10% ownership
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VC Valuation Concepts
Ownership Determines Return on Investment
10%
20%
30%
40%
Ownership
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Ownership Must Be Considered on a Fully-Diluted Basis
VC Valuation Concepts
Instruments that affect capital structure
• Employee Stock Options (ESOP)
• Warrants
• Convertible Loans
• Convertible Interest
• Discounts to Conversion
Post-Money Valuation
Individual Amount Invested% in a Company
10% 6%
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Ownership Must Be Considered on a Fully-Diluted Basis
VC Valuation Concepts
Pre-Money
$20M
Investment
$30M
IndividualInvestment
$10M
ESOP
10%
Convertible Loan
$10M
+
+
$10MNon Diluted % =
$20M + $30M= 20%
$10MFully Diluted % =
$20M + $10M + $30M
x 90% = 15%
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3 Steps
The VC Method
Define Risk and Target Return
Determine Exit Values by Comparables
Calculate Pre-Money to Achieve Target Return
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The Venture Capital Method
The VC Method
(1) Risk/Return AssessmentGiven the risk of an investment, we
determine the minimum return by
which that investment is worth doing
(2) ComparablesWe analyze the values at which similar
companies have been acquired
(3) Determine the Pre-Money and
Post-MoneyWe determine the pre-money valuation
that yields a multiple of 8x given the
amount of our investment and
assuming that Company A will be
acquired for $400 M
Ex: Company A is very risky, we need a
multiple of 8x to compensate the risk
Ex: Company A is very similar to
company B, which was recently
acquired for $400 M
Ex: If we invest $30 M in Company A, we need $240 M in proceeds at
exit ($30 M x 8x), which means we need to own 60% of the company
($240 M / $400 M)
Pre-money + $30M (we are the only investors)
$30M (example individual investment)60% =
Pre-money = €20M
Post-money = €50M
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Pre-Moneys Increase as Assets Risk Decerases
The VC Method
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Practical Example: Chase Pharmaceuticals
Donepezil Is the Standard-of-Care Treatment for Alzheimers’ Disease
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Practical Example: Chase Pharmaceuticals
High Doses of Donepezil Help Slow Down the Disease, But This Comes with Side Effects
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Practical Example: Chase Pharmaceuticals
Innovation: Combination of Donepezil with a Peripheral Cholinergic Blocker
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05 Practical Example: Chase Pharmaceuticals
SWOT Is a Useful Tool to Assess Risk
Strengths Weaknesses
• Simple and robust scientific and medical concept
• Abbreviated and less costly regulatory development
• First time working with the team
• Company’s headquarters notclose
Opportunities Threats
• Unmet medical need and huge market opportunity
• Potential for a slowdown in disease progression
• Concept can be extended to other combinations of AChEIs and antidotes
• Perceived risk of generic challenge at exit
• Disappointing clinical results
• New CEO may not fit in thecompany’s athmosphere
Source: Own Analysis Based on Non-confidential Data from Andera Partners
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Practical Example: Chase Pharmaceuticals
Comparables Help Assess Return Potential
Average = $150 M
Upfront
Source: Andera Partners
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Practical Example: Chase Pharmaceuticals
Returns Analysis Based on Potential Upfront Values
Upfront Value $50 M $125 M $150 M $200 M $250 M $300 M
Multiple 1.9x 4.6x 5.6x 7.4x 9.3x 11.1x
Source: Own Analysis. The figures above are just an example for explanatory purposes only. They do not correspond to the actual analysis for this investment
Base Case
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Practical Example: Chase Pharmaceuticals
Chase Pharmaceuticals Was Acquired by Allergan in Nov 2016 for up to $1 Billion
Source: PharmaLive
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PotentialRealized
Practical Example: Chase Pharmaceuticals
Realized and Potential Returns after Transaction
Upfront Value $50 M $125 M $150 M $200 M $250 M $1000 M
Multiple 1.9x 4.6x 5.6x 7.4x 9.3x 37.0x
Source: Own Analysis. The figures above are just an example for explanatory purposes only. They do not correspond to the actual analysis for this investment
Base Case