how to valuate your company, with capricorn venture partners

Xavier Corman | Martin van Wunnik 1 28/05/2013 Xavier Corman | Martin van Wunnik 1 28/05/2013

Finance for Startups

How to valuate your company, with Capricorn Venture Partners

Martin van WunnikXavier Corman


Sponsors


Finance for Startups

Introduction

• Financial Valuation Basics

• Non Financials Aspects

• Capricorn Venture Partners

• Q&A


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Who we are

Martin van Wunnik

Xavier Corman


Financial Valuation Basics

Based on Balance Sheet

Based on Profit & Loss Statement

DCF – Discounted Cash Flows

with WACC – Weighted Average Cost of Capital& IRR – Internal Rate of Return


Based on Balance SheetNet Assets = Total Assets – Total long term debts

Adjusted Net Assets = : +/- adjustments Provisions, historical values (land, buildings),

‘normalized salaries’, …

Liquidation value : Not going-concern (social liabilities, C4, …)

Goodwill, Customers, Patent, etc…


Based on Profit & Loss Statement

Multiples based on:

SalesEBITDA

EBITTaxable Profit

Net Profit

www.impulse.de

•

http://www.impulse.de/

http://www.impulse.de/


DCF – Discounted Cash Flows


WACCWeighted Average Cost of Capital

Time & Risk

The WACC is the cost of each capital component,multiplied by its proportional weight,and then summing them up.


Cost of Equity:Which elements ?

re = rf + β × (rm − rf)

Capital Asset Pricing Model (CAPM)

rf = risk-free rateβ = equity beta (volatile)(rm − rf) = market risk premium


IRR – Internal Rate of Return

IRR makes DCF = 0

Present value of all future cash flow = initial investment (i.e. break even)

The higher IRR, the better (when all other factors are equal)


IRR (Internal Rate Return)

IRR 10 % IRR 25 % IRR 50 % IRR 100 %0

5

10

15

20

25

30

35

23

8

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Comparison of IRR

Year 1 Year 2 Year 3 Year 4 Year 5


Evolution IRR/maturity

Idea MVP 1st Clients Break-even Profit Sustainable growth0%

20%

40%

60%

80%

100%

120%

IRR


Idea MVP 1st Clients Break-even Profit Sustainable growth

0%

20%

40%

60%

80%

100%

120%

050000100000150000200000250000300000350000400000

Idea MVP 1st clients Break-even TOTALScenario 1 Capital increase 1.000.000 1.000.000

Shares investor 40%Type of investor BA+VCCost of capital 100% 50% 35% 100%

Scenario 2 Capital increase 50.000 200.000 750.000 1.000.000Shares investor 5% 15% + 4% = 23% 15%+13%+4%=31%Type of investor FFF BA VCCost of capital 100% 50% 35% 41%

Cash need

IRR


Investor’s motivation

Return on investment

Social aspect

Influence on the management of the company


Pré-money & Post-money

2,000,000

500,000

ValuePre-money Investment


Valuation - What is dilution ?

Start 1st Round 2nd Round0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

95%81%

69%

5%

4%

4%

15%

13%

0.15

VCBAFFFFounder(s)


Relution / Dilution

Start 1st Round 2nd Round Exit0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

95%81%

69% 75%

5%

4%

4%3%

15%

13%10%

0.150.11942675159

2357

VCBAFFFFounder(s)


Tools for relution

Options (call/put)

Warrants

Cap

rico

rn V

en

ture

Pa

rtn

ers

How to value your company?

Finance for Start-Ups May 28, 2013

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CAPRICORN VENTURE PARTNERSIn short

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Partners-owned

20 people organisation, 20 years existence

Licensed asset manager – AIFMD compliant

Over € 250 million under management

Capricorn Venture Partners

ICT€ 15 million

CLEANTECH€ 112 million

Quest for Growth€ 106.8 million** December 31, 2012

Quest Cleantech Fund€ 11.0 million** December 31 , 2012

HEALTHTECH€ 42 million

Head office, Leuven, Belgium

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DISCLAIMERThe views expressed in this presentation do not necessarily reflect the views of the Capricorn Venture Partners or its investment managers.

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HOW TO VALUE YOUR COMPANY?Capricorn Venture Partners

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Venture capital reality

Most capital get raised to address specific operational needs

before significant value has been created. In those instances

the strategic interest of new and existing investors to obtain

or maintain a certain percentage interest in the company

prevails over the valuation models.

In most cases traditional valuation models become only

relevant at exit.

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Conventional Valuation Techniques

• Discounted cash flow

• Price / earnings ratio

• Price / EBITDA ratio

• Price / sales ratio

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Issue

Cash flow, earnings, EBITDA, sales, … ?????

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Alternative Valuation Techniques

• Peer comparison

• Technology value

• Pre-money versus post-money

• 1/3 sweat - 1/3 IP – 1/3 €’s

• Your value is 1 to 2 times the money you can raise

• The price a fool is prepared to pay

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Who is afraid of dilution?

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What do you prefer?

Pre-money versus post-money

• Always differentiate between pre-money and post-money• pre-money = value of the company before the transaction• post-money = value of the company after the transaction• post-money = pre-money + capital increase• post-money = invested amount / percentage in the company• post-money = total number of shares after the transaction x price per

share

• Always differentiate between actual and fully diluted

shareholding• fully diluted = including all shares resulting from conversion, stock

options, warrants, or any other rights related to securities of the company

• Use price per share and total number of shares fully diluted as

the legally binding values

• Keep it simple


A simple cap table example

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price per share investment shares seed series A series B series C series C + SOP€ € #

founders 100.000 1.000.000 80% 44% 28% 22% 20%

seed investor 1 250.000 250.000 20% 11% 7% 5% 5%Series A investors 2 2.000.000 1.000.000 44% 28% 22% 20%Series B investors 3 4.000.000 1.333.333 37% 29% 26%Series C investors 4 4.000.000 1.000.000 22% 20%

stock option plan 509.259 10%

pre money 1.000.000 2.500.000 6.750.000 14.333.333post money 1.250.000 4.500.000 10.750.000 18.333.333 20.370.370

total 10.350.000 5.092.593

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A simple cap table example - exit

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price per share investment shares series C + SOP exit multiple€ € # €

founders 100.000 1.000.000 20% 15.709.091 157

seed investor 1 250.000 250.000 5% 3.927.273 15,7Series A investors 2 2.000.000 1.000.000 20% 15.709.091 7,9Series B investors 3 4.000.000 1.333.333 26% 20.945.455 5,2Series C investors 4 4.000.000 1.000.000 20% 15.709.091 3,9

stock option plan 509.259 10% 8.000.000

pre moneypost money 20.370.370 80.000.000

total 10.350.000 5.092.593 7,7

exit value 80.000.000stock-options 10%

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Measuring non-financial value

• Separate KPIs/VIPs for the current year and towards exit

• 2013 points should reflect management KPI’s and our

priorities

• By preference “measurable” or “achieved yes/no” points

• Not every cell needs to be filled

• Colour coded• Blue : status at start of year/neutral/work in progress• Green : realised• Orange : critical but solution identified• Red : critical no solution identified• Italic : changed versus previous quarter

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Key Performance Indicators& Value Inflection Points

2013 towards exit

Commercial Traction

• Conclude multi year supply contract with key player

• Continue supply of product to + 5 clients

• Multiple supply contracts with yearly value above € 500k

• Diversified customer portfolio with standard products

Operations • + 80% production yield • Ready to order additional capacity

• ISO qualification• Demonstrated high yield and fast ramp-up• Second sourcing or dual location strategy

in place to reduce supply risk

Technology and IP• 600 V grounded substrate demonstrated• Solution identified and demonstrated at

product level for current issue

• Demonstrated capabilities on smaller scale• Strong and broad IP portfolio, several

patents granted, strong patent application pipeline

Team

• VP Sales on board• Strengthen team via active chairman,

executive chairman or alternative solution

• Conversion from a research driven team to a commercial team with demonstrated industrial experience

Finance • Close bridge round • Close series B financing to allow

• + € 5M sales• Cost leadership allowing high margin

business

Other • Operations in Asia or clear plan towards Asia

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5 reasons why you will fail

1. Don’t underestimate the time to market

4. It is not easy to convince a million consumers

5. In love and in business you have to let go sometimes

3. Big data is not a free for all

2. Beware of “It’s kind of a …”

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Team

• Get business & entrepreneurial experience in the team

• Do not force researchers in a CEO role

• Build multidisciplinary teams (not all engineers!)

• International exposure and language skills

• Humans are not scalable

• Hiring new key persons that you have to pay more as the founders?

• No function in a start-up company is forever

• Keep you friends as friends

• Foresee “good leaver – bad leaver” conditions in shareholders

agreement and stock option plans


IP strategy

• Define and challenge your IP strategy!

• Protection or freedom to operate?

• Does a patent has value without the associated business?

• Is a licence model a valid business model?

• Are you prepared for a patent due diligence by a US law

firm in view of a $ xxx million acquisition?

• Any change of control clauses in your contracts with

customers, suppliers, license agreements


IP strategy is more than patents

• Trademarks

• Website

• Trade Secrets

• Contractual IP• Employment and assignment of invention agreements• Consultancy contracts• Contracts with suppliers and customers• License agreements

• Your network


Importance of patents

• Patents are important in any phase of a VC investment !

• As an information source for deal selection

• Before making an investmento Strong and clean IP o Full ownership of patent(s) by the company remains the preferred

model!o Exclusive license with transfer rights and right/obligation to defend

source IP?o FTO - Freedom to operate is key

• During the investment period

• At exit (most likely via M&A transaction)


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Pitching is a lot like dating

1. Don’t order the most expensive thing on the menu

4. Have realistic expectations

5. Learn how to deal with disappointments

3. Be aware that you will be stuck with eachother for a while

2. Be yourself

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For further inquiries

Contact:

Tom Vanhoutte ([email protected])


Lei 19/1, B-3000 Leuven, Belgium

Tel +32 16 284100 Fax +32 16 284108

http://www.capricorn.be

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mailto:[email protected]

http://www.capricorn.be/

how to valuate your company, with capricorn venture partners

Economy & Finance

capital increase

irr internal rate of

capricorn venture partners26

capital component

cost of equity

eventhe higher irr

shares investor

type of investor ba