valuation of pre commercialized companies
TRANSCRIPT
S
“ Valuation of Pre-Commercialized
Companies”
Experience. Governance - Financial Management - Strategy
Integrity. Trust.
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Real World
Gerard Buckley
Experience and Expertise Founder & CEO of Jaguar Capital an Advisory Practice for
Growth Companies in Governance, Financial Management & Strategy
Past - Chairperson of Board of Directors, Maple Leaf Angels Corporation & founder and Lead Director for Maple Leaf Angels Capital Corporation, the General Partner of MLA48LP1 a Pre-Seed Angel Fund.
Certified Corporate Director of the Institute of Corporate Directors
Previously Entrepreneur in Residence with Incubes
Past member of Small & Medium Enterprise Committee of The Ontario Securities Commission
Investment Committee of Mount Saint Vincent University, Halifax, NS
32 yr. Career with Scotia Capital as a Financial Risk Management Advisor to Fortune 200 Companies: Rogers, Irving Group, Empire Co., Four Seasons, Bruce Power, OPG, Province of Ontario, Ford etc.
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Introduction Fair Market Value Revenue Companies Business Valuations Investor Expectations Pre-Commercialization Q & A
AGENDA
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Valuation - Agreement ofPrice to Buy and Sell
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The Valuation of a company is the price to buy the entire company whether it is public or private often quoted in the price of a share. For a private company you need to know the total value usually stated as Pre- Money Valuation before investment or Market Capitalization (post money valuation) after investment.
Introduction
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FMV - Fair Market Value
``The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in a open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.``
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Revenue Companies
1. Multiple of EBITDA 5. Book Value2. Discounted Cash Flow 6. Market Value3. Comparable transaction method 7. Liquidation Value:
Forced or Orderly4. Total Enterprise Value
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Business Valuations
Every valuation and Pricing is unique
In a M&A Transaction price or valuation comes down to the strategic value the acquirer brings to the transaction & the portion paid to the target
43% of Canadian business owners who are within 10 years of retirement and have no transition plans
65% of business owners don’t know what their company is worth
75% of their worth is tied up in their business
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Investor Expectations
, as a M&A buyer paid < 20 mil with <20 people for 90 % of it`s targets
An Angel Investor has traditionally expected a return of 10X on invested capital
Valuations for tech start-ups have been increasing in recent years while the stock market decreases in valuation
According to CB Insights; between 2012 and 2014, the capital efficiency ratio for 1b exits for VC backed US tech exits has been cut in half, dropping from 22x to 9x.
The capital efficiency of exits in the $500m - $1b range fell by 46% to 7.5x
Exits in the $100m to $500m range also saw a decrease, although the trend was less dramatic from 8.2x to 6.3x.
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Valuation – How Subjective is it?
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Ready to make some money I will auction off $20 to the highest bidder Three rules:
Bid increments must be in amounts of $1 You must have cash in your pocket to bid While the highest bidder obtains the $20, the second highest bidder must
pay a penalty equal to his or her last bid. The penalty payment will go to Start-Up Canada – Halifax.
Valuation ExerciseValuations are as much an art
as a science
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Investor Expectations
At the end of the day valuations are subjective Many VC`s will not discuss investment until a price is set Many VC’s will try to neutralize valuation through terms and conditions
such a liquidity preference. A high valuation may create an orphaned financing or even worse a
future down round Businesses are sold not bought, a business should be preparing for an
exit from the start
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Investors Expectations
Valuation is calculated on a Fully Diluted Basis – all options, warrants, convertible debentures, vesting, etc. are converted for the purposes of presenting the `Capitalization Table` referred to as `Cap Table`
Valuation is caveat emptor – buyer beware. More investors have lost more money because they overpaid for a stock than has been lost due to fraud. (Warren Buffett and Benjamin Graham = Value Investing)
Has the founder bootstrapped the company to a sustainable level
Are you raising enough money to last you 18 to 24 months?
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“Valuation metrics in some sectors do appear substantially stretched – particularly those for small firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.” Janet Yellen, Federal Reserve Board Chair in her report to congress on the state of monetary policy – July 2014
Are Current Valuations Sustainable?
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When you are offering equity to employees When you are trying to raise equity financing When you are trying to sell the business
When does a Pre-Revenue Need a Valuation
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Pre-Commercialization Methods
1. Venture Capital Method (ARI)
2. Scorecard Method (Bill Payne)
3. Risk Factor Method (ARI)
4. The Shamrock Method (David Berkus Hybrid)
5. Strategic value based on assumptions of acquisition
6. Comparable companies with similar forecasted profit
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Venture Capital Method
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Scorecard Method
Management - quality team in place, except sales
Opportunity - appears to be a huge opportunity
Product – disruptive technology, prototype done
Sales – team not in place , channels unclear
Competition – many small players, lack technology
Other Factors – foreign Market, partners
30%25%15%10%10%10%
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Risk Factor Method
Stage of the business Legislation/Political risk Manufacturing risk Sales and marketing risk Funding/capital raising risk Competition risk Technology risk Litigation risk International risk Reputation risk Potential lucrative exit
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Shamrock Method “A David Berkus Hybrid”
Credit for Actual Invested Capital (no sweat equity) Up to 450K for Disruptiveness of Technology & Patents Up to 450K for Proof of Concept or Product Validation Up to 450K for Business Model, pricing, etc. Up to 450k for go to market strategy, traction, growth… Up to 450K for Management Team Up to 450K for other including advisors, governance, financials,
company infrastructure, etc. Credit for 2 years of revenue run rate up to 3 years
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237 Investments in 2014 totaling $90.5 m, an increase from 2013 of 199 investments and a increase in investment from 89.0 m
Average investment is $1,229k up fr $945k 2013 from over 1700 investors down from 2100 in 2013
Investments in $ 89% - Ont & Que, 10% West, 1% Atlantic ICT (42%), Life Sciences (41%), Clean Tech (3%) Valuation – Median $4.0m, Mean 5.6m 61% of transactions involved a co-investor Of 2972 applications in Canada 7.9% get funded by networks
Canadian Angel Investment Group Activity - 2014
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Median Angel Round Size $800K in ’14 up from $600k in 2013. Mean Angel Round Size $1.64m in 2014 up from $1m in 2013
Pre-Money Valuations continue to climb at $3M in 2014 up 20% from 2013; however, top valuations increased from $9.3M to $13.5M
72% of deals occur in angel groups’ home states
73% of Angel Deals are Syndicated or Co-Invested
Median Round Size $2M in ‘14 from $1.8M in 2013 when co-invested
Share of Deals by Sector - Internet 34.6%(-), Healthcare 18.3%(+), Mobile & Telecom 15.3%(-), Software (non-Internet/mobile) 4.2%(-)
Angel Resource Institute – Halo Report -2014
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s is what they base their Valuation on This is what investors base their valuation on:
High anticipated growth rate Experienced management team Sustainable competitive advantage Barriers to entry Clear strategy for commercialization Proof of concept or enterprise level validation Business model anchored in Reality Traction (sales or user) Investor exit strategy
In Summary:
WHAT INVESTORS LOOK FOR
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1. National Angel Capital Organization 2014 Report on Angel Investing Activity in Canada.
2. Angel Resource Institute – Halo Report – Angel Group Update: 2014
3. Valuing Pre-Revenue Companies by Andrew Maxwell RIC Centre c CIC- Canadian Innovation Centre 2011
4. How do Investors Value Pre-Revenue Companies? By Leo Polovets, Forbes Magazine – Dec 24, 2014
5. Entrepreneurs, here’s how to think about your valuation by Bernard Moon, Sparklabs Global Ventures – Venturebeat.com – Oct 5, 2014
6. The Berkus Method: Valuing an Early Stage Investment by David Berkus -The Berkonomics – Mar 27, 2012
7. Tech Start-ups: Take the Money and build by Howard Tullman – Money Magazine
8. 2012 Valuation Survey of Angel Groups by Bill Payne
9. Valuation of Early Stage Companies, Presented by: Angel Resource Institute, October 24, 2010
10. Goodbye Capital Efficiency: Tech Start-ups are raising more, and exiting for less. CB Insights Blog July 14, 2015
References
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“1/3 of all SME’s in Canada had problems accessing additional financing, let Jaguar Capital help you attain the financing you deserve”
– Gerard Buckley
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Gerard Buckley, BBA, FICB, ICD.D, Acc. Dir.Managing DirectorJaguar Capital Inc.(C) 416-884-9522(W) 416-645-6695
www.jaguarcapital.ca
@jaguarcapital @gerardbuckley
JAGUAR CAPITAL TEAM