This document discusses various methods for obtaining growth funding for a business, including venture capital and private equity investment. It covers the venture capital process, evaluating and valuing a venture, and preparing presentations for investors. Key valuation methods include earnings valuation using price-earnings multiples and discounted cash flow valuation. The document provides guidelines on determining a company's value, selecting an appropriate valuation approach, and targeting the right investors.
1. Growth Funding
Patterns of Entrepreneurship
Chapter 7
Session 6: Financial Alternatives for Debt and Equity Capital
2. copyright 2003 Jack M. Kaplan
Session Outline
• Understand the Venture Capital Process
• Private Placement Process
• Value the Venture
• Select the Valuation Method
• Prepare a Presentation to Investors
3. copyright 2003 Jack M. Kaplan
Venture capital firms
Investment banking firms
Insurance companies
Large corporations
Growth Equity Investors
4. copyright 2003 Jack M. Kaplan
Understand the Venture Capital
Process
Specialized Industries for the venture
The Location of the Venture
Stage of Development
Early Stage Financing
Expansion Financing
Acquisioion/Buyout Financing
5. copyright 2003 Jack M. Kaplan
VC firms want returns of 30% or more
Only for high-growth companies
Require deals over $2 million to invest
Most often, VC is not available until the
company is ready for commercialization of
the product or services
Most want a exit strategy in 3-5 years
Venture Capitalists
6. copyright 2003 Jack M. Kaplan
The Venture Capital Process
Entrepreneurs
Venture
Capitalists
Investment
Bankers
Private
Investors
Public Market
•Corporations
•Angles
Funds
Ideas
Funds
IPO’s
Money Stock
7. copyright 2003 Jack M. Kaplan
The Logic of the Deal
• Typical start-up - Venture Capital Fund will
invest 2-3 million for 40% preferred equity
ownership position.
• This gives V.C. a liquidation preference over
common shares until the 2-3 million is
returned.
• If Venture fails, they have first claim to assets
and technology.
• Also blocking rights over key decisions
including sale of the company and IPO.
8. copyright 2003 Jack M. Kaplan
• Antidilution clauses or “Rachets” - This
protects against equity dilution of additional
rounds of financing at lower values take place.
• This preferential treatment comes at the
expense of all common shareholders.
• If company does well, V.C. enjoys upside
provision by having right to put additional
money at a set price.
• Limit risk by co-investing with other firms.
9. copyright 2003 Jack M. Kaplan
The VC “LANDSCAPE” in 2000
# of VC Firms in Existence
# of Professionals
# of First Time VC Funds Raised
# of VC Funds Raised This Year
VC Capital Raised This Year ($B)
Avg VC Fund Size Raised This Year ($M)
Source: NVCA Yearbook 2001; Venture Economics
1980
87
1035
24
57
2.08
36.5
1990
375
3794
14
82
3.20
39.0
2000
693
8368
164
497
105.05
211.4
10. copyright 2003 Jack M. Kaplan
The Committed Capital Bubble
0
5
10
15
20
25
30
35
40
1995 1996 1997 1998 1999 2000 2001
0
1
2
3
4
5
6Uninvested Venture
Capital
Years of Uninvested
Capital
Years of Uninvested
Capital at 1995
Investment Pace
Source:
VentureOne
Years
AccumulatedCapital
Over-commitments($B)
11. copyright 2003 Jack M. Kaplan
The Illiquid Bulge
From 1995-2000:
14,463
978
1,529
1,180
10,776
Companies funded
Went public
Were acquired
Went out of business
Remaining
Source: Venture Economics; Venture Source
-
-
-
12. copyright 2003 Jack M. Kaplan
A Generic Late 90’s Model
Round
Type Date
Amount
Raised (MM)
Pre-Money
Valuation
(MM) IRR Multiple
1 Seed Jan-97 $ 5 $ 35 79% 18.37
2 1st Jan-98 $ 10 $ 100 65% 7.35
3 2nd Jan-99 $ 25 $ 200 59% 4.04
4 3rd Jan-00 $ 60 $ 600 52% 1.52
5 IPO Jan-01 $ 1000
$ 100 Million
13. copyright 2003 Jack M. Kaplan
A Generic Early 90’s Model
Round
Type Date
Amount
Raised (MM)
Pre-Money
Valuation
(MM) IRR Multiple
1 Seed Jan-90 $ 0.50 $ 2 101% 32.53
2 1st Jan-91 $ 3.00 $ 10 70% 8.13
3 2nd Jan-92 $ 8.00 $ 32 50% 3.30
4 3rd Jan-94 $ 13.50 $ 100 32% 1.32
5 IPO Jan-95 $ 150
$ 25 Million
14. copyright 2003 Jack M. Kaplan
Why It’s Great To Be An Entrepreneur - TODAYUS Venture Capital Partnership Returns
Versus Public Market Returns
Funds Formed 1969-1999 (quarterly returns)
-30
-20
-10
0
10
20
30
40
50
60
Sep-86Jun-87M
ar-88Dec-88Sep-89Jun-90M
ar-91Dec-91Sep-92Jun-93M
ar-94Dec-94Sep-95Jun-96M
ar-97Dec-97Sep-98Jun-99M
ar-00
Quarter
QuarterlyReturn
VC Partnerships
Nasdaq
Source: Venture Economics/NVCA
15. copyright 2003 Jack M. Kaplan
The opportunity is considered “hot” area
The venture delivers scalable technology
There are client references
The team is diligent and goal
The entrepreneur is skilled in finance, capital
and deal structures
Realistic expectations are incorporated into
goals of the company
Profile of the Ideal Entrepreneur
from a VC Perspective
16. copyright 2003 Jack M. Kaplan
Two Formal Methods:
• Private placement
• Public stock offering
Private placement controlled by Regulation D of the
Federal Securities Act
Rule 504
• Up to $1,000,000
• 12 month completion period
• No restrictions on the number of investors
Equity Financing
17. copyright 2003 Jack M. Kaplan
Rule 505
• Up to $5 million
• 12 month completion period
• No more than 35 non accredited investors and
unlimited number of accredited investors
Rule 506
• Unlimited amount of raising funds
• No more than 35 unaccredited but sophisticated
purchasers.and to unlimited number of
accredited investors.
• must be able to evaluate merit and risks.
Equity Financing
18. copyright 2003 Jack M. Kaplan
First: Determine motive for valuing the
business
–Selling stock or buying a business
Second: Define what is to be valued
–Entire company, product line or a unit
division
–Income stream determination
Third: Set a point in time for valuation
Valuation Process
19. copyright 2003 Jack M. Kaplan
Recent profit history
General conditions of company
Market demand and competition -- at
time of offering
Ability to transfer goodwill
Future profit potential
Management team
Factors to Assess a Company’s Value
20. copyright 2003 Jack M. Kaplan
Valuation: Select the valuation method
–Apply the methods and compute valuation
Weight the Values: Apply a percentage
allocation to each value (E.G.: 40% to
adjusted book value, 30% price earnings,
and 30% to discounted value)
Determine Value and Weight
21. copyright 2003 Jack M. Kaplan
Asset Valuations
Earnings Valuations
Discounted Cash Flow Valuation
Valuation Techniques
22. copyright 2003 Jack M. Kaplan
No single valuation captures the real value
of the firm. Value is the perception of
opportunity, risk, and financing resources
available.
Difference is determined by vision, market
analysis, time pressures, and negotiating.
Valuation Statement
23. copyright 2003 Jack M. Kaplan
Asset Valuation
–Book Value
–Adjusted Book Value
–Liquidation Value
–Replacement Value
What is the Business Worth?
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Book value
–Current assets + property + equipment
(net of depreciation)
–Total net worth
Used primarily for accounting purposes
Asset Valuation
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Current assets + market value of property
+ equipment + intangible assets
Adjusts for large discrepancies (land,
equipment)
Better reflects actual market value
Adjusted Book Value
26. copyright 2003 Jack M. Kaplan
If the business is sold
Value of assets - quick sale
Asset valuation does not consider
intangible factors such as reputation,
talent, or goodwill
Liquidation Value
27. copyright 2003 Jack M. Kaplan
Historical Earnings
Future Earnings
–Projected earnings
–Nature of industries and similar companies
–Anticipated economic conditions
Earnings Valuation
28. copyright 2003 Jack M. Kaplan
Prepare Executive Summary
–Company, market potential, marketing
strategy, competitive position, milestones,
product position, financial summary
Prepare Forecast: 1-3 Years
–Monthly: year 1
–Quarterly: year 2 and 3
Choose Valuation Process
Earning Valuation for Start-Up
Companies
29. copyright 2003 Jack M. Kaplan
Determine P.E. Ratio
–Select similar public companies if
available
–Use S&P quarterly industry analysis
handbook for your P.E. ratio
–Reduce P.E. by 50%, if your size is
smaller and illiquidity factor (holder may
not be able to sell shares without
considerable effort).
Earning Valuation
30. copyright 2003 Jack M. Kaplan
Use Factors for Rating Scale of 1-6
–Risk assessment
–Competitive position
–Industry and company
–Growth opportunity
–Desirability
–Total and average
How to Calculate P.E. Multiple
31. copyright 2003 Jack M. Kaplan
Form a corporation
Authorize 2 million shares
Issue 1million shares
Projected P&L is $200,000
Profit after 3 years (EBIT)
Projected P.E. is 12 for your industry
(after careful analysis)
Guidelines Using Earning Valuation
32. copyright 2003 Jack M. Kaplan
Value company at 2.4 million today
Each share is $2.40 outstanding
Determine amount you require to raise
–Sell 100,000 shares @ $2.40
–You are offering 10% of the company for
$240,000
Value Guidelines
33. copyright 2003 Jack M. Kaplan
Select adviser(s)
Complete business plan
Define use of funds
Seek qualified advise from lawyer
Select a mentor to advise you
Target investor group
– Personal, family, angels, professional
Guidelines
34. copyright 2003 Jack M. Kaplan
Prepare a Presentation to Investors
–Non-Disclosure / Non-Compete
Agreement
–Demo of product
–Hand-outs
–PowerPoint presentation
–Determine if you want qualified or
determine if you want qualified or non-
qualified investors
–Subscription Agreements
Guidelines
35. copyright 2003 Jack M. Kaplan
Is useful to investors who are attempting to
appraise a return on investment and return
on time
Forecasts cash flows and discounts them
back to the business
Must have positive cash flow - Calculate
Discounted Cash Flow Valuation
36. copyright 2003 Jack M. Kaplan
Terminal value
–Return of capital via sale
Tax benefits
Operating cash flows
–Business related expenses (car, club
membership)
–Salary and dividends
Discounted Cash Flow Valuation
Notas do Editor
86-94 less volatility in VC 95-00 comes closer and closer to Nasdaq pattern Why would pension mgr allocate to illiquid VC