How to finance a Startup. Pisa, 18 June 2018

Transcription

1 How to finance a Startup Different techniques for startup fund raising. How to select and employ correctly the most suitable financial aid method Pisa, 18 June 2018

2 About myself Education Msc Aerospace Engineering PoliMi MBA SDA Bocconi PhD Aston University Professional Venture Factory Vertis TTVenture: Ideal Standard: Pirelli Pneumatici: Eurofly: Managing Partner Investment Director Chief Investment & Technology Officer EMEA NPD leader Target Cost Management Global R&D PMO leader Production Manager Maintenance Control Academic Other MIB School of Management: Biz planning for new ventures, New Product Development University of Bologna: Innovation Management Lab High Level Group for Innovation Policy Management Expert committee, CRUI, association of Italian Rectors Informal advisory board, Ministry of Education, University and Research 18 June

3 While a new idea is a thought about something new or unique, and making that idea real is an invention, innovation is an invention that has a socioeconomic effect. (Wiebe Bijker) 18 June

4 Why do startups exist? 18 June

5 Higher R&D Costs and shorter time to market (source: H.Chesbrough, 2006) Higher R&D Costs Shorter time to market INTEL New fabs costing $3Bln today vs $30M twenty years ago PHARMA Rise of development costs from $80M to $800M in ten years P&G (consumer) Feminine hygiene pads development costs increased from $10M up to $20-$50M in the last decade HARD DISKS Early 1980s Late 1980s 1990s 6 years 2-3 years 6 months PHARMA FDA approval now takes 8 to 10 years: the presence in the market with patent protection is shortned and fast shipment is needed Mobile phones A new model every 6 months, obsolescence less than 2 years 18 June

6 Our problem in R&D: the pharma case Reference pricing schemes Focus on new therapeutic areas Lower POS 18 June

7 Our problem in R&D: the pharma case 67% 76% 70% 53% 54% 43% 32% 20% 15% 23% Source: F.Pamolli et Al. The productivity crisis in pharmaceutical R&D, Nature, June

8 Our problem in R&D: the pharma case % New Lead Preclinical Phase I Phase II Phase III Registration 18 June

9 Our problem in R&D: the pharma case Smaller players are more efficient Source: Deloitte, Measuring the Return from Pharmaceutical Innovation, 2014 Units are omitted to protect anonymity of companies analyses 18 June

10 Solution: external innovation 58% Source: Deloitte, Measuring the Return from Pharmaceutical Innovation, June

11 Innovation processes hase changed. Traditional innovation Open Innovation past present research development research development time time 18 June

12 The source of finance influences research results utilisation Research Development Government Funds Corporate Funds Business Unit Funds Selection Based on academic peer review process Allocated following overall, multi-business needs Pay for immediate service approach Relevance to firm s business model Almost no relevance to business needs LOW Do not generate immediate benefit for any business MEDIUM Short term programs for fast market release HIGH Stock of unused technologies HIGH MEDIUM LOW External market evaluation of unused technologies is the best, unbiased approach 18 June

13 Wasted knowledge? (Chesbrough, 2003) R&D Business Unit Scaffali di conoscenza inutilizzati 90% 81% 18 June

14 Different financing tools for innovation

15 Focus on early stage investors SEED STARTUP EXPANSION H2020 SME ph.1 Founders Family Friends Fools Foundations Family Offices BP Competitions H2020 SME ph.2 Business Angels Research Grants Economic Promotion Mezzanine Crowd sourcing Micro Credits Guarantees H2020 SME ph.3 Venture Capitalists Customers Suppliers Mezzanine Classical Bank Up to 50k Eu 0.2 2M Eu > 1M Eu 18 June

16 The EU has developed a variety of financing tools for RDI 18 June

17 EIB has also developed a variety of financial products for innovative companies Source: EIB 18 June

18 A different investor for any different point in life of a company 18 June

19 How do guarantee schemes work? Source: EIB 18 June

20 Financial or industrial investor? FINANCIAL INDUSTRIAL Technology platform Early development stage Breakthrough business model High growth/cash generation Strategic support Managerial autonomy One product company Already developed techs Distribution and production synergies Low growth/economies of scope Full strategic allignment Less managerial autonomy 18 June

21 Venture capital

22 18 June

23 VCs have limited time and do not manage their own money Limited Partners (investors) General Partner (fund manager) Investment period 5yrs Exit period 5yrs Portfolio companies 18 June

24 A long selection process 18 June

25 and you do not invest just once Source: CBInsights, June

26 How does a fund work? Invested capital Gross distributions Net cash flow cumulated Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10 Yr11 Yr12 18 June

27 WHAT S THE RISK OF STARTING UP? Surviving the start up in the US (years after start up) Historical default rate (% of defaults in 5 years) 100% Mortality % 85% 70% 62% 55% 50% 47% 44% 41% 38% 35% 15% 18% 11% 11% 9% 6% 6% 7% 7% 8% Moody's S&P Highest Quality High Quality Upper Medium Medium Speculative Highly Speculative Default Investment Grade Not Investment Grade Source: US Small Business Administration Source: EBS Investing in start ups is like investing in junk securities 18 June

28 SURVIVAL RATE IS CONFIRMED AROUND 50% IN 5 YRS 18 June

29 Survival rate for VCs 46% Survived Exited 28% 14% 14% 7% 5% 6% 2% 2% 1% Years after first VC investment 18 June

30 WHAT IS THE TARGET IRR FOR VCs? 18 June

31 Discount rates per stage Stage Discount Rate Seed % Start-up 50-70% Round A/B 50-70% Round C/D 35-50% Expansion 25-40% Source: Patrick Frei & Benoît Leleux ; Jean-Pierre Vuilleumier, Angel Days 18 June

32 THERE IS NOT ONE METHOD DCF How about terminal value? What if no sales are foreseen shortly? Multiples Will work on late stage Comparables what is really comparable? Deal with uncertainty have a flexible valuation (success fee?) Milestones or several rounds? 18 June

33 Read it! 18 June

34 Earning multiples When can be used This methodology is likely to be appropriate for an investment in an established business with an identifiable stream of continuing earnings that can be considered to be maintainable. This methodology may be applicable to companies with negative earnings, if the losses are considered to be temporary and one can identify a level of normalised maintainable earnings. Warnings Market-based multiples: the aim is to identify companies that are similar, in terms of risk attributes and earnings growth prospects, to the company being valued. This is more likely to be the case where the companies are similar in terms of business activities, markets served, size, geography and applicable tax rate. EV/EBITDA: remove the impact on value of depreciation of fixed assets and amortisation of goodwill and other intangibles. If such multiples are used without sufficient care, the Valuer may fail to recognise that business decisions to spend heavily on fixed assets or to grow by acquisition rather than organically. Source: EVCA International Valuation Guidelines 18 June

35 Net Assets When can be used This methodology is likely to be appropriate for a business whose value derives mainly from the underlying value of its assets rather than its earnings, such as property holding companies and investment businesses. Warnings This methodology may also be appropriate for a business that is not making an adequate return on assets and for which a greater value can be realised by liquidating the business and selling its assets. In the context of private equity, it may therefore be appropriate, in certain circumstances, for valuing Investments in loss-making companies and companies making only marginal levels of profits. BUT: What is the market value of your assets if are intangible? Source: EVCA International Valuation Guidelines 18 June

36 DCFs When can be used Can be applied to any stream of cash flows (or earnings). In the context of private equity valuation, this flexibility enables the methodology to be applied in situations that other methodologies may be incapable of addressing. While this methodology may be applied to businesses going through a period of great change, such as a rescue refinancing, turnaround, strategic repositioning, loss making or is in its start-up phase, there is a significant risk is utilising this methodology. Warnings Requires detailed cash flow forecasts, the need to estimate the terminal value and an appropriate risk-adjusted discount rate. All of these inputs require substantial subjective judgments to be made, and the derived present value amount is often sensitive to small changes in these inputs. Due to the high level of subjectivity in selecting inputs for this technique, DCF based valuations are useful as a cross-check of values estimated under market-based methodologies and should only be used in isolation of other methodologies under extreme caution. Source: EVCA International Valuation Guidelines 18 June

37 Investor Company Customers Remember: VCs are sitting in the middle of value creation Venture Capital Method DCF, Multiples Investor s expenses Capital payment Cash outflow Operating costs Expenses Investor s return Dividends + capital Cash inflow Operating revenues Earnings 18 June

38 VC method vs DCF Discounted Cash Flows Venture Capital Method Company Value = Sum of discounted FCF + discounted Terminal Value Not suitable for startups: - Up to 80% of valuation from TV - Cumulated FCF is negative in the planning period - Cost of capital questionable (if discount is too low, valuation is too high) BUT: is useful for analysing company s value drivers Calculate IRR and compare with target - Define target IRR - Esimate cash needs (FCF) - Estimate time to exit - Estimate exit value (transactions or multiples) Allows a backward calculation of required share 18 June

39 Company valuation is a process Risk Level Expected IRR Comparables Business plan Future and present values Final Valuation Company phase (poc cash positive) Market Team Execution Correlate risk level with expected IRR in a portfolio perspective Identify public companies operating in the same industry of the target one Check any correlation between company size and multiples Economic and financial projections approved by the company [if not available] statistic projections of financials Multiples (discounted with liquidity factor) DCF Median and average value Sensitivity analysis 18 June

40 Valuating startups is not science. Let s be flexible and adjust valuations once the real money is on the table. 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% Founders adjusted shares Founders base shares Investors adjusted shares 30.0% Investors base shares 20.0% 10.0% 0.0% 18 June

41 The global VC market: investments 18 June

42 The global VC market: how much per stage? 18 June

43 The global VC market: internet dominates Source: Venture Pulse, Q1 18, Global Analysis of Venture Funding, KPMG International and CB Insights (data provided by CB Insights) April, June

44 Exits are declining and are still driven by M&A! 18 June

45 M&A numbers confirm that VCs are the innovation catalysts between financial and corporate worlds Investors Venture Capital Entrepreneur Corporate Provides financial resources Selects and manages investments on behalf of Investors Brings technology, know how and management Dominates the end market 18 June

46 Exit values are more realistic than those published by media Source: Venture Capital Liquidity Report 2016 PitchBook 18 June

47 Unicorns? Time to face reality 18 June

48 Let s be realistic on startup value 18 June

49 Venture Factory S.r.l. Via Francesco Nullo, Milano Italy p