Workshop Business Angels. Valuation Valuation is an art, not a science!
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1 Workshop Business Angels Valuation Valuation is an art, not a science! Jean-Pierre Vuilleumier Managing Director CTI Invest Contact: vui@cti-invest.ch Overview of possible valuation approaches Cash Flow based methods -DCF model (classical Discounted Cash Flow) -Adjusted DCF (by McKinsey) -Option Pricing model Market based methods -Market multiples -Transaction multiples -Venture Capital method Business Angel methods 2
2 Business Angel methods Berkus method Meier method Morbitzer method Price range method Rule of thirds 3 Business Angel methods Berkus Method For a sound idea CHF 1 Mio. For a prototype + CHF 1 Mio. For a quality mgt team + CHF 1-2 M. For a quality board + CHF 1 Mio. For any roll-out, sales + CHF 1 Mio. Value Range: CHF 1-6 Mio. Meier Method 1 Manager CHF 1.5 Mio. 2 Managers + CHF 1.5 Mio. Value Range: CHF Mio. 4
3 Business Angel methods Morbitzer method Businessidea CHF 0.75 Mio. Mgt Team CHF 1.5 Mio. Prototype (PoC) CHF 0.75 Mio. Board/Investors CHF 0.75 Mio. Total CHF 3.75 Mio. -Value add investor CHF 0.75 to 1.0 Mio. Valuation CHF Mio. Rule of thirds 1/3 Founders 1/3 Management Tea 1/3 Investor (BA) Price range method Only consider to invest if: Valuation range proposed by founders is CHF 2-5 Mio. 5 Valuation: two views Company s View (DCF Method classical) Company Value = Sum of discounted FCF + discounted CV CV Continuing Value t Investor s View (Venture Capital Method) IRR (Internal rate of return) Sum discounted CF = EXIT Value t JP Vuilleumier / CfC AG / 2008 Slide
4 Success rate Number of Projects 1-2 Category Highflyer (IPO) Star (Trade Sale) Successful EXIT Probability (in %) % 3-4 LifeStyle company Survival mode % 5-6 Bankruptcy Failure Winding down % Source: Rule of thumb of the VC industry. 7 Valuation of an high potential venture The START-UP AG/SA is a Swiss High Tech company, founded twelve months ago. The product is successfully beta-tested and well received by the early adopters in the market. The company is seeking CHF 1 million of capital to finalize the application and to start the distribution (just looking at this round). The company would prefer to have Business Angels as investors. The planning of the company is forecasting sales revenue of CHF 25 Mio. with net income of CHF 3 Mio. in 5 years. 8
5 Valuation: 4 Questions 1. Define your expected annual return for your investment 2. Capital need of the company = your investment (only the upcoming financing round) 3. Define the Time to exit (5-7 years) 4. Compute the expected Exit value JP Vuilleumier / CfC AG / Expected return by stage of company Project stage Expected Return (p.a.) Multiplicator (holding period: 5 Years) Seed % x Start-up % x First stage % x Put those numbers in relation the the expected success rates! 10
6 Valuation: 4 Questions and the Answers 1. Define your expected annual return for your investment: 50 % p.a. (7.6 x for 5 years) 2. Capital need of the company = your investment CHF 1 Mio. (co-financed with other BA s) 3. Define the Time to exit: 5 Years 4. Compute the expected Exit value: still unknown JP Vuilleumier / CfC AG / Exit Value: Market Comparables P/E Ratio (Price/Earnings) Total Equity Value = (P/E) x Net Profit P/E Ratio in the industry: 10 x Alternative: P/S Ratio (Price/Sales) Total Equity Value = (P/S) x Sales 12
7 Valuation formulas (1) (1) Find the future value in year 5 (Exit Value) Future Value 5 = Net Profit 5 x (P/E) Future Value 5 = CHF 3 Mio. x 10 = CHF 30 Mio. (2) Find the present value Present Value 0 = CHF 30 Mio./( ) 5 Present Value 0 = CHF 30 Mio. / 7.6 Present Value 0 = CHF 3.95 Mio. 13 Valuation formulas (2) (3) Required investment at time 0 is INV 0 is = Your Investment = CHF 1 Mio. (4) Percentage of the equity for you? Post-money = Present Value 0 = CHF 3.95 Mio. = 100 % - Your Investment = INV 0 = CHF 1 Mio. = 25.3 % Pre-money valuation = CHF 2.95 Mio. = 75 % (left for founders) Equity % = Your Investment / Post-Money = CHF 1 Mio. / CHF 3.95 Mio. = 25.3 % 14
8 Bibliography David Amis, Howard Stevenson: Winning Angels, 2001 David Amis, Howard Stevenson, Heinrich von Liechtenstein: Winning Angels, 2003 Herve Lebret: What we may still learn from Silicon Valley, 2007 Guy Kawasaki: The Art of the Start, 2004 McKinsey & Company, Planen, gründen, wachsen, 3. Auflage McKinsey & Company, The New Venture Adventure,
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