Get documents about "Valuation
Shared by: dfhdhdhdhjr
-
Stats
- views:
- 45
- posted:
- 8/14/2012
- language:
- Latin
- pages:
- 29
Document Sample
DEAS Seminar Series
Michael J. Roberts
Sources of Financing
Recurring View (Monthly) – Blended Model Lease
Access
Key May ’00 Biz Plan/ Actual
September Data Insurance
Costs/ Car
Parking
Car Cost/ Maintenance
Member Fuel
Hours used/ month
Members/ Car
Utilization rate
Contribution
Margin/ Member Monthly Fee
# Uses
Hours/Use
$/Hour
Revenues/ Member Monthly Usage
Total Contribution Miles/Use
Margin/ Month
$/ Mile
Monthly interest $/ member
i rate (monthly)
Beginning Members
New Members
# Members
Attrition
Restaurant Business Model
• What do you think it looks like?
From the Business Model…build a
set of financial statements
• P&L
• Balance Sheet
• Cash Flow
Balance Sheet
- The company’s financial position at one moment
in time.
- Basic equation: Assets = Liabilities + Owners’
Equity
Assets: provide benefit to the firm in the future,
valued at lower of cost or present market value.
Liabilities: amounts or obligations owed to third
parties.
Owners’ Equity: what’s left. Also = to original
paid-in capital and retained earnings, less
dividends.
Income Statement (Profit & Loss
Statement)
- Operations over a period of time (quarter, year).
- Basic equation: Revenue earned-expenses
incurred = net income - dividends = retained
earnings
Four main categories of expenses:
- cost of goods sold
- selling, general, and administrative costs
- interest cost
- provision for income taxes
Statement of Cash Flow
Beginning Balance
+/- Operating Activities: Money generated by and
spent in doing business, and Interest & Taxes
+/- Investing Activities: Money used in things that
support operations or in financial assets. Primarily
used for purchasing assets that increase productive
capacity.
+/- Financing Activities: Money used for issuing or
retiring debt or equity, or paying dividends.
= Ending Balance
Beginning cash+cash inflow-cash outflow=ending
cash
The Cash Flow Cycle for a Venture
Cumulative Cash Flow in $
Date of First Cash Flow Positive
Time
Date of Cumulative Cash Breakeven
Maximum Financing Needs
Burn Rate
Remember
• People who are giving you money want to
get it back, plus a return
• Required Return is a function of perceived
risk
– Core risk of project
– Capabilities/track record of entrepreneur
– “Security”
Investor Background also Influences
Perception
• Functional /Industry Experience
• Investing Experience
• Potential involvement in venture
Risk & Reward
Reward
Risk
Risk/Reward Management
Probability
of
Occurrence
Expected Value
Probability of
Losing 100%
Goal # 2
Goal # 1
Goal # 3
-100% +25% +100% Return on Investment
The horse race……..
Valuation
Risk
Time
Sources of Financing
• Own Money/Customers/Suppliers
• Friends and Family
• “Angels” and Sophisticated Angels
• Early Stage / Seed VC
• Traditional VC
• Banks
• Corporate Partners or Strategic Investors
• Public Capital Markets
No External Financing is the Best
Option
• Keep control and equity upside
• Minimize pressure for exit / liquidity event
• Creative use of contracting, collect-in-
advance, pay later strategies
• Not possible when large absolute amounts
of capital are required
F&F & Angels
• Individual investors often invest for some
reason other than pure cash return
• What are their reasons: a + or – for you
• Managing info flows is key
Venture Capital
• Require Probability of exceptional returns –
swinging for the fences
• Need to put large amounts of capital to
work
• High stakes – majority of founders do not
make it
Banks
• Will always look to cash flow first
• Then to corp assets
• Then to personal assets, guarantees
• You can reach a point where it is in their
interests to pull the plug – their last chance
to get out whole - will not be in the equity
holders’ best interests
Questions to Ask
• What are the venture’s MONTHLY cash flows?
• How much cash is required in total – how deep is
the trough?
• What size bites do we want it in?
• What are the particular risks and rewards and who
has an appetite for them?
• How can the Reward / Risk ratio be managed?
• What returns will investors expect?
More ?s
• What terms matter other than price, and am I
willing to live with these terms ?
• Do the deal terms align our interests, or not?
• What alternatives do I have?
• What do I need other than $$, and What do they
bring other than $$?
• Likely exit routes / liquidity path?
• What will the returns look like for me after I give
up what will be required?
Pluses and Minuses
Source + -
Own money/Customers/ Relatively Easy Requires well-established network
Suppliers Helps assure future success Requires some personal wealth
Retains control with minimum Requires positive cash flow
oversight
Friends & Family Easily Accessible Thanksgiving Dinner
Good Terms Lack of sophistication
Little Due Diligence
Angels & Sellers Eager/Knowledgeable Idiosyncratic
“Good” Terms More or Less sophisticated
Early Stage VC Expertise Managerial control
Legitimacy Scarcity of Early Stage VC firms
Traditional VC Expertise Deal Terms
Legitimacy It’s about the money
Asset Lenders Leverage Benefits Covenants
No/Little Equity dilution Bankruptcy Exposure
Corporations Extensive Resources Slow Decision Making Process
Provide Credibility Foreclosing Exit Options
Exit Strategy
21
CEO’s average equity holdings
30% by round of financing
25%
25%
20% 17% 16%
15% 12%
Founder CEO
10% 8%
6% 6% 6%
Professional
5%
CEO
0%
1 2 3 4
Source: Noam Wasserman, “Inside the Black Box of Entrepreneurial Incentives.” Based on survey conducted in July/August 2000 of
211 private Internet/software firms.
When do you need to consult a lawyer?
• Early
• There are lots of legal risks
– forgotten founders
– danger of unprotected intellectual property
– employment/stock agreements
• You often can’t fix them later, even if you
have more time and money
Valuation
• Implied or Implicit or Imputed Valuation is
Different than “Calculated (NPV)
Valuation”
• Have you ever bought a share of stock?
• do the math: $/% = Implicit Valuation
Investors generally Back into a
valuation, don’t start there
• What is my best guess about terminal value
and exit time
• What is my best guess about future funding
requirements and resultant dilution
• What is the most I can afford to pay now
i.e., what is the smallest % ownership I can
walk away w/ and still get my required
return
The Math
REQUIRED/TARGET RETURN = R
YEARS UNTIL EXIT = n
INVESTMENT = I
REQUIRED STAKE % = I * [(1+R)^n]
TV
I/POST$ = ACQUIRED STAKE %
I/POST = I * [(1+R)^n]
TV
The Lesson:
Good decisions come
from having good
alternatives from among
which to choose
Where 100 of the 1989 Inc. 500 founders got their ideas
Systematic
search
Swept in by PC
4%
revolution
5%
Discovered by
luck
20% Idea from
previous job
71%
7 casual job into business
6 wanted as consumer
4 happened to read about industry
Source: Amar Bhide (1994), “How entrepreneurs craft strategies that work,” Harvard Business
Review (March-April).
Career Implications
If you are interested in finding an opportunity
(or being involved in someone else’s), then
the following matter a lot:
– Industry you work in
– Whether you are known in your industry
– Where you live
– Your network of personal and professional
contacts
– Your reputation
– Planned serendipity
