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					Valuation Strategies

     Chris Clement
 What is a cynic ?
A man who knows the price
of everything and the value
        of nothing.
  Oscar Wilde (1854 - 1900), Lady Windermere's Fan, 1892, Act III
                               2 GREAT SPEAKERS

Scott Kothlow
CFO, SomaLogic
Scott Kothlow is currently the Chief Financial Officer at SomaLogic,
Prior to joining SomaLogic, Scott held various accounting and finance positions with
NeXstar Pharmaceuticals, Inc., and other venture backed technology companies.
Scott began his career with Arthur Andersen & Company as an Audit Manager.

Larry Blankenship
CEO and Chairman, ValveXchange, Inc.
 Larry Blankenship is CEO and Chairman of ValveXchange, Inc., an Aurora, Colorado based company
developing an innovative new heart valve technology.
Mr. Blankenship previously held executive positions at CardioOptics, the IVAC division of Eli Lilly; Vitalmetrics,
Inc. (acquired by Tyco); and the Valleylab division of Pfizer (now part of Covidien). Larry was also CEO and co-
founder of The Larren Corporation, a Colorado medical device development company later acquired by the
Battelle Memorial Institute, where Larry was Vice President of Medical Programs.
Over the course of his career, Larry has been responsible for overseeing the development and market
introduction of dozens of medical devices including surgical tools, catheters, drug delivery systems, patient
monitors and heart valves. Larry also serves on several boards of directors and advisory boards, including as
a Director of the Colorado Bioscience Association.
Valuation Strategies

      Scott Kothlow
     SomaLogic Inc.
  Valuation – the Challenge
What is the $ value of an idea (possibly protected by some IP)
  …that is often unknown or unproven,
     ….requiring new technology or untested methods,
          ….for a new or nonexistent market,

       to be managed by a new management team

And specifically for Biotech/Life Science
    …long, multiple stages of development,
      …with significant $’s per development stage,
          …that could fail during development stages,

        with regulatory uncertainty of product approval
   The Analytical Method for Valuation used for
   an “Established” Company

  The accepted valuation method taught in every Finance course
  is the Discounted Cash Flow Method, with the following basic steps:

  1. Project future revenues & costs of the Company
  2. Project timing of capital expenditures
  3. Convert the net cash flow from the above into a projected cash
  4. Estimate the cost of capital to the business
  5. Discount the above projected cash flows using the cost of capital

The above analysis can be done for an early stage company, but
the input/output assumptions will certainly be wrong.
  Why Valuation Analysis is not Right for Early
  Stage Companies

 From a Financial Analysis Perspective
   • investors have different expected rates of return for each financing round
   • significant negative cash flows in the early years carry a huge weighting in the
   analysis against the positive cash flow in outlying years
   • success in Early Stage investments is mostly Binary, the venture eventually
   succeeds or it does not. There is not much value residual value in failure.

From an Investor’s Perspective
   • entrepreneurs always think it is going to take 1-2 years less time, cost millions
   of dollars less to develop, and will generate revenue sooner and faster
   • most importantly, you can’t predict timing and outcomes in research & science
  Why Forecast a 3-5 year Spending
If financial forecasts will not be accurate in the outlying years & have
limited applicability in determining a valuation for early stage

            why do I need to create a long term forecast….?

 A forecast is a critical tool for management in analyzing &
 understanding the future financing dynamics,
 most importantly, for determining the timing and $’s to reach
 critical milestones for possible inflection points that are likely
 stages of financings rounds at higher valuations…..
    VC’s Perspective on Valuing an
    Early Stage Company

A VC uses some type of “black box” process that includes:
Judgment regarding tangible and intangible considerations
about the business ---- if you don’t pass these, a VC will
probably not spend a lot of time on the number crunching

Leads to a deeper analysis of the Financial Forecast,
Funding Requirements, and potential Exit Value
    Subjective Factors VC’s use to Evaluate
            Early Stage Companies

There are many factors, but the early stage companies are generally driven by
the following subjective factors

    • experience and capabilities of the CEO and management team
    • the novelty of the technology and proof of principle or validation
    • evaluation of intellectual property
    • estimated capital needs, and expected burn rate
    • expected time-to-market, expected path to profitability
    • terms and deal structure
    • could the technology lead to potential acquirers of the company
    • current economic climate
VC’s Perspective on Valuation

                          What value would the
                            next round investor
Are the investment $’s    assign to the Company
enough to get to the
next major milestone                                 What is
                                                     value at
                                                      an exit

 Value of
    the              Potential           Estimated
 company             value at             Value at
in today’s             next                 Exit
  round               round
             VC’s Perspective on Valuation..
                  Working Backwards

10 – 20               6–8                 3–4
 times               times               times
 return              return              return

            First              Second                       Potential
           Round               Round              Pre-IPO   Exit Value
          Investor            Investor             Value
Entrepreneur’s Approach to Valuation

Understand the short and long term operating and funding
requirements of your company.

   •How much must be raised now?

   •When will the next financing be needed?

   •What significant milestones will be accomplished during
   that time?
  Entrepreneur’s Approach to Valuation

Make sure your analysis is aligned with the way the VC
• Build a strong case, that if the Company executes its business plan
over the next 12-18 months, the value will be significantly higher
then it is today

• Emphasis should be on the increased value of the next
milestone(s)… the stages where development risk is reduced or

• See if you can find examples and the value of comparable deals for
other successful companies ahead in terms of development
Entrepreneurs Perspective
Develop a financing strategy based on building value from one
financing to the next and understanding how value will be measured

                              Milestones that lower the
                                 development risk
  Forecast investment $
 and managed spending                                           Know the
 to the next milestone +                                         public
      some cushion                                             markets and
                                                                values of

 Value of the               Potential              Estimated
 company in                 value at                Value at
today’s round              next round                 Exit
Entrepreneurs Need to Manage the
Risk Factors

                    Source: Nature BioTechnology
            Remember the Simple Investment
 Pre-Money Valuation + Invested Capital = Post-Money Valuation
“Pre-Money” Valuation - This is the
estimated value of the company as it stands
prior to any purchase of equity by the               These two components determine how
investor.------ establish through negotiations       much ownership you gave up for the
+ Invested Capital - the amount of money
needed by the company to reach next                    For example, in a company with a pre-
milestone or financing round, ………this                  money value of $5 million, a $5 million
                                                       investment would buy a 50% ownership
impacts the amount of equity ownership in
                                                       stake in the company
exchange for the investment

“Post-money” Valuation is the resulting

 valuation after the investment of capital
determining the capital that you need is probably more important then the valuation

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