Jeffrey S. Petty Entrepreneurial Finance - Valuation Final assignment • The final individual assignment will be posted on Moodle on 26 May 2023 and discussed in class. • The completed individual assignment must be uploaded on the course Moodle no later than Sunday, 11 June 2023 at 20h00. 2 Entrepreneurial Finance 3 Entrepreneurial Finance “Proof” in the numbers? Assumptions Historic? Income statement Balance sheet Cash flow Use of proceeds 4 Entrepreneurial Finance Projections… Funding amount Assumptions are critical Risk (Discount) 5 Entrepreneurial Finance Timing Need/want to adjust the valuation? Add more assumptions Consider macro economic factors Change the current assumptions 6 Entrepreneurial Finance “Too much money searching for too few deals…” Investors need entrepreneurs/new ventures There are more sources of funding than ever Entrepreneurial investing is in fashion globally 7 Entrepreneurial Finance Potential & equity % Required Future value (FV)= I x (1+return rate)years Time (number of years) Present value = I of investment 8 Entrepreneurial Finance Return rate Investment basics In the future.. All figures in '000 Year 1 Year 2 Year 3 Year 4 Year 5 Software sales B2B 193 227 325 430 498 Software sales B2C 30 30 35 200 750 Consulting services 100 110 121 133 146 Total revenues 323 367 481 763 1394 Expenses Cost of goods sold 145 165 216 343 627 200 200 200 200 200 43 52 62 75 90 -66 -50 2 145 477 Revenues Operating expenses Salaries & Benefits Sales & Marketing Net Profit 9 Entrepreneurial Finance Subjectivity ????? Competition Higher Valuations FOMO 10 Entrepreneurial Finance Timing matters… Pre-money valuation: The value before an investment Post-money valuation: The value after an investment So…. Pre-money valuation = (post-money valuation)-(new investment) 11 Entrepreneurial Finance Annual valuations 12 Entrepreneurial Finance Trends by stage 13 Entrepreneurial Finance A simple estimate…at time X Implied valuation = Investment/equity percentage 2,500,000 = 1,000,000 / .40 The pre-money valuation is… 14 Entrepreneurial Finance A recent deal London-based Lottie has just raised an additional €7 million for its platform which is making the process of finding the right elderly care stress-free and simple. The startup has now reached a valuation of over €52 million and its growing fast. • As an investor, which assumptions would you analyze in order to calculate the valuation? https://www.eu-startups.com/2022/07/lottie-lands-e7-million-to-simplify-the-search-forquality-elderly-care-and-picks-up-a-valuation-of-over-e52-million/ 15 Entrepreneurial Finance Trade-offs…none guaranteed Assetbased Earnings multipliers VC method Berkus method Comparable Balance sheet Income statement Terminal value Key factors “Proven” example “Worst case” “Easy” for early stage Perceived risk All five “equal” Valid proxy 16 Entrepreneurial Finance Worst case scenarios Cash Property Securities Inventory Equipment Intangible assets 17 Entrepreneurial Finance Multiples Measure x multiple* (e.g. Cash flow or EBITDA or Sales or Customers) Pharma firm = EBITDA x multiple* Social media = Monthly Active Users x multiple* *The multiplier depends upon norms, the market conditions, the firm, etc. (Use a reliable source for the multiplier) 18 Entrepreneurial Finance Comparables • Select a (similar) company within the industry – Ideally, it will have been valued by an investor recently • Identify the key metrics used for the valuation – App subscribers/users; revenue/employee; etc. • Estimate a relative valuation 19 Entrepreneurial Finance Add the 5 values Berkus Idea Product Prototype Value Value each variable (0-500,000*) Rltnshp. *context dependent 20 Entrepreneurial Finance Team VC method - Critical variables • Expected company performance at time of exit • Number of years until exit • Investment amount • Desired annual rate of return: 30%, 50%…or more • Data on stock options & issued shares • Data on anticipated additional funding rounds 21 Entrepreneurial Finance VC method – Critical calculations • The (estimated) company terminal value – Enterprise value multiple: EV/EBITDA – Equity multiple: Price earnings (PE) ratio e.g. Net revenue x PE ratio • The required future value of the investment Investment x (1 + return)years (both calculated at expected time of exit) 22 Entrepreneurial Finance Reliable data • NYU – – – – – http://people.stern.nyu.edu/adamodar/New_Home_Page/data.html Multiples Discount rate estimation Growth rate estimation Industry averages And so much more… 23 Entrepreneurial Finance In the future… Final equity ownership required = = required future value (investment) ________________________ total terminal value (company) investment x (1 + return)years ______________________ multiple x (terminal “income”)* Note: Options will reduce the terminal value * “income” may be revenues, EBITDA, EBIT, etc. 24 Entrepreneurial Finance Shares % ownership acquired (y =# new shares) = y ________________________ # issued shares + y or new shares share price = = % ownership _______________ x issued shares 1-(% ownership) investment _______________ # new shares 25 Entrepreneurial Finance Equity 20 50 30 ENT 26 Entrepreneurial Finance INV 1 INV 2 Future dilution? What if they intend to grant more equity later? In some cases, selected equity holders are not diluted Conservative approach: All current equity holders are diluted retention % = 1 - (total of final future % ownership) current % ownership required = final % ownership _______________ 27 Entrepreneurial Finance retention % Simple rules • Know your industry • Realistic assumptions – Projections – Investment required – Risk rate • Try multiple approaches & scenarios 28 Entrepreneurial Finance A simple approach Agree on the assumptions Agree on the methods 29 Entrepreneurial Finance You will not argue over a number Valuation assignment The assignment is posted on Moodle Work in the assigned on Moodle Submit the completed valuation assignment on Moodle – Read the scenario and answer the questions. – Include a spreadsheet showing your calculations – List any assumptions that you use Deadline: 22h00 on 08.03.23 30 Entrepreneurial Finance
