Early-Stage Company Valuation in NZ
With Specific Application to Equity Crowd funding
How are Companies Valued
(generally)?
Different methods for different contexts
― Discounted Cash Flow
•
FCFF, FCFE, DDM, EVA etc.
― Comparable Company Multiples
•
M&A transactions, publicly listed comps, capital raising valuation by similar firms
― Asset Based
•
NAV, replacement cost, break-up value
― Previous transaction value
•
Acquisition price, implied value at capital raised, most recent traded price
Early-stage Company Context
Issues arise when applying traditional methods to early-stage companies
― Discounted Cash Flow
•
Positive cash flows may be outside of reasonable forecast period
•
Very sensitive to discount rate assumptions
― Comparable Company Multiples
•
M&A comps imply control and/or synergy value
― Publicly listed comps imply lower discount rate (various reasons)
•
Asset Based
•
Does not assess value of future potential, very conservative
― Previous transaction value
•
May not exist/be available or stale
•
May relate to different class of capital e.g. liquidation preference, anti-dilution
provisions, or board representation
A quick word on the ‘Venture Capital
Method’
A pricing tool rather than a valuation method. Assumes that funding is
received.
― Determine the terminal value of the company at the point of exit
•
Make forecasts for the company’s financials for the holding period
•
Assess value using one of the previous valuation methods e.g. 5x EBIT at end of
year 5
― Discount the terminal value to date of investment to give the post-money
valuation
•
e.g. discount back 5 years at 30% compound annual rate
•
Adjust for additional future financing rounds if anticipated, base this on cash
balances and burn rates over the forecast period
― Subtract the value of investment round to give the pre-money valuation
•
e.g. If the post-money valuation from the previous step is $5m, and the forecast
is based on the assumption of $1m invested, then the pre-money valuation is
$4m.
Discount Rate Selection
Higher risk  higher return expectations  risk premium on discount rates
― The higher the level of risk associated with the investment, the higher the
discount rate must be
― The venture capital method implicitly considers only the exit value in the
case of success, rather than the (probability-based) expected case.
There are two ways of dealing with this:
•
Explicitly consider a number of scenarios at the point of exit and analyse on a
probability-weighted basis.
•
Increase the discount rate to incorporate an annual probability of failure (with
zero residual value). e.g. a 20% discount rate for non-diversifiable risk combined
with a 20% annual chance of failure in each of the five years forecast will
equate to a combined discount rate of 50%
Where is the risk?
At the shareholder level, require a discount (increase discount rate) for:
― Lack of control – a minority interest in a company does not give
meaningful voting rights
― Lack of marketability – the costs and difficulty associated with finding a
buyer for your shares
― Liquidity – the costs associated with trading the shares quickly when there
isn’t a stable market price
― Information asymmetry – shareholder’s are only legally entitled little more
than the annual financial accounts
― Agency problems – incentives of directors and managers are not always
aligned with that of shareholders
Some of these issues can be mitigated e.g. by listing on a secondary
exchange such as Unlisted or the NZAX.
Where is the risk? contd.
For early-stage and small companies, a further discount may be required for:
― Lack of depth/quality of management including key person risk
― Weak bargaining power with customers/suppliers
― More vulnerable to threat of new entrants, substitutes, industry rivalry
― Lack of established customer base / market validation
― Risk associated with product development
― Revenue concentration risk
― Lack of runway / financial sustainability
For shorthand, companies are often grouped into stages with respect to
progress in addressing these factors.
Stages of Company Maturity
Stages of company development are commonly associated with rounds of
funding
Stage
New Zealand Venture Investment Fund (NZVIF) Definition
Seed
An investee company is at the seed stage of its development if the investment will enable
development, testing and preparation of a product or service to the point where it is feasible to start
business operations. Most likely to be pre-revenue.
Start-up
An investee company is at the start-up stage of its development if the investment will enable
actual business operations to get underway. This includes further development of the company’s
product(s) and initial production and marketing. May or may not be pre-revenue.
Early
expansion
An investee company is at the early expansion stage of its development if the
investment provides capital to initiate or expand commercial production and marketing but where the
company is normally still cash flow negative.
Expansion
An investee company is at the expansion stage of its development if the investment provides
capital for the growth and expansion of a company, which may or may not break even or trade
profitably. Capital may be used to finance increased production capacity, market or product
development, or provide additional working capital.
The differences between stages are not always well-defined, nor does every
stage require its own funding round.
So what do the Comps Say?
Good data in the early-stage private investment space is notoriously difficult
to come by… however the New Zealand Venture Investment Fund (NZVIF)
have published summary statistics.
Source: The Valuation of Early-stage Investments in New Zealand, NZVIF, December 2012
Crowd funding Data as Comp
― Crowd funding is still in its infancy in NZ (and globally), dataset is small
and the market is yet to mature
― There are possible arguments that a crowd funded capital raise
can/should command a higher valuation than from ‘private’ investors
•
Validation from crowd funding platform
•
Validation from other investors (less due diligence)
•
More diversified shareholder base and greater ability to list on a secondary
exchange (improved access to future capital)
•
Takeovers Code may provide additional protections
•
Retail investors may have lower return expectations
 Availability of rewards/product discounts
 Personal connection with brand
 Belief in company mission (impact investing, ethical investment criteria)
 Smaller investment universe (unable to access VC/PE funds)
NZ Crowd funding Data
― First offer closed successfully in September 2014
― As at 21 July 2015
•
30 offers to date, $11.5m raised
•
20 successful offers
 6 fully subscribed (reached max target)
 2 offers raised the $2m legal maximum allowable under crowdfunding
•
4 currently open
 Including the first company to do a second round of crowdfunding
•
6 failed offers
― Shareholder statistics
•
Average number of investors per offer – 131
•
Average investment size $4,400
NZ Crowd Funding Data contd.
― Industries:
•
Fast Moving Consumer Goods (FMCG) – 7 (23% of offers)
•
Technology: Software & Services – 8 (27% of offers)
•
Financial – 4 (13% of offers)
•
Others include Energy, Technology Hardware, Hospitality, Consumer Durables,
Health Care, Tourism, and a film project
― Rewards/Discounts available
•
Yes – 17
•
No – 13
•
Rewards have included permanent discounts for shareholder, free
products/services, exlusive or early access to new products, company
memorabilia, and exclusive party invites
― Voting shares available
•
Available to all, with no minimum investment threshold - 17
•
Only available to large investments over a specified minimum - 10
•
Voting shares not available – 3
Valuation Data – by Stage
Pre-Money Valuation
Crowd funding - Succeeded
Stage
NZVIF Data
Count
Median
Average
Count
Median
Average
Seed
3
800,000
1,786,401
69
870,000
1,698,448
Start-up
7 2,400,609
3,644,439
182 2,265,401
4,207,319
Early Expansion
11 5,000,000
4,358,417
59 7,528,758
15,188,035
Overall
21
3,053,478
3,752,993
310
NA
5,738,771
― Broadly speaking, crowd funding valuations have been in line with
NZVIF’s historic data although early expansion stage companies have
tended to have lower valuations, likely due to being earlier stage in their
expansions
― Important to note:
•
Individual outliers present
•
Stage classification is subjective
Valuation Data – FMCG Industry
Pre-Money Valuation - FMCG/Food & Beverage
Crowd funding - Succeeded
Stage
Count
Median
Seed
-
-
Average
-
NZVIF Data
Count
2
Median
Average
-
-
Start-up
3 1,050,000
1,583,783
4 2,500,000
3,290,000
Early Expansion
3 5,000,326
5,500,109
4 3,682,756
3,656,074
Overall
6
3,276,739
3,541,946
10
NA
2,778,430
― Start-up stage FMCG offers have tended to be at lower valuations than
NZVIF data whilst early expansion stage offers have been at higher
valuations
― Constituents:
•
Start-up: Pineapple Heads, Angel Food, Sorbet by Ethique
•
Early Expansion: Renaissance Brewing, Yeastie Boys, Invivo Wine
Valuation Data – Software Industry
Pre-Money Valuation - Software & Services
Crowd funding - Succeeded
Stage
NZVIF Data
Count
Median
Average
Count
Median
Average
Seed
1
800,000
800,000
21
500,000
564,700
Start-up
1 1,000,000
1,000,000
76 1,771,913
2,457,594
Early Expansion
3 5,000,000
4,650,372
25 7,200,000
15,622,776
Overall
5
1,000,000
3,150,223
122
NA
4,829,551
― Software start-up and early expansion stage companies have had lower
valuations than that observed in NZVIF’s historic data
― Constituents:
•
Seed: Chariot
•
Start-up: Parent Interviews,)
•
Early Expansion: TRNZ Digital Travel Guides, Sell Shed, Collect
Valuation Data – Failed Offers
Pre-Money Valuation
Crowd funding - Failed
Stage
NZVIF Data
Count
Median
Average
Count
Median
Average
Seed
2
873,228
873,228
69
870,000
1,698,448
Start-up
3 4,058,169
4,207,535
182 2,265,401
4,207,319
Early Expansion
1 9,800,000
9,800,000
59 7,528,758
15,188,035
Overall
6
4,051,435
4,028,177
310
NA
5,738,771
― Seed stage companies with offers that failed will likely have related to
issues other than valuation. For the start up stage offers that failed,
valuation may have been a contributing factor
― Constituents:
•
Seed: Techvana – The New Zealand Computer Museum, H2Explore
•
Start-up: Be Intent Youth, Tapp, Liquid Waste Treament Systems
•
Early Expansion: Mad Group
Questions, Comments, Enquiries?
General enquiries:
Media enquiries:
Lewis Grafton
David Wallace
Analyst
Managing Director
+64 27 4696 433
+64 21 419 440
lgrafton@armillary.co.nz
david@armillary.co.nz
About Armillary Private Capital
At Armillary Private Capital we have a purpose of enabling success for
businesses, business owners and investors.
We are an investment bank providing specialist asset and market place
management, corporate finance, advisory and financial training services.
We manage the Unlisted unlicensed financial product market.
Armillary is also the manager of CrowdArm Limited (CrowdArm), a licenced
crowd funding operator trading as CrowdCube in New Zealand. CrowdArm
is 50% owned by Quadriga Acquisitions Limited, a related party to Armillary.