Financing and Valuing Your Startup

8/6/2019 Financing and Valuing Your Startup

1/34

July 18, 2011

Venture Financing

and Valuation


2/34

Quick Background

San FranciscoTech M&AAdvisory

Tokyo

Class of 2012


3/34

AGENDA

FinaFina

ncinncinggNewNewVentVenturesures

ValuiValui

ngngNewNewVentVenturesures

TheTheTermTerm

SheeSheett


4/34

Financing NewVentures

The Overview


5/34

So you have a

business and you needfinancing

Step 1: Profile yourbusiness


6/34

Capital Intensive,ProvenTechnologies

Capital Intensive,New Technologies

Small Businesses

Technology or Business ModelNovelty

Low High

Low

High

CapitalRequirement

NewTechnologie

s / BusinessModel


7/34

Venture Capital(Create Big Co.)

Capital Required to AchieveBreakeven Cashflow

Low Medium

Low

High

Scalability of Business

Not ViableBootstrap(Create a small

company)

Venture Capital

Boot Strap

Low BarriersHigh Barriers

Source: Get Venture, Mark Peter Davis. http://www.markpeterdavis.com/getventure/2010/07/how-to-raise-vc- presentation.html


8/34

Investment Stage

Seed Start-upFirst

Round

Second

Round

ThirdRound

Expansion

Mgmt.Buyou

t

Restructurin

g

Idea toOpportunity &Initial ProductDev.

Launch tosustainability Growth Turnaround

Family, Friends,Angel Investors Venture

Capitalists


9/34

Breakdown of Prominent VCs Portfolio

Source: HBS, Analysis by Professor William Sahlman based on 468 investments over the period 1990-2006


10/34

Two types of VCs

INDEPENDENT VCs CORPORATE VCs

VS.

Limited

Partners(Pension Funds,Wealthy

Individuals,Endowments)

Corporate

TreasuryFunding

7-10 years Unlimited

TimeHorizon

Limited / None Extensive

StrategicSynergies

Stronger Weaker

Monitoring

Stronger Weaker

FinancialDiscipline


11/34

Local Funding sources for TechStartups
http://www.founderinstitute.com/http://www.rajacapital.com/http://e27.sg/wp-content/uploads/2011/01/mpinc.png


12/34

Valuing New

Ventures

Valuation


13/34

Two things you need to know aboutvaluation

Its an art, not ascience

Its in the contextof a financing

negotiation


14/34

Venture Valuation

AssumeStartUp needs $3.5mm in investmentto carry its operations for the next fiveyearsIn year 5, StartUp projects that it cangenerate $2.5mm in net income andbe valued at a Price-to-Earning (PE)ratio of 15xStartUp vi sits Kawano Capital to ask for $$


15/34

Venture Valuation

Fact SummaryInvestment $3.5 million

Term 5 years Year 5 Net Income $2.5mm Year 5 PER 15xRequired IRR for Kawano Capital 50%


16/34

Venture Valuation

(1 + IRR ) years x(investment )

(1 + .50 ) 5 x ( 3.5 )

Required future value of

investment

$26.6million

PER x Year 5 net

income15 x 2.5

Future Terminal Value

$37.5million

$3.5million

Required Ownership Stake

Entry Valuation

=70.9%

=$4.9m(Post-money)

$4.9m $3.5m

=$1.4m(Pre-money)


17/34

That was easy (?)

In real life, investment are staged andrarely do entrepreneurs receive the fullfunding required in a single fundinground

Investors will most like would like tostage the investments to reduce risk


18/34

Multiple Rounds of Investment

Required future ownership stake

future value(investment)terminal value(company)

=final%

Investment

TermIRR FinalOwnership

Round 1 $1.5mm 5 yr 50% 30.4%Round 2 $1.0mm 4 yr 40% 7.3%Round 3 $1.0mm 3 yr 25% 3.3%

(1 + IRR ) years x(investment )PER x Year 5 netincome

=


19/34


Required future ownership stake

Retention % = 1 (total future final ownerships fromsubsequent rounds)

Current

Ownership =Investment

TermIRR FinalOwnership

Retention

CurrentOwnership

Round 1 $1.5mm 5 yr 50% 30.4% 89.3% 34.0%

Round 2 $1.0mm 4 yr 40% 7.3% 96.7% 7.6%

Round 3 $1.0mm 3 yr 25% 3.3% 100% 3.3%

FinalOwnershipRetention %


20/34


Investment

TermIRR CurrentOwnershi

p

Pre-money

Valuation

Post-Money

Valuation

Round 1 $1.5mm 5 yr 50% 34.0% $2.9m $4.4m

Round 2 $1.0mm 4 yr 40% 7.6% $12.2m $13.2m

Round 3 $1.0mm 3 yr 25% 3.3% $29.3m $30.3m

Entry Valuation


21/34

So which is better for the entrepreneur?

Single-stagedinvestment Staged investmentVS.

FounderOwnership

FinancialSecurity

Less(29%)

More(59%)

More Less


22/34

Valuation Deadlocks

Valuation Deadlock

Well put that asidefor now

Stated discount to thenext round of

investment

Staged investments


23/34

The Term Sheet

Valuation is only half the trouble


24/34

AN

OT HE Rk

e y

s u c c e s

s f a c

t o

r

Sometimes more important than thevaluation

THETERMSHEE

T


25/34

Lesson One

Investors rarelybuy

commonequity


26/34

CONVERTIBLE PREFERRED

STOCK

Definition: Hybrid security thatcan be converted fromsubordinated debt into equity atthe holders discretion


27/34

EXAMPLE

Kawano Capital invests $4mm inconvertible preferred stock inStartUp for 40% of the firm(Post-money valuation of $10mm)


28/34

Firm Enterprise

Firm EnterpriseValue

$4m $10m

60%

40%

Convertible PreferredStock

$4mm

Post-moneyvaluation

VCstake


29/34

VCstake

Firm Enterprise

Firm EnterpriseValue

$4m $10m

60%

40%

Convertible PreferredStock

$4mm

Protectdownside

Post-moneyvaluation


30/34


31/34

Pitch right for your type of company Deal terms have value , its easier

to negotiate these than the valueitself

Do not run out of cash

Demonstrate that you are capableof attracting the right team

Who you raise money from is critical Local vs. abroad


32/34

END

Some Ending Thoughts


33/34

2011 LAUNCH Conference, SF

Takahito Iguchi , CEO

Tonchidot


34/34

Be ENERGETIC!!

Documents

Financing and Valuing Your Startup