IGNITE 2008

“How Investors Value Technology Companies”

Art, Science, Maths and Realities

What Entrepreneurs Need to Know

Professor Alan Barrell and Peter Phillips

Slide 2

Agenda – Welcome to the Real World

• Valuation – when and why is it important ?• Thinking about INVESTORS – they have the ££££/$

$$$• Deciding on best sources of Finance• The Background – Economics, Markets and Values• Case Based discussions – the art of the possible • Valuation calculations and methods – where do they

fit ?• Special problems of Emerging Technologies• Valuing the Future….Crystal Balls vs PCs

Slide 3

Slide 4

Stay Cool!Stay Cool!

Dilbert - Scott Adams

Slide 5

Stay Cool!Stay Cool!

Dilbert - Scott Adams

Slide 6

Stay Cool!Stay Cool!

Dilbert - Scott Adams

Slide 7

Valuation – how and why?

• To indicate value to potential investors

• What is a company worth?

- What someone will pay for it

• What is this determined by?

- Other investment choices

(there are usually MANY !)

Slide 8

A Search for Fair Value – see any Science here?

Issue date Value at

issue

1 Year On

Bookham April 2000 £1.2 billion

£231 million

Lastminute.

Com.

March 2000

£571 million

£54 million

Orchestream June 2000 £212 million

£52 million

Just2clicks Feb 2000 £130 million

£ - - - -

Slide 9

The Changing Horizon – World Economics affects Company Valuations

EnvironmentIssues

The death ofdeference

New employmentpatterns

Organisations

Globalisation

Technology

Slide 10

The Changing Face of Globalisation – Realities for Europe, US and The World

• Two fifths of the Worlds people live in the two fastest growing large economies – China and India – FACT

• Education, Wealth Creation and New Knowledge are at the heart of Economic Planning in Asia

• Growth in Asia is far ahead of Europe.

• The desire to LEAD is strong in Asia

• CASH is in place in the Asian economies – as well as brainpower.

• Growth of FDI and VC.

Slide 11

Slide 12

Some Economic Indicators – How are key Countries doing? How does it affect investing?

• Can the trend continue? China’s $s growing at 200billions a quarter!• Inward and outbound investing – trends• Sovereign Wealth Funds• Chinese and Indian VC investing• Chinese and Indian Angel Investors are growing in number and getting organised

GDP % Change Ind. Prod. % Trade Balance

US $ Bn

Foreign Reserves

US $ Bn

China + 9.5 + 8.9 +60 1.65 Trillion

And growing!

India + 8.6 + 8.0 - 25 130

Britain + 2.9 + 0.1 - 49

Euro Area + 2.1 + 1.0 + 86

USA + 3.9 + 3.5 - 679

Slide 13

The Phenomenon of Ancient China – Creativity and Inventiveness – some of the Inventions – many NOT financed or exploited – little return for inventors…

• The first lamps• Magnetic Compass• The Camera• Gunpowder• Paper for writing• Printing• Iron and Steel Smelting• Copper and Bronze ware• Oil Drilling and Production• Coal Mining• Pottery and Porcelain• Wine making and tea and tea culture• Early Astronomy• Sericulture – gave us Silk• Seismography• Traditional Medicine and Anaesthetics• Acupunture• Vaccination against Smallpox• The Hot Air Balloon• The Soushi Calendar• Decimal and Binary Mathematics

Slide 14

When a market “BOOMS” - Venture Capital Investments in E-Commerce (U.S.A.) “When Greed overcame Fear”

Source: Venture Economics

Netscape IPONetscape IPO33rdrd largest in largest inNasdaq HistoryNasdaq History

Amazon.com IPOAmazon.com IPO

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

To

tal I

nv

est

ed (

$ m

illio

n)

Slide 15

Cambridge Venture Capital Scene – Estimated total value of funds: in excess of £1.5billions

Venture Capital Funds with Regional Associations – at the height of a “boom”

- UK and Europe

- Cambridge Region only- UK only

Less than £1.0 million

More than £3.0 million

INVESTMENT SIZE

CRIL Generics Prelude 3i

ICT

Life Sciences Avlar

FNIVenture Capital

Merlin

Amadeus

PrimeTechnologyVentures

Pall MallVentures

Alta Berkeley

ETCapital

SiemensVC

Abingworth

CreateVentures

CambridgeGateway

TTPVentures

Slide 16

1990 1995 2000 2005 2010 1990 1995 2000 2005 2010

ExpectationsExpectations

WWW InventedWWW Invented

NetscapeNetscape

Amazon.comAmazon.com

Christmas 1999Christmas 1999

Christmas 1998Christmas 1998

E-tailers shakeout beginsE-tailers shakeout begins

Internet inInternet inevery businessevery business

Investor disillusionmentInvestor disillusionment

Business disappointmentBusiness disappointment

Robust e-businessesRobust e-businessessurvive & thrivesurvive & thrive

PioneerPioneer investorsinvestors

LateLateInvestorsInvestors

Early investorsEarly investors

But….Boom can lead to BUST- valuation implications? “Return of Fear….” “Down Rounds” ....Discuss….

R&DR&D MarketingMarketing ProfitabilityProfitability Cash FlowCash Flow

Peak ofPeak ofIrrationalIrrational

ExpectationsExpectations

Bygrave; GartnerGroup, 11/99

IPO FeverIPO Fever

RationalRationalExpectationsExpectations

Slide 17

US Angels – The REAL early stage funders !

• In 2000 US business Angels invested more than $200billions in early stage companies

• This was much more than the so called “venture capital industry” which did not reach investment levels that year of $150 billions.

• In the difficult year of 2002 – when VCS “sat on hands” – Cambridge Angels kept the early stage and emerging business sector alive and well

• Cambridge Angels are adopting the US success model and working more closely together.

Slide 18

The Competitive Threat“Today’s Peacock is tomorrow’s feather duster” –

There is ALWAYS competition….

Slide 19

Sources of Competitiveness

Creativity Risk

Speed Reputation

Cost Values

Learning Information

Slide 20

Valuations and Technology Development – “Survival of the Fastest…”

All international phone calls1971

All airline passengers1975

All mobile phones 1984

All emails 1992

All SMS1998Source: Analysys, World Bank and ITU

Slide 21

Three Converging RevolutionsThree Pervasive Technology Platforms

BIO TECHPharmaceuticals

DiagnosticsResearch/Info

ToolsIndustrial

GenomicsBioinformatics

Proteomics

INFO TECHHardwareSoftware

Communications

NANO TECHElectricalStructural

BiomedicalEnergy & Environment

BiosensorsBiochipsBioelectronics

MicrofluidicsNanobiotechnology

Drug Delivery

NanodevicesNanosensors

Nanoelectronics

Slide 22

• Universities and centres of academic excellence• Exploitable, converging Technologies• Entrepreneurs with marketable ideas and products

• Business angels and established seed funds

• Sources of early stage venture capital

• Core of successful large companies

• Quality management teams and talent

• Supportive infrastructure

• Affordable space for growing businesses

• Access to capital markets

• Attractive living environment and accommodation

source :- Gibbons - Stanford University 1998

Characteristics of high technology regions- Catalysts for Growth – Centres of Investment – is

this the environment where most of us are?....

Slide 23

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The emergence of high-technology clusters in Greater Cambridge

1971 1981 1991 2001 The future?

ScientificInstruments

Nanomaterials

Drugs delivery

Sensors/actuators

Informatics

Instrumentation

Medical engineering

LEPs

Drug modelling

Bluetooth

Sentient computing

Telecoms

Industrial inkjet

Biosciences

Computing

Software

ScientificInstruments

Wirelesscommunications

Telecoms

Industrial inkjet

Computing

Biosciences

Software

ScientificInstruments

Hi-tech 20,200 25,100 34,900 46,200jobs:

Computing

Software

ScientificInstruments

Industrial inkjet

1971 1981 1991 2001 The future?

ScientificInstruments

Nanomaterials

Drugs delivery

Sensors/actuators

Informatics

Instrumentation

Medical engineering

LEPs

Drug modelling

Bluetooth

Sentient computing

Telecoms

Industrial inkjet

Biosciences

Computing

Software

ScientificInstruments

Telecoms

Industrial inkjet

Biosciences

Computing

Software

ScientificInstruments

Wirelesscommunications

Telecoms

Industrial inkjet

Computing

Biosciences

Software

ScientificInstruments

Wirelesscommunications

Telecoms

Industrial inkjet

Computing

Biosciences

Software

ScientificInstruments

Hi-tech 20,200 25,100 34,900 46,200jobs:

Computing

Software

ScientificInstruments

Industrial inkjet

Computing

Software

ScientificInstruments

Industrial inkjet

50,000

Slide 25

Slide 26

Overlapping Technologies support Overlapping Business Clusters

HEALTH

KNOWLEDGE CREATION

INFORMATION and COMMUNICATIONS

TECHNOLOGY

Basic Research

Sound & vision

Bio-pharmaceuticalsComputing

Publishing

Medicalservices

Bio-informatics

Medical devices and scientific instruments

University/ Research Institutes

Inkjet printing

Wireless

Telecoms

Networking

Technology ConsultingMedicalresearch

Education

Slide 27

“Show Me The Money!”

• Basics – Investment Readiness• How organised are we ?• Company structure ?• Management Team?• Intellectual Property?• Vision, Purpose,Plans and Positioning Ideas?• Advisors ? “Greyhairs and Wisdom” ? Basics –

eg Accounts and Controls ?• “Rumsfeld Questions” – “What we DON’T

know?”

Slide 28

Sources Of Business Finance

Maturity

Risk

“Our Money”“Our Money”

Family and FriendsFamily and Friends

Business AngelsBusiness Angels

Early Stage VCEarly Stage VC

Expansion CapitalExpansion Capital

B

A

N

K

F

I

N

A

N

C

E

??

Seed FundsSeed Funds

Pre-IPOPre-IPO

Slide 29

Converging Interests and InfluencesInnovating in the Overlap and Adding Value – working together – across

functions as well as across borders – public funds are available

EDUCATION&

RESEARCHincluding Universities

INDUSTRY&

BUSINESS

GOVERNMENTNational & Local

Slide 30

Stages Of Investment (1)

3. Early stageCompanies that have completed the “proof of principle”, own some IPR, have a management team substantially in place, requiring funds for manufacturing and/or licensing, and sales

1. Seed

Developing IPR, unlikely to have full time employees, and may well have no business premises. Working on “proof of principle”

2. Start up

Companies in the process of being set up, with limited trading. Involved in product development and initial marketing

Slide 31

Stages Of Investment (2)

4. ExpansionEstablished companies, with a full management team and generating sales, and require further finance to break into new markets. The definition “Expansion” often creates confusion

6. Later stage

Many variants – M and A, MBO, MBI etc.

5. Pre IPO

Final round prior to a listing on a recognised Stock Exchange. Can be referred to as “Expansion” funding

Slide 32

“Show Me The Money” – It’s more than “valuation”

• Understanding the “Money Supply Chain”• Research and Help – and where to find it• What’s Best for Our Business ?• “Money on its own may not bring the Value you need”• Friends, Banks, “Angels”, VCs et al.• Grants – including DTI R & D Grants• Resourcefulness, Resilience and Recovery”• Learning from encounters with investors• Attention to detail – “nitty gritty”

Slide 33

The Early Stage Business Balance – what do investors look for and see? When “valuing” ?

The role of Chairman and NXDs

Inspired Leadership

Enthusiasm

Bullshit

Courage

OptimismVision

Creativity

Management

Research & Analysis

Caution

Process

Financial Control

Market Knowledge

Slide 34

1) The “Bibles” – BVCA and EVCA Handbooks and Websites2) VCs can be small, large, regional,national, international,privately

held or publicly quoted. UCFs growing in number.3) RDA and Govt supported VCs are emerging to fund up to £250K

or £500K4) VCs can be “general” or industry focussed5) All VCs have clear investment criteria.6) VCs are firmly regulated by the FSA, or other National

Regulatory bodies.7) Some are regulated in the Channel Islands. 8) Corporates make direct investments AND some have free

standing VC operations.

Sources Of Business FinanceThe Venture Capital Jungle – where Valuations are a

“specialty”

Slide 35

Engaging The Funders

• Preparing the case - how to start -”Do we need help ?” -

Intermediaries-Corporate Finance.

• Is the Business Model Clear?

• Keep Business Plans Simple!

• Targeting funders - Investors have specific criteria

• ?Angels, Banks, Seed Fund, Corporates or VCs – or a “mix”

• Matching agendas

• Sponsors for spin-outs

• Organisations and people - the forward plan

Slide 36

One Fund’s Investment Criteria Cambridge Gateway Fund

• Innovative core technology• Protected/protectable I.P.• Sectors - I.T., Telecomms, Life Sciences• Beyond proof of concept - not seed, not start-up• Management team, Business Model and Plan in

place• Potential to exploit global markets• Ready for “roll out”

Slide 37

• Investors due diligence agenda:-– Technology and I.P.– Market - is it really there?– People - can they do it?– Exit options and drive

• Due Diligence on Investors:-– Investment criteria– Track record– People, relationships, references– Clarity of expectations– Available finance - including “follow on”– Willingness to syndicate and to participate

Due Diligence is a two way thing: it will affect valuation get it RIGHT !

Slide 38

Exploring the Spirit of Adventure and Discovery – and on to Entrepreneurs

• An early case of an “Angel Investment”

• Adversity and achievement – rewards for persistence

• Investors look for “special people”

• Inspiration and Passion show in different ways

• Investors invest in…People mostly

• Knowing the Investor mindset

Slide 41

A “Brainpower Hero”

Slide 42

Einstein on IMAGINATION….

“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world”

Albert Einstein 1879 - 1955

Slide 43

Slide 44

“You look at things and ask - why?

but I dream of things that never

were and ask -

George Bernard Shaw

why not?”

Why MINDSET matters – what’s an Entrepreneur ?

Slide 45

Schumpeter (1911) on Entrepreneurs

“Entrepreneurs blow gales of creative destruction.”

Role of the entrepreneur in transforming economies by developing:

New products New methods of production New ways of organizing Untapped raw materials Enhanced competitive performance

Josef Schumpeter Vienna 1911

Slide 46

Is there RISK involved?....Oh dear….How do we manage risk ?....

Slide 47

As an Investor - Would you invest in this team ?

Slide 48

If you or I had done so in 1978 – we wouldn’t be working here now !

Microsoft Corporation, 1978

Slide 49

Time for a final little story, about a bright little boy….

Slide 50

Who became a brilliant young man….

Slide 51

Inventor and champion of Intellectual Property Rights……..

Slide 52

NOT just the inventor of the Electric Light…..Thomas Edison – he built an Empire on Intellectual Property –

“Capturing Imagination and creating / adding value”

Slide 53

Let’s look at some Realities – Cases we have known

• Contrasting financing means and valuation – Ink Jet Printing

• Technology, Passion and Energy don’t always prove sufficient – Active RF

• A Funding Fable – “Valuation Obsession” almost killed the company

Slide 54

Contrasting Case Studies – same business sector – similar companies – similar valuations. Equity finance is not the ONLY way – but valuation

counts any way

Domino

Venture Capital

IPO – LSE 43 X oversubscribed

Growth financed by rights issues

Significant acquisitions to buy new technology (e.g. laser coders)

Always profitable

Half yearly reporting

1,500 shareholders

Regular dividends

Shareholder driven – business ratios and “bottom line” focus

Founder realised £21 millions

Willett

Organic growth & bank borrowing

No equity investments

No public offerings

New technology “developed within” – at controlled costs (e.g. laser coders)

Always profitable

No public reporting other than annual accounts

No Dividends for first 10 years

Growth and ambition driven

Owners’ re-investment policy minimise reported bottom line and taxes

Founder realised £60millions – cash.

Slide 55

“Pilgrim’s Progress” – A true story…

Slide 56

Pilgrim’s History

• Born Cambridge 1967 • Educated London &

Cambridge

• BSc Computer Engineering

• Early work - Cambridge & Oxford

Slide 57

Pilgrim’s History

Then…

• To Silicon Valley

• Euphonix Inc – Palo Alto

• Atari Corporation – Sunnyvale

• Chromatic Research Inc – Sunnyvale

Slide 58

Pilgrim’s Experience

• Project Management

• Real Time Systems

• ASIC Design

• Systems Architecture

• Digital Multimedia

• User Interface Design

• Technical Leadership

Slide 59

Pilgrim’s Company in UK – activeRF Ltd

• Back to Cambridge in 1997

• Passion to start own company

• Bitten by the Entrepreneurial bug!

• A “One man band” …

• or more correctly – “One man & his dog”

Slide 60

Tagging Crumpet

Slide 61

Tagging Crumpet

• Dog collars to security systems

Slide 62

The original concept (Jan 1999)

Slide 63

Early Chronology –Post Dog Collar!

• October 1998 – Incorporation

• October 1998 - February 1999 – “One man & his dog”

• Angels to the Rescue!

Slide 64

Commercial micro-location

Slide 65

Share class

board

board

board

Power Evolution at active RF – valuation implications

Founder

Angels

Employees

VC’s

CEO

OrdinaryOptions

Preferred

Founder

Angels

Passive Shareholders

Slide 66

CEOT

heC

ompa

ny

Factions in Conflicts of Interest – value and control diminish….

Founder Angels

Chairmanand Board

VC

Employees

OrdinaryShareholders

Slide 67

activeRF Limited – slippery slope

• Dog collars to security systems• The leap from Lab to Industry• Cultural success• Technical failure• What happened to the revenues?• Management evolution and the CEO• Valuation from zero to £250K to £5.5m to

£250K to zero.

Slide 68

VentureAdventure vs.

Slide 69

antenova Limited – how it started – Pilgrim again….

• IP acquired and brought to Cambridge

£120k Angels, Family & Friends

Slide 70

Case Study: Antenova – a funding fable

• Disruptive technology which could change the world – from University collaboration

• Outstanding management – technical and operations• Inexperienced in fundraising• Valuation obsession• Where has all the money gone?• Salvation, adequate funding and continued progress

Slide 71

Thinking Of Angels! – we keep referring to them !

Slide 72

Some Angel Groups Active in Cambridge

• Cambridge Angels - Serial Entrepreneurs, Cambridge locations

• Cambridge Capital Group – geographically more spread – Cambridge centric investors

• I.Q. Capital – was Great Eastern Investment Forum

• Glen House Capital Strategies Ltd• Sophia Business Angels

Slide 73

Connections

• www.cambridgeangels.net

• www.cambridgecapitalgroup.co.uk

• www.iqcapital.co.uk

• www.glenhouse.uk.com

• www.sophiabusinessangels.fr

Slide 74

Financing Tomorrow’s Businesses – Optimizing your value

• Technical Expertise • Marketing Expertise• Contacts• Decision Making skills• Presentation skills• Dealmaking skills• Money-raising skills• Other Financial skills• Possible exit routes and practical help with

exit

7

What else you get from

Business Angels….

Slide 76

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If at first you don’t succeed….try again….but learn from the mistakes!

Slide 78

Slide 79

Inspiration SHOWS – investors have Inspiration SHOWS – investors have emotions!emotions!

“Excellence can be achieved, if we:Care more than others think is wise,Risk more than others think is safe,

Dream more than others think is practical,Expect more than others think is possible.”

Deborah Johnson-Ross

VALUATION is a major topic – serious study needed !

For more information……

www.alanbarrell.com

alan@alanbarrell.com