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Prof. Vittorio de Pedys

FOR DISCUSSION. LESSON 6. How Business Angel and Venture Capital evaluate investments. Prof. Vittorio de Pedys. WOULD YOU HAVE INVESTED?. MICROSOFT CORPORATION, 1978. 2. START SMALL AND THINK BIG. 3. START SMALL AND THINK BIG. 4. GRANDFATHER OF SILICON VALLEY. 5.

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Prof. Vittorio de Pedys

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  1. FOR DISCUSSION LESSON 6 How Business Angel and Venture Capital evaluate investments Prof. Vittorio de Pedys

  2. WOULD YOU HAVE INVESTED? MICROSOFT CORPORATION, 1978 2

  3. START SMALL AND THINK BIG 3

  4. START SMALL AND THINK BIG 4

  5. GRANDFATHER OF SILICON VALLEY 5

  6. GRANDFATHER OF SILICON VALLEY 6

  7. PRIVATE EQUITY AND VENTURE CAPITAL 7

  8. VENTURE CAPITAL INVESTMENT PROCESS 8

  9. U.S. Venture Capital in 2010 26 B$ into 2800 deals; up 11% 800 firms have 6.000 partners Average partner manages 223 M$ of investments, sits on 6 company boards 72 IPO’s vs 12 in 2009 & 160 average 1990-1994 1° California ; 2° Massachusettsss ; 3° NY Source: UCLA 9

  10. Italian Venture Capital in 2010 • 90 M€ investments in 30 companies (early stage) • 13 players • 2-3 disinvestments • Exit generally through selling to other companies • Italian venture capital & private equity association www.aifi.it Source: AIFI 10

  11. Introduction to raising capital 11

  12. Capital raising sequence • Personal savings & credit card debt • Friends, families and “fools” • Business Angels • Venture capital • IPO or acquisition 12

  13. Stages • Seed = product developed & launched, CEO in place, some early sales, not profitable • Early stage = paying customers, proven business model, management team in place, break even revenue • Expansion = needs investment for sales & marketing investments to sell more 13

  14. Business Angels • Typically retired or semi-retired, successful professionals who have investment cash • Many want to mentor CEO’s • To be considered “accredited investors” need > 500.000 € net worth • Typical angel investment 40-60k per year • Like Venture Capitals, do not sign NDA agreements • Normally invest locally & for themselves 14

  15. Angels groups • Angel groups in almost every city • Most are non-profit organizations • Each member invests individually • Use standard deal term sheets • All investors sign same term sheet • Investors may invest different amounts 15

  16. The Italian Business Angels organization is called IBAN (Italian Business Angels Network) http://www.iban.it/ 16

  17. Typical angel deal in U.S. (2010) 1.7 B$ total investment* 400 K$ investment 1.5 M$ pre-money valuation 20-25% equity One seat on the board of directors Source: ACA 2010 17

  18. Typical angel deal in Italy (2010) • 33 M€ total investment • 145 K€ average investment in each company • 40-60 K€ average investment per Business Angel • Consider 1-5 investment opportunities during the year • One seat on the board of directors Source: IBAN 18

  19. Venture Capital vs Business Angels Venture Capital’s have: • Expensive offices & high overhead costs (vs. angel’s home office) • High labour costs (vs. angels work solo) • Investors who expect high profits (vs. angels have lower profit expectations) • VC board of directors (vs. no board) 19

  20. Club degli investitori • Group of entrepreneurs of the Piemonte region that invests in new or recent constitution companies that are innovative, with highly growth potential • Investments realized: Arenaways – Authix – Caspertech - Lachesi – Microcinema – Microwine – Skuola.net – Nicanti • The club is formed by 40 members Source: clubdeglinvestitori.it 20

  21. Evaluation process 1/2 • Entrepreneur sends Business Plan to the club • Every member can examine the Business Plan • Selection is based on : • Innovation level of the product or the service proposed • Credibility of the entrepreneur and the management team • Target market and selling strategy • Headquarters in the Piemonte region Source: clubdeglinvestitori.it

  22. Evaluation process 2/2 • Club reviews plan & decides if appropriate to present to all members • Entrepreneur makes 15 minute presentation & 20 minute Q&A • If 4-6 Angels investors express interest, due-diligence team formed & meets with entrepreneur for 2-3 hours to learn more • Typical pre-money valuation = 500K€ - 1M€

  23. VCsAND ANGELS LOOKS FOR CREDIBLE DIFFERENTIATION… New Co Competitor 10 Competitor 9 Y1 Competitor 11 Competitor 7 Competitor 1 Competitor 6 Y2 Competitor 2 Competitor 3 Competitor 8 Competitor 5 Competitor 4 X1 X2 23

  24. 3. PRODUCT &TECHNOLOGY …AND DEFENSIBLE BARRIERS PARTNERSHIPS NETWORK SIMPLICITY TECHNOLOGY DOMAIN KNOWLEDGE BUSINESS PROCESS 24

  25. METHODS TO EVALUATE A VC DEAL It is important to know the meaning of post-money and pre-money valuation in Venture Capital or Private Equity

  26. PRE MONEY VALUATION A pre-money valuation refers to the valuation of a company 

  27. POST MONEY VALUATION Post-money valuation is the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity If a company is worth $100 million (pre-money) and an investor makes an investment of $25 million, the new, post-money valuation of the company will be $125 million. The investor will now own 20% of the company.

  28. METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP • ANGEL VALUATION • VENTURE CAPITAL METHOD

  29. METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP • ANGEL VALUATION • VENTURE CAPITAL METHOD

  30. TIPICAL ANGEL VALUATION (1/2) NO REVENUES? 500K-1M€ STANTARD PRE-MONEY VALUATION

  31. TIPICAL ANGEL VALUATION (2/2) ….or bridge loan to A round Venture capital investment: Angels can buy A round shares at 75% share price

  32. METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP • ANGEL VALUATION • VENTURE CAPITAL METHOD

  33. VC METHOD • POST = V/ (1+r)t • V= EBITDA x multiple exit • R= required annual return of the fund • t= time to exit

  34. 10,1 EXAMPLE • EBITDA Year 4 = 5M€ • Value in 4 years= 5 M€ x 5 = 25M€ • Required annual return: 50% • Time to exit = 4 years • Investment = 3 M€ • POST = 25/ (1+50%) 4 = 4.9 M€ • VC QUOTA = 3/ 4.9 = 60% • PRE = 4.9 - 3= 1.9 M€

  35. METHODS TO EVALUATE A VC DEAL IF THE COMPANY EXISTS • DCF • MULTIPLES

  36. DCF MODEL Sum of all future cash flows that are estimated and discounted to give their present values WACC: Kd (no debt) + ke (35%-50%) Used by VC to check

  37. METHODS TO EVALUATE A VC DEAL IF THE COMPANY EXISTS • DCF • MULTIPLES

  38. MULTIPLES EV/EBIDTA EV/REVENUES EV/CASH FLOW EV/EBIT P/E Private comparable companies + AIM companies Very simple but easy to make mistakes

  39. 10,1 AVERAGE EBITDA MULTIPLE = 5 X EBITDA

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