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IGNITE 2008

IGNITE 2008. “How Investors Value Technology Companies” Art, Science, Maths and Realities What Entrepreneurs Need to Know Professor Alan Barrell and Peter Phillips. Agenda – Welcome to the Real World. Valuation – when and why is it important ?

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IGNITE 2008

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  1. IGNITE 2008 “How Investors Value Technology Companies” Art, Science, Maths and Realities What Entrepreneurs Need to Know Professor Alan Barrell and Peter Phillips

  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

  3. Stay Cool! Dilbert - Scott Adams

  4. Stay Cool! Dilbert - Scott Adams

  5. Stay Cool! Dilbert - Scott Adams

  6. 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 !)

  7. A Search for Fair Value – see any Science here?

  8. Organisations Environment Issues Technology The death of deference Globalisation New employment patterns The Changing Horizon – World Economics affects Company Valuations

  9. 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.

  10. 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

  11. 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

  12. $6,000 $5,000 $4,000 $3,000 Total Invested ($ million) $2,000 $1,000 $0 When a market “BOOMS” - Venture Capital Investments in E-Commerce (U.S.A.) “When Greedovercame Fear” Netscape IPO 3rd largest in Nasdaq History Amazon.com IPO Source: Venture Economics

  13. - Cambridge Region only - UK only - UK and Europe Venture Capital Funds with Regional Associations – at the height of a “boom” Cambridge Venture Capital Scene – Estimated total value of funds: in excess of £1.5billions Siemens VC FNI Venture Capital Prime Technology Ventures Amadeus Alta Berkeley ICT Pall Mall Ventures Create Ventures CRIL Generics Prelude ET Capital Cambridge Gateway TTP Ventures 3i Life Sciences Abingworth Avlar Merlin More than £3.0 million Less than £1.0 million INVESTMENT SIZE

  14. But….Boom can lead to BUST- valuation implications? “Return of Fear….” “Down Rounds” ....Discuss…. Peak of Irrational Expectations Expectations E-tailers shakeout begins Christmas 1999 Investor disillusionment IPO Fever Late Investors Business disappointment Christmas 1998 Robust e-businesses survive & thrive Amazon.com Early investors Internet in every business Netscape Rational Expectations WWW Invented Pioneerinvestors R&D Marketing Profitability Cash Flow 1990 1995 2000 2005 2010 Bygrave; GartnerGroup, 11/99

  15. 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.

  16. The Competitive Threat“Today’s Peacock is tomorrow’s feather duster” – There is ALWAYS competition….

  17. Sources of Competitiveness Information Learning Risk Creativity Reputation Speed Values Cost

  18. All international phone calls 1971 All airline passengers 1975 All mobile phones 1984 All emails 1992 All SMS 1998 Valuations and Technology Development – “Survival of the Fastest…” Source: Analysys, World Bank and ITU

  19. BIO TECHPharmaceuticalsDiagnosticsResearch/InfoToolsIndustrial INFO TECHHardwareSoftwareCommunications GenomicsBioinformaticsProteomics BiosensorsBiochips BioelectronicsMicrofluidicsNanobiotechnologyDrug Delivery NanodevicesNanosensorsNanoelectronics NANO TECHElectricalStructuralBiomedicalEnergy & Environment Three Converging RevolutionsThree Pervasive Technology Platforms

  20. Characteristics of high technology regions- Catalysts for Growth – Centres of Investment – is this the environment where most of us are?.... • 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

  21. The emergence of high-technology clusters in Greater Cambridge 50,000

  22. Overlapping Technologies support Overlapping Business Clusters INFORMATION and COMMUNICATIONS TECHNOLOGY HEALTH Telecoms Medicalservices Bio-informatics Medical devices and scientific instruments Networking Computing Bio-pharmaceuticals University/ Research Institutes Wireless Inkjet printing Sound & vision Medicalresearch Technology Consulting Publishing Basic Research KNOWLEDGE CREATION Education

  23. “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?”

  24. Sources Of Business Finance “Our Money” B A N K F I N A N C E ?? Family and Friends Business Angels Seed Funds Risk Early Stage VC Expansion Capital Pre-IPO Maturity

  25. EDUCATION & RESEARCHincluding Universities INDUSTRY & BUSINESS GOVERNMENTNational & Local Converging Interests and InfluencesInnovating in the Overlap and Adding Value – working together – across functions as well as across borders – public funds are available

  26. Stages Of Investment (1) 1. Seed Developing IPR, unlikely to have full time employees, and may well have no business premises. Working on “proof of principle” 3. Early stage Companies 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 2. Start up Companies in the process of being set up, with limited trading. Involved in product development and initial marketing

  27. Stages Of Investment (2) 4. Expansion Established companies, with a full management team and generating sales, and require further finance to break into new markets. The definition “Expansion” often creates confusion 5. Pre IPO Final round prior to a listing on a recognised Stock Exchange. Can be referred to as “Expansion” funding 6. Later stage Many variants – M and A, MBO, MBI etc.

  28. “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”

  29. The Early Stage Business Balance – what do investors look for and see? When “valuing” ? Inspired Leadership Management Creativity Enthusiasm Research & Analysis Process Bullshit Market Knowledge Courage Caution Vision Optimism Financial Control The role of Chairman and NXDs

  30. Sources Of Business FinanceThe Venture Capital Jungle – where Valuations are a “specialty” • The “Bibles” – BVCA and EVCA Handbooks and Websites • VCs can be small, large, regional,national, international,privately held or publicly quoted. UCFs growing in number. • RDA and Govt supported VCs are emerging to fund up to £250K or £500K • VCs can be “general” or industry focussed • All VCs have clear investment criteria. • VCs are firmly regulated by the FSA, or other National Regulatory bodies. • Some are regulated in the Channel Islands. • Corporates make direct investments AND some have free standing VC operations.

  31. 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

  32. 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”

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

  34. 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

  35. A “Brainpower Hero”

  36. Einstein on IMAGINATION…. “Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world” Albert Einstein 1879 - 1955

  37. Why MINDSET matters – what’s an Entrepreneur ? “You look at things and ask - why? but I dream of things that never were and ask - why not?” George Bernard Shaw

  38. 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

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

  40. As an Investor - Would you invest in this team ?

  41. Microsoft Corporation, 1978 If you or I had done so in 1978 – we wouldn’t be working here now !

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

  43. Who became a brilliant young man….

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