An eValuation Model Presentation to Investors-R-Us Board of Directors
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An eValuation ModelAn eValuation ModelPresentation to Investors-R-UsBoard of Directors
Presentation by:
2B (or not 2B) Consulting
Neil Gall
Marek Ryfko
Richard Schwartz
Mayank Sharma
Jawad Tareen
March 18, 2000
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Problem Statement
Develop a set of criteria and application and assessment guidelines for use in evaluating the investment and
financial potential of e-business plans.
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Agenda
Uniqueness of E-Commerce
TraditionalValuation Methods
New Model
Rationalization
Case Study
Implementation
Conclusion
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The Changing Face of Business
Physical Product
Digital Product
Physical Agent
Digital Agent
Digital Process
Physical Process
Traditional Commerce
E-Business
Adapted from “Electronic Commerce: A Managerial Perspective” by Efraim Truban et. al. 1999
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How E-Commerce is Different
Pace of Change is Faster than Legislation and Regulation
Traditional Valuation Models do not Fully Capture the Value of E-Business Companies
Continuous Evolution in Terms of Customer Value
Generally Require Large Investment in Marketing as Opposed to Capital Expenditures
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E-Business Models
E-Tailing
Auction (C2C)
Community
Professional Services
Portal
Exchange (B2C and B2B)
Search Engine
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Traditional Firms
Main Assets are Facilities & Equipment
Debt Raised for Firm’s Operations and Asset Acquisition
Funding from Investment Banks
Lending Based on Cash Flows of the Firm
E-Business
Main Assets are Customers
Huge Marketing Expense
Debt Largely Unavailable - Investors want Equity
Funding from Venture Capital Firms
Cash Flow not Used for Firm Valuation
Dot Coms that issue Debt are rated by Moody’s as JUNK (e.g. Amazon, E*Trade)
Traditional vs. E-Business Firm Valuation Considerations
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Traditional Valuation Methods
Method Problems
Payback Arrival of EarningsAscertaining FC & VC
P/E or P/S E’s are initially negativeSales does not mean returns
Op. Cash Flows are negativeEvaluation of Risk
Disc. Cash Flows
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Traditional Valuation Methods
Operating Profit ???Capital intensity meaningless
Method Problems
EVA
Real Options Complexity of useNo time value of option
Market Cap inflatedCustomers are ill-defined
Market Cap / customers
Requirement of a New E-Business Framework
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What Should the New Model Look Like?
TangiblesTangiblesIntangiblesIntangibles
eValuationeValuation
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The eValuation Model
+Gross Revenue
# of Customers
Earnings
# of Customers
Risk Free Rate + WACC + Market Return
x [ # of Customers x (1 + Growth) ]
x [ Intangibles ]
Value =
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The eValuation Model
Revenue Streams
• Content• Access• e-Commerce• Advertising• Affiliate Programs
Customer Types
• Subscribers• Buyers• Visitors
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The eValuation Model
Costs
• Customer Acquisition• Updating Content• Logistics in sales process• Marketing & Promotion• Overhead
Earnings
• Reflects the payback time• Earnings reduce the risk profile• Returns get factored in the model
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The eValuation Model
Discount Factor• Factors in risk free rate & cost of capital• Risk premium assigns the riskiness of the venture • Earnings are co-related to a reduced risk premium
# of Customers & Growth Rates• Establishes the importance of the customer• Growth rate incorporates penetration rate
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Customers = Assets
VALUE PROPOSITION
COMPETITIVE SUSTAINABLE ADVANTAGE
CUSTOMERS
What do customers really value?
How original is the idea?
What needs are going to be met?
What is the management skills set ?
What are the back-end processes?
What are the technological resources?
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Value Proposition
StrategyMarketing
CRM
Product-Service
VALUE PROPOSITION
Channel Conflicts
Mass Customization
Global Reach
Customer Awareness
Branding
Cross Selling
One to One
Customer Feedback
Customer Satisfaction
Customer Retention
Customer Support
Customer Involvement
R&D
Market Opportunity
Unique eBusiness Solution
Innovation
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Competitive Sustainable Advantage
Management & HR
Tax & Legal
Processes
Technology
Alliances
COMPETITIVE SUSTAINABLE ADVANTAGE
Quality of Management
Organizational Structure
Compensation
Training
Employee Attraction/Retention
Electronic Signature
Jurisdiction
Trademark Registration
Payment
Taxation
Fulfillment
Operations
Virtual Communities Site Design
Data Warehousing
Database Management
Scalability of Infrastructure
Security
Outsourcing
Suppliers
Partners
Affiliates
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Intangibles Score Card
Intangibles Weight1-3
Score1-10
Cut-off1-10
Weight xScore
Value PropositionProduct-ServiceMarketingStrategyCRMCompetitive Sustainable AdvantageManagement & HRAlliancesTechnologyProcessesTax & Legal
Composite TotalComposite Index
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The eValuation Model Captures the Complete Value
TangiblesTangiblesIntangiblesIntangibles
eValuationeValuation
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Mitigating the Risks
• Customization (Overlapping Businesses - e.g. AOL)
• Growth is Constant and based on Current Economic Situation (No Seasonality or Recession Market)
• Subjective Attribution of Weights to Intangibles by Venture Evaluators
• Hurdle eValuation Figure needs to be established based on appropriate eBusiness model
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Model Customization
•E-Auction Houses (e.g. eBay)
• # of Customers & Growth easier to establish
• Customer Interface more critical in Intangible evaluation
• E-Brokerage (e.g. E*Trade)
• Revenue / Customer easily measurable
• Technological Infrastructure weighted more heavily
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Customization of Intangibles
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1
5
Tax & Legal
Alliances
Technology
Marketing
Management & HR
Products/Services
Strategy
Processes
CRM
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Case Study
vs.
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Comparing Models
eValuation
Current Valuation
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Analysis of Intangibles
eV Index = .67eV Index = .67
Intangibles Weight(1-3)
Score(1-10)
Cut-off(1-10)
Weight xScore
Value PropositionProduct-Service 3 7 7 21Marketing 2 7 6 14Strategy 2 8 6 16CRM 3 7 7 21Sustainable Competitive AdvantageManagement & HR 3 6 7 18Alliances 3 7 7 21Technology 2 7 4 14Processes 1 5 2 5Tax & Legal 1 4 2 4
Composite Gross 134/200Composite Index .67
eV Index = .86eV Index = .86
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eValuation Analysis
$135.5 Million
30 Million Visitors
- $52 Million
30 Million Visitors+
1 + 9.3%
x [30 Million Visitors x (1 + 1.41) ] x [0.67]
= $ 123.4 Million= $ 123.4 Million
= $ 1,468.2 Million= $ 1,468.2 Million
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Current vs. eValuation Model Relative Relationship
Market Capitalization:
eValuation:
= $ 123.4 Million
= $ 1,468.2 Million
= $ 83.2 Billion
= $ 7.667 Billion
Y!:L Ratio: 10.85:1Y!:L Ratio: 10.85:1
Y!:L Ratio: 11.90:1Y!:L Ratio: 11.90:1
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Case Study Wrap-Up
• eValuation model considers both Tangibles as well as Intangibles
• eValuation Model is to start-ups what Market Capitalization is to established E-Businesses
• Offers “Go” or “No Go” Criteria based on investor specific business model Hurdle Rate
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Implementation Plan
Phase 1
Framework questions specificationTraining
Industry templates specificationWeb publication preparation
Feedback Maintenance& SupportTraining
Phase 2
Phase 3
Phase 4
Web publicationTraffic generation
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Implementing the eValuation Model
Speed Cost
Acceptance
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What About Larbi?
Client Develops Business Plan
Client Researches Funding Alternatives Online
Client Completes Online Profile
Contact is Initiated with Investors-R-Us
Face-to-Face Interview
eValuation Performed
Funding Decision
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Conclusion
+Gross Revenue
# of Customers
Earnings
# of Customers
Risk Free Rate + WACC + Market Return
x [ # of Customers x (1 + Growth) ]
x [ Intangibles ]
Value =