Startup Valuation - Roig & Vicén - vDraft2
Transcript of Startup Valuation - Roig & Vicén - vDraft2
MasterThesis
StartupValuation
Authors:
AleixRoig,GrandeÉcole–MajorinFinance
CarlosVicén,GrandeÉcole–MajorinFinance
Underthesupervisionof:
Prof.PatrickLegland,AffiliateProfessor–FinanceDepartment
May2020
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Acknowledgements
Thisresearchpaperwouldnothavebeenpossiblewithout thehelpofmany
people that collaborated directly or indirectly on its realization. Hence, through
theselines,wewouldliketoexpressourgratitudetothem,lettingthemknowhow
importanthavebeentousnotonlyduringthethesisrealizationprocess,butalso
throughoutallourmaster’sexperience.
First,wewouldliketothankourthesissupervisorMr.PatrickLeglandforhis
invaluablecontributioninthisthesis,givingusimportantanddetailedguidelines,
orientation,andmaterial,andhelpingustremendouslyduringtherealizationofthis
researchpaper.
Wewouldalso liketothankouruniquefriendsandcolleaguesfromHECfor
alwaysgivingustheirviewonourthesisdiscussionsandshowingustheirbestboth
professionallyand,moreespecially,personally.
Finally,wewanttothankourfamiliesforgivingustheopportunitytobepart
ofHECParis,anexperiencethatgoeswellbeyondtheacademicaspect,becoming
oneofthegreatestmilestonesinourprofessionalandpersonallives.
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TableofContents
LISTOFFIGURES...................................................................................................................7
1. INTRODUCTION............................................................................................................9
2. STARTUPS.....................................................................................................................10
2.1. DEFINITION.............................................................................................................................10
2.2. ECOSYSTEM.............................................................................................................................11
2.3. MATURITYSTAGES...............................................................................................................15
2.3.1. Pre-SeedStage...................................................................................................................15
2.3.2. SeedStage............................................................................................................................16
2.3.3. EarlyStage..........................................................................................................................16
2.3.4. GrowthStage......................................................................................................................17
2.3.5. ExpansionStage................................................................................................................17
2.3.6. ExitStage.............................................................................................................................17
2.4. FINANCING..............................................................................................................................18
2.4.1. Equity.....................................................................................................................................18
2.4.1.1. Pre-Seed..................................................................................................................18
2.4.1.2. SeedRound.............................................................................................................19
2.4.1.3. SeriesA....................................................................................................................19
2.4.1.4. SeriesB....................................................................................................................19
2.4.1.5. SeriesCandMore................................................................................................20
2.4.2. Debt.........................................................................................................................................20
2.4.2.1. VentureDebt.........................................................................................................21
2.4.2.2. WorkingCapitalLineofCredit......................................................................21
3. STARTUPVALUATION..............................................................................................22
3.1. TRADITIONALVALUATIONMETHODS..............................................................................24
3.1.1. DiscountedCashFlow.....................................................................................................24
3.1.2. ComparableCompanies.................................................................................................31
3.1.3. PrecedentTransactions.................................................................................................32
3.1.4. RealOptions........................................................................................................................33
3.1.5. BookValue...........................................................................................................................38
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3.1.6. LiquidationValuation.....................................................................................................39
3.2. NON-TRADITIONALVALUATIONMETHODS....................................................................40
3.2.1. VentureCapital..................................................................................................................40
3.2.2. Berkus....................................................................................................................................42
3.2.3. Scorecard.............................................................................................................................44
3.2.4. FirstChicago.......................................................................................................................46
3.2.5. RiskFactorSummation..................................................................................................49
3.2.6. Cost-to-Duplicate..............................................................................................................50
4. CASESTUDY:HELLOFRESH....................................................................................51
4.1. MAINGOALSOFTHECASESTUDY.......................................................................................51
4.2. COMPANYINTRODUCTION...................................................................................................51
4.2.1. Generalinformation........................................................................................................51
4.2.2. BusinessActivities............................................................................................................53
4.2.3. Company’sFactsandFigures......................................................................................55
4.2.4. Companyrisks....................................................................................................................59
4.3. INDUSTRYOVERVIEW...........................................................................................................60
4.3.1. Industry’sFactsandFigures........................................................................................60
4.3.2. CompetitiveLandscape..................................................................................................62
4.3.2.1. Meal-kitproviders...............................................................................................63
4.3.2.2. SupermarketChains...........................................................................................63
4.4. COMPANYVALUATION.........................................................................................................64
4.4.1. DiscountedCashFlows...................................................................................................65
4.4.2. ComparableCompanies.................................................................................................70
4.4.3. RealOptions........................................................................................................................74
4.4.4. BookValue...........................................................................................................................76
4.4.5. VentureCapital..................................................................................................................77
4.4.6. FirstChicago.......................................................................................................................78
4.4.7. RiskFactorSummation..................................................................................................79
4.4.8. ValuationFootballField................................................................................................81
5. CONCLUSIONS..............................................................................................................85
APPENDIX..............................................................................................................................87
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1. HELLOFRESHINCOMESTATEMENT........................................................................................87
1.1. WeightedAverageHelloFreshIncomeStatement.............................................87
1.2. JPMorganHelloFreshIncomeStatement–OptimisticScenario................87
1.3. MorganStanleyHelloFreshIncomeStatement–NeutralScenario...........88
1.4. BarclaysHelloFreshIncomeStatement–PessimisticScenario...................88
2. HELLOFRESHBALANCESHEET...............................................................................................89
2.1. WeightedAverageHelloFreshBalanceSheet......................................................89
2.2. JPMorganHelloFreshBalanceSheet–OptimisticScenario.........................89
2.3. MorganStanleyHelloFreshBalanceSheet–NeutralScenario...................90
2.4. BarclaysHelloFreshBalanceSheet–PessimisticScenario............................90
3. HELLOFRESHCASHFLOWSTATEMENT................................................................................91
3.1. WeightedAverageHelloFreshCashFlowStatement........................................91
3.2. JPMorganHelloFreshCashFlowStatement–OptimisticScenario...........91
3.3. MorganStanleyHelloFreshCashFlowStatement–NeutralScenario.....92
3.4. BarclaysHelloFreshCashFlowStatement–PessimisticScenario.............92
BIBLIOGRAPHY....................................................................................................................93
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ListofFigures
FIGURE1:VOLUMEANDNUMBEROFSTARTUPEXITSWORLDWIDE(2011-2018).......................12
FIGURE2:WORLDWIDEDISTRIBUTIONOFSTARTUPSBYINDUSTRY(2017)..................................13
FIGURE3:STARTUPMATURITYSTAGES.................................................................................................15
FIGURE4:TYPEOFVALUATIONMETHODSUSUALLYUSEDREGARDINGSTARTUPMATURITYSTAGE..23
FIGURE5:STARTUPVALUATIONMETHODSCOMPARISON.......................................................................23
FIGURE6:BETAADJUSTMENTSCHEMEFORTECHSTARTUPS.............................................................29
FIGURE7:REALOPTIONSDECISIONTREEEXAMPLE...............................................................................34
FIGURE8:BINOMIALREPRESENTATIONFORBONDS,STOCKSANDCALLOPTIONS...............................35
FIGURE9:SCORECARDCOMPARISONFACTORSANDRESPECTIVERANGE..............................................45
FIGURE10:SAHLMAN,SCHERLISFIRSTCHICAGOMETHODSCENARIOPROBABILITIES......................48
FIGURE11:HELLOFRESHLOCATIONS......................................................................................................52
FIGURE12:HELLOFRESHPRODUCT.........................................................................................................54
FIGURE13:HELLOFRESHREVENUEEVOLUTION(2014-2021)..........................................................55
FIGURE14:HELLOFRESHMARGINSEVOLUTION(2014-2021)..........................................................56
FIGURE15:HELLOFRESHCOSTSBREAKDOWN(2017).........................................................................57
FIGURE16:HELLOFRESHCOSTSASAPERCENTAGEOFSALESEVOLUTION(2015-2021)................57
FIGURE17:HELLOFRESHECONOMICBALANCESHEET(2015-2021)..............................................58
FIGURE18:HELLOFRESHCAPITALRAISING(2012-2016)..................................................................58
FIGURE19:HELLOFRESHPRE-IPONON-DILUTEDSHAREHOLDERSTRUCTURE(2017)...................59
FIGURE20:FOODANDMEAL-KITINDUSTRYVOLUMES[2016AND2021]........................................61
FIGURE21:HELLOFRESHWEIGHTEDAVERAGESCENARIOINCOMESTATEMENT................................66
FIGURE22:HELLOFRESHFREECASHFLOWSCALCULATION..................................................................67
FIGURE23:HELLOFRESHDISCOUNTRATECALCULATION.....................................................................67
FIGURE24:HELLOFRESHTERMINALVALUECALCULATION...................................................................68
FIGURE25:HELLOFRESHDCFVALUATIONMODEL...............................................................................68
FIGURE26:HELLOFRESHDCFIMPLIEDVALUATION.............................................................................69
FIGURE27:HELLOFRESHENTERPRISEVALUE(EURM)SENSITIVITYTABLE.....................................69
FIGURE28:HELLOFRESHSHAREVALUE(EUR)SENSITIVITYTABLE..................................................70
FIGURE29:CORRELATIONBETWEENCAGRFY16-19ANDEV/SALESMULTIPLE...........................72
FIGURE30:HELLOFRESHCOMPARABLECOMPANIESANALYSIS............................................................72
FIGURE31:PUBLICCOMPSVALUATIONMODEL......................................................................................73
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FIGURE32:HELLOFRESHPEERS’EV/SALESMULTIPLES......................................................................73
FIGURE33:REALOPTIONSSHAREPRICECOMPUTATIONUNDERUP-STATEANDDOWN-STATE......74
FIGURE34:REALOPTIONSCURRENTSHAREPRICECOMPUTATION......................................................75
FIGURE35:REALOPTIONSVALUATIONMODEL......................................................................................76
FIGURE36:BOOKVALUEVALUATIONMODEL.........................................................................................77
FIGURE37:VENTURECAPITALVALUATIONMODEL...............................................................................78
FIGURE38:FIRSTCHICAGOSCENARIOSDEFINITION..............................................................................78
FIGURE39:FIRSTCHICAGOVALUATIONMODEL.....................................................................................79
FIGURE40:RISKFACTORSUMMATIONRISKASSESSMENT....................................................................80
FIGURE41:RISKFACTORSUMMATIONVALUATIONMODEL..................................................................80
FIGURE42:SUMMARYTABLEOFHELLOFRESHENTERPRISEVALUEFOOTBALLFIELDANALYSIS.....81
FIGURE43:HELLOFRESHENTERPRISEVALUEFOOTBALLFIELDGRAPH.............................................82
FIGURE44:ACCURACYOFEACHMETHODANALYSISFORENTERPRISEVALUE....................................83
FIGURE45:SUMMARYTABLEOFTHEHELLOFRESHSHAREVALUEFOOTBALLFIELDANALYSIS.......83
FIGURE46:HELLOFRESHSHAREVALUEFOOTBALLFIELDGRAPH.......................................................84
FIGURE47:ACCURACYOFEACHMETHODANALYSISFORSHAREVALUE..............................................84
FIGURE48:HELLOFRESHSHAREPRICEEVOLUTION..............................................................................86
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1. Introduction
Startupsrepresentoneofthemosticonicbusinesssectorsofourtime,always
present fromthenewstotheuniversities.Manyof themostvaluablecompanies,
eitherinfinancialtermsorregardingtheirimpactandpresenceinthesociety,have
madetheirwayfromstartupstogloballeaders,completelyreshapingindustriesand
changingourdailylifeand,andwhynottosayit,thelifeoftheirfounders,making
themmorethanrich.
Fromtheinvestorspointofview,thisnichehasincreasinglybeenahotmarket
with extremely good opportunities for wise –and lucky– investors to capture
massive returns,making theventure capital industryoneof themost renown in
financeandoneofthemostdesirableplacestoworkinformanyfinancelovers.
Theneedtoraisecapitaltofuelthegrowthandexpansionofthestartupsand
theneedtoinvestthecapitalthatventurecapitalfirmscollectfromtheirinvestors
connect these twogroups.However, in either case theymust facea challenge to
culminatethissymbioticrelationship:thetwopartsneedtoagreeonthefairvalue
ofthecompany.
This isacrucialpoint forbothstartupsandventurecapitalistsand itcanbe
managed through a correct company valuation using different methodologies
adaptedtothestartupecosystem.Hence,theprincipalgoalofthisresearchpaperis
to understand how to value a startup and which are the most common
methodologies to do so. Anyone interested in finance is aware of the typical
valuationsmethodstotrytocomeupwiththefairvalueofacompany,howeverthe
particularities that the startupecosystempresentsmakes thisprocess especially
difficultandchallenginginthisindustry.
So,weaimtofirstlyunderstandwhatarethespecificitiesthatstartupsentail,
andhow they translate into the different valuationmethods that canbe used in
ordertoovercometheissuesthatonehastofacetoproceedwiththevaluationofa
startup.Moreover,wewilltestthisprocesswithourownexperiencebycarryingout
thevaluationofHelloFresh,astartupthatwentpublicin2017.
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2. Startups2.1. Definition
Nowadays, startup is a word widely and mainstream used. However, the
conceptbehindthiswordisusuallyvagueornotveryclear.Manypeopleusethe
terminology startup to refer to young companies founded by one or more
entrepreneurs,whichhaveexperiencedveryhighgrowthtrends,andoperateinany
technologicalfield.
Nevertheless, there are many companies with simple and genuine ideas
operatingindifferentsectorsthatobjectivelyandrationallyshouldbeconsidered
asstartups,buttheyfalloutofthiscategorybymostofthepeople.Thisisbecause
thesecompaniesdonotmatchthecriteriastatedabovesince,forinstance,theydo
notinvolvetechnologyintheiroperations.Similarly,therearemanycompaniesthat
fallintothiscategorywhichshouldnotbeconsideredassuch.
In this context, wewill start by setting a clear ground for our analysis and
definingpreciselywhatdoesstartupmeantous.Accordingtotheconceptsseenin
class,therearethreemaincriteriathateverycompanymustmeettobeconsidered
astartup:(i)Binarymodel;(ii)Negativefreecashflows;and(iii)Equityfinanced.
Firstly,itmustnotbepossibletoclearlystatethattheideathatthecompany
puts in practice through its operation will or will not work, i.e. it has a binary
businessmodelresultinginabinarysuccess.
Secondly, the companymust have experienced negative free cash flows and
accumulatedlossesduringitslife,i.e.itisnotprofitableyet.
Thirdlyandlastly,thecompanymustbefinancedwithequity.Usuallyitisonly
equityfinanced,howeverit ispossiblethatthestartuppresentsanon-significant
amountofdebtwhichmaycomefrom,forinstance,convertiblecreditsor,incaseof
socialenterprises,aidfromgovernmentsorfoundations.
Hence, according to the classification criteria stated above,many companies
thatareconsideredstartupshouldnotbetoldassuch,sincetheirbusinessmodels
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arebasedinareliablesuccessprovedfromtheexperienceofothercompanieswith
similar operating methods. Meanwhile, companies operating beyond the
technological sector, which usually are set apart from the startup classification,
shouldbeconsideredasstartupaslongastheymeetthecriteriastatedbefore.
2.2. Ecosystem
Despite the dot com bubble originated at the end of the nineties and its
subsequent downfall, the creation of new and innovative companies has been
occurringduringthelast30years.
Whileintheoldendaysitwasextremelydifficulttocreateasuccessfulbusiness
withoutan importantamountofcapital to facethe initialset-upcosts,nowadays
startups can be initiated without incurring in large initial expenses. The
technologicalimprovementoccurredduringthelastthreedecades,combinedwith
the globalization and the increase of resources such as information access, data
analysis and the increase of customer base, have boosted the creation of new
startups,whichprovideproductsand–mostly–servicestotheemergingneedsof
thedifferentsocieties.
Asstartupsneedacertainamountofcapitaltostarttheiroperations,afactthat
provestheupwardtrendofthestartupecosystemistheincreaseoftheinvestments
made on startups. Investment in new and innovative companies have recently
becomeverypopular,withanincreasingnumberofinvestorswhichrecognizethe
uniquepotentialfortunetobemadebyinvestingoracquiringtherightstartup.Asa
matterof fact,between2012and2017,startup fundingacrossall industriesand
regions grew by 50 percent, with special sectors such as artificial intelligence,
roboticsandadvancedmanufacturingthatpresentedimportantfundingincreases.
The increase on the creation of new startups can also be identified by the
number of exits of venture-backed startups. Although only 0.2 percent of new
businessesreceiveventurecapitalfunding,around50percentoftherecentUSIPOs
areventure-backed.
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Figure1:Volumeandnumberofstartupexitsworldwide(2011-2018)
Source:Statista,Globalstartups–Statistics&Facts
While the technological improvements and digital transformation play an
importantroleinthedirectionofhowthemarketsareorientedandoperated,these
factorsalso influenceonthetypesofstartupsreleased in themarket. In fact, the
appearanceofnewindustries–suchas instantvideo-messaging–isalso linkedto
theappearanceofnewstartupsoperatinginthesesectorstocovernewsocialneeds.
Butnotonly startupsare created fromscratch to cover thenewdemandsof the
evolving society. Also, there are entrepreneurs who seek to optimize existing
businessmodelswiththeaimtooffernewsolutions–suchasfintechcomparedto
thetraditionalbankingsystem–adaptingexistingbusinessmodelstotheevolving
socialrequirementsanddemandsofthesociety.
Regardingtheworldwidedistributionofstartupsbyindustry,accordingtothe
data shown inFigure 2, in 2017most of the startupsweredirectly or indirectly
linkedtotechnology,beingfintech,healthcareandartificialintelligencethesectors
withmoreoperatingstartups.
1000
1500
2000
2500
3000
3500
4000
4500
0
50
100
150
200
250
300
2011 2012 2013 2014 2015 2016 2017 2018
Volumeandnumber ofstartup exitsworldwide (2011-2018)
Volumeofstartupexits($bn) Numberofstartupexits
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Figure2:Worldwidedistributionofstartupsbyindustry(2017)
Source:Statista,Globalstartups–Statistics&Facts
RegardingthecurrentCoronaviruscrisisinwhichweareimmerse,althoughit
is too early to extract strong conclusion with actual data, there are some key
consequencesthatarealreadypossibletonote.
Intermsoffunding,therewasahighdropoffinancingroundsclosedinthefirst
twoweeksaftertheWorldHealthOrganizationdeclaredthespreadofthevirusas
apandemic,theecosystemwasalmostfrozen.Afterthisinitialperiodthingshave
started to improve, especially for specific industries that are expected to benefit
from the crisis such as the healthtech and the medtech, and online delivery
industries.
Nevertheless,despitethepick-upandthetractiongainofsomesectors,overall
the activity has clearly slowed down, with startup investors still looking for
attractive opportunities, but reducing both the number of investments and the
moneydeployedon them, i.e. fewer roundswith lower valuations. In this sense,
SanderVonk,ManagingPartneratVoltaVenturessaysthat“atVoltaVentureswe
expectasteepdeclineinthenumberofdealsinQ2withcarefulrecoveryinQ3and
Q42020dependingonthedurationofthefinancialimpactofthenewcoronavirus”,
feelingsharedbyhisfellowRomainLavault,GeneralPartneratPartech,whostates
that “most startups should expect a “new normal” with fewer rounds, more
syndicateddealsandprobablymorecautiononvaluations”.Inthisregard,asurvey
0% 1% 2% 3% 4% 5% 6% 7% 8%
FintechLifesciencesandhealthcare
ArtificialIntelligenceGamingAdtechEdtech
CleantechBlockchain
AdvancedmanufacturingandroboticsCybersecurity
Agtech
Worldwide distribution ofstartups byindustry(2017)
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amongventurecapitalpractitionersandprofessionalinvestorscarriedoutbythe
Spanish financialnewspaperExpansión,estimates thedrop invaluationbetween
20%and60%,dependingontheindustryandstageofthestartup.
In addition, according tomany other venture capitalists interviewed by EU-
startupsmagazine,thereisaconsensusinwhichearlystagestartups,especiallypre-
seed and seed –explained later in Section 2.3–, are the ones which will clearly
strugglethemostforraisingfundsandtosetpropervaluations.Theprogressunder
thissituationwillbeslowanditwilllastatleastforthenextsixmonths,butitwill
notbesolveduntiltheconfidencereturnstostockmarkets,andtheyarealmostfully
recovered.Obviously,thisisbecauseoftheadditionofahighuncertaintyfactorto
thealreadyveryuncertainbusinessmodelsoftheseearlystagecompanies.
However,thatsaid,asOliverRichards,PartneratMMCVentures,states,“great
entrepreneurs building great businesses will continue to raise capital to grow
throughoutthepandemicandafterit”.Then,eventhoughthetroublesomesituation
for the startupecosystems that theCoronavirus implies, itmight alsobe a great
opportunity to invest against fewer competitors in best-in-class companies, at a
lowervaluationthanbefore,withthehopetoenterinanormalizedsituationatthe
endoftheinvestmenthorizon.
All in all, although the appearance of startups can happen in almost every
sector,thevastmajorityofnewstartupsisconcentratedintechnologicalindustries,
which,atthesametime,happentobelowcostsectorsattheearlystages,enhancing
theattractionoftalentedentrepreneurswithouttheneedoflargeamountsofcapital
to set up the business. Regarding the difficult situation in which we are
unfortunately immerse due to the Coronavirus, despite the fact that the startup
ecosystemwill clearly suffer in forms of fewer financing rounds closed at lower
valuations,asWarrenBuffetoftensays,tomakemoneyyouneedtobuycheapand
sellexpensive,andthismightbeagoodtimetobuycheapifyouhavetherequired
capitaltoinvest.
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2.3. MaturityStages
AswepreviouslysaidinSection2.1,startupssharecommoncriteriawhichlet
us identify and classify them.However, not all startups are in the same state of
maturity,andeveryoneofthesematuritystageshasitsownverydifferentneeds,
objectives,andparticularities.
Although there is no absolute agreement on startupsmaturity stages, there
seems to be an accord between practitioners and academics where we can
differentiate six states of maturity, which are shown in Figure 3 and explained
afterwards.
Figure3:Startupmaturitystages
Source:HECParis,StartupValuationcourse
2.3.1. Pre-SeedStage
ThePre-Seedstageisthestageofthebusinessideaorigination.Atthisstage,
thecompanystillhasnotdevelopedanyminimumviableproductnoravalidated
business model. At this time founding and management team is formed, the
PartnershipAgreementissigned,andtheroadmaptotransformthenon-developed
ideaintoarealityisconceived.
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Inshort,thecompanyhasarawideawithoutdevelopment,andseeksforthe
validationofitsideafromitspotentialfuturecustomers.Theinvestorsatthisstage
usetocomefromtheentrepreneursthroughownfundsandfromtheirrelativeslike
familyandfriends.
2.3.2. SeedStage
TheSeedstageiscrucialforthesuccessforthestartupsinceitisconceivedas
thepointinwhichtheideacomestrue.Atthispoint,themainobjectiveistoexpand
theideainanadequatemannerandtovalidatethebusinessmodel,developinga
minimumviableproductwhichwillallowthecompanytotesttheproduct inthe
marketwithrealcustomers.
Hence,weincludeinthisstagestartupsthathavealreadycarriedoutanMVP
and keep looking for validating both their businessmodel and productwith the
market.Seedinvestmentsmaycontinuetocomefromfriendsandfamily,however
businessangelsandseedstageventurecapitalfundstendtobethemostrelevant.
2.3.3. EarlyStage
TheEarlystagerepresentsthephaseinwhichtheproductisimproved.Atthis
stage, thecompanyisabletocollect feedbackfromitscustomersandtoproduce
somemetricswhichwillreflect itsperformance.Usingthemthroughan iterative
process, the startup must be able to correct the failures of the product and to
transform the minimum viable product from the previous stage into a tangible
productthatisapprovedbythemarketandeasilyscalable.Inaddition,thecompany
mustestablishitsfirstcommercialagreementsanddefinethegrowthstrategythat
itwillfollowduringthenextstages.
Tosumup,Earlystagestartupsownanalreadydevelopedproductandarenow
lookingforboostingtheirgrowthandestablishingcommercialpartners.Thetypical
investorsarebusinessangelsandespeciallyventurecapitalfunds.
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2.3.4. GrowthStage
IntheGrowthstagethecompanymustfocusonitsgrowthandimprovingits
profitability and customer base. At this stage, the startup must already have
developedamarket-validatedproduct,recurrentclientsandpositivemetrics,and
thegrowthstrategymustbewelldefined.Withoutanydoubt,cashflowsturntobe
thecrucialparameteratthisstage–intermsofbothsizeandstability–inorderto
ensuretheexternalfinancing.
So, startups included in theGrowth stage have validated their productwith
theircustomersyet,theyaremassivelygrowingandfuellingthisgrowthwiththe
expansionoftheirteamandoperations.Atthisstage,theinvestmentisalreadyvery
relevant,soventurecapitalfundsarethemainplayers.
2.3.5. ExpansionStage
The Expansion stage is that in which the company seeks to go beyond its
consolidatedmarketandexpanditscustomerbase.Asimplewayofdoingsomay
be through partnerships or agreements with large companies which operate in
differentcountriesorsectors,howeverinthisstagetheuncertaintyandtheriskis
massive because a bad investment decision can be fatal. To support these
investments,externalfinancingremainscrucialtoallowthecompanytoexpandits
operationsandtofuelitsgrowthstrategy.
In short, the startups own a validated product and is now focusing in the
international expansion of their operations either organically or inorganically
through agreements or acquisitions. To do so, massive funding injections are
required,usuallyprovidedbyventurecapitalfunds.
2.3.6. ExitStage
The Exit stage is that inwhich the company is sold. Although some startup
foundersseektoremainastheowneroftheircompanyaimingtocreateahigh-value
and long-run company, usually the last step of successful startups is exiting the
company.
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ThisexitmaybecarriedoutthroughBuy-outsorIPOs.Thefirstonerefersto
thedirectsaleofthestartuptoabigcompany,mayitbebecauseitoperatesinthe
samesectorandwantstoimproveitspositioninginthemarketorbecauseitsees
complementaritiesinthetwobusinesstobeexploited.Itisalsopossibleforservice
providerssuchasAIorcybersecuritystartupsthattheyareacquiredtobeimproved
internalprocessesofthebigplayer.InthecaseoftheIPO,thecompanysimplygoes
publicthroughitssaleatthestockmarket.
2.4. Financing
Aswehaveseensofar,oneofthekeydriversofsuccessforstartupsistheir
ability to raise funds to fuel their growth and accomplish their growth strategy
milestones.Thesecompaniescanrisefundsthroughdifferentprocesses.
2.4.1. Equity
As seen in the first section, these companies usually raise funds through equity
issuances,andwecanfinddifferentfundingroundsdependingonthematuritystage
ofthestartup.
2.4.1.1. Pre-Seed
Pre-Seed isusually the funding round for startupsvaluedbetween$1mand
$3m,andoftenitisthefirsttimeinwhichtheyraisecapital.
Sinceatthispointcompaniesdonothaveproperfinancialdataorperformance
metrics to support their project, investments aremainly driven by the founders
themselvesandtheirrawidea.
The initial funding from any startup usually comes from the founders
themselves.Regardingexternalinvestors,familyandfriendsaretheusualinvestors
inthisround,althoughbusinessangelsareofteninvolvedaswell.Theusualticket–
amountofcapitalinvestedbyeachoftheinvestors–rangesfrom$10kto$250k.
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2.4.1.2. SeedRound
Seedroundisusuallythefundingroundforstartupsvaluedbetween$3mand
$6m, and it is the first round inwhich startups raise the needed funds to start
makingtheirideareal.Hence,capitalraisedtendtobeusedtodeveloptheproduct
andtestitsmarketfit,tocarryoutanalysisandresearch,andtoincreasetheteam.
The usual investors in this round are business angels, seed Venture Capital
fundsandincubators,andtheusualticketrangesfrom$250kto$2m.
2.4.1.3. SeriesA
SeriesAareusuallythefundingroundforstartupsvaluedbetween$10mand
$15m,andtheyaretheroundsinwhichcapitalraisedisinvestedinoptimizingand
bringingtothenextlevelwhathasbeendonesofarandmakingbothproductand
businessmodelmorescalable.
Atthispoint,investorstendtofocusonkeyperformanceandoperatingmetrics
thatreflectthepotentialgrowthandsuccessprobabilityoftheidearatherthanvery
precisefinancialdata.
TheusualinvestorsintheseroundsareVentureCapitalfundsbusinessangels
–sometimescalled“superangels”–,andtheusualticketrangesfrom$2mto$10m.
2.4.1.4. SeriesB
SeriesBareusuallythefundingroundforstartupsvaluedbetween$30mand
$60m,and theyare the rounds inwhichcapital raised is invested in fuelling the
expansionstrategyofthecompany–intermsofcustomerbase,markets,team,etc.–
and,moregenerally,scalingitsbusiness.
At thispoint, the firmtendsnot tobeprofitableor, if it is,profits tendtobe
scarce.However,investorslookatthetractionofthestartupandtrytomakesure
thatthebusinessmodelactuallyworks.
Theusualinvestorsintheseroundsarelate-stageVentureCapitalfunds,and
the usual ticket ranges from $5m to $20m. Since tickets are of very significant
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amountsintheseserieswhichtranslatesintolargeownerships–33%inaverage–,
investorsneedtobechosencarefullyfromacorporategovernancepointofview.
2.4.1.5. SeriesCandMore
Series C or more are usually the funding round for startups valued above
$100m, and they are the rounds in which capital raised is invested in boosting
customerbaseandmarketshare,obtainingbest-in-classtalentand,dependingon
thepositioningofthefirm,acquiringcompetitorstogrowaswellinorganically.
At this point, the startuphasproven that its businessmodelworks andhas
proper financial date to support their decrease in risk profile. Nevertheless,
investorstendtobeextremelydemandingatthisstage–mainlybecauseofthelarge
investmentstheyareconsidering–,carryingoutintensiveduediligenceprocesses.
Theusualinvestorsintheseroundsarelate-stageventurecapitalfunds,private
equityfirms,hedgefundsandinvestmentbanks,andtheusualticketrangesfrom
$20mto$250m.Aftertheserounds,itisusualthatstartupsgopublicthroughIPOs
orgetacquiredbylargerplayersinthesector.
2.4.2. Debt
Althoughthemostimportantandhabitualwayoffundingforstartupsisissuing
equity,someofthemalsoraisecapitalthroughdebtinstruments.
Traditionaldebtholderstrytoensuretherecoveryoftheirlendingandadjust
theinterestschargedtotheriskoftheinvestment.Hence,thehighriskthatstartups
entailintheirearlystagesmakesthemimpossibletoaskforatraditionalloanorto
bechargedwithunbearableinterestpayments,at leastuntiltheyreachamature
stage. That makes debt a more unusual financing option. Nevertheless, debt
financing typically presents some advantages over equity financing, such as the
lowercostandtheavoidanceofdilution.
Despitedebtisbyfarnotasrelevantfortheecosystemasequityfoundingbut
itstillplaysaroleinthegame,wewillbrieflymentionsomeofthemosttypicaldebt
instrumentsthatstartupsmayuseduringtheirearlystages.
21
2.4.2.1. VentureDebt
Venturedebtorventurelendingisafinancingoptiononlyavailabletostartups
backedbyventurecapitalfunds.Creditorsevaluatethefirm’sgrowthrate,business
planandinvestors’trackrecord,andtendtostructureitslendingasa3to4-year
termloan,collateralizedwithcompanyshares.
2.4.2.2. WorkingCapitalLineofCredit
Workingcapitallinesofcreditarerevolvingcreditlinesusedtocoverbusiness’
operatingcosts,suchaspayroll,inventory,orrent.Startupscanwithdrawasmuch
astheywantuptoapredefinethreshold,withthecommitmentofrepayingitina
specifictimeframeandwithapredefinedinterestrate,sometimesincreasinginline
withtheborrowedamount.Oncetheborrowerreturnsthewithdrawnamount it
canbenefitagainfromtheinitialcreditedamount.
22
3. StartupValuation
Valuationiscrucialtoestimatethefaireconomicvalueofanowner’sinterestin
acompanyorbusiness.Thisvaluationshouldconsidertheactualmarketvalueof
the assets that the company possess, but it should also comprise the future
performancethatitwilldelivertoitsequityholders.
In this sense, themost commonmethods thatpractitioners in the corporate
financeindustryhaveusedtovaluecompaniesarefocusedoncashflowgeneration,
earningsgrowth,capitalstructureandotherfinancialmetricsthatcanbeforecasted
forareasonabletimeperiodincaseofmaturecompanies.
However, ifwe think of startups, especially in early stage companies,which
havelittleordirectlynopastfinancialstobeusedtopredictitsprospects,whichare
operatinginabinarybusinessmodelwithmassivefailurerates,andwhichcurrent
situation–intermsofgrowth,margins,capitalstructure,etc.–mayextremelydiffer
fromthatofwhattheywillhaveintheiroptimalmaturestage,itseemsclearthat
alternativevaluationmethodsmustbeused.
Asaresult,wehavedecidedtosplitouranalysisintotwocategories:traditional
methods,thatmaybeusedwhenvaluingstartupsintheir lateststages;andnon-
traditional methods, that may be useful for early stages. In the first group we
include: (i) Discounted Cash Flow; (ii) Precedent Transactions; (iii) Comparable
Companies;(iv)RealOptions;(v)BookValue;and(vi)LiquidationValue.Inthelast
groupweinclude:(i)VentureCapital;(ii)FirstChicago;(iii)Berkus;(iv)Scorecard;
(v)RiskFactorSummation;and(vi)Cost-to-Duplicate.Figure4showswhentouse
eachtypeofmethoddependingonthestageofthestartup,andFigure5showsa
comparison in terms of traditionality, frequency of use and complexity between
them.
23
Figure4:Typeofvaluationmethodsusuallyusedregardingstartupmaturitystage
Note:MultiplesreferstoComparableCompaniesandPrecedentTransactions
Source:RocaSalvatella;“ModelosdeValoracióndeStartups”
Figure5:Startupvaluationmethodscomparison
Source:Ownelaboration
24
3.1. TraditionalValuationMethods
Aswepreviouslydiscussed,wewillstartbyanalysingthetraditionalvaluation
methodsthatcanbeusedforstartupsinlateormaturestages.
3.1.1. DiscountedCashFlow
The Discounted Cash Flow –hereafter DCF– is a common valuationmethod
widelyusedtoestimatethevalueofcompanybasedonitsfuturecashflows.This
method is specially used to value mature companies with stable cash flow
generationandpredictableprospects.Likewise,theDCFmethodcanbealsoused
forthevaluationoflatestagestartupsthathavegeneratedrevenues,withpositive
freecash flows,andwhoseprospectsparametersareacceptablypredictable.For
earlystagestartups,ontheotherhand,asthesecompaniesdonotpresenthistoric
cashflowdataandtheirprospectsarebasedonahighlevelofuncertainty,theDCF
isnotused.
RegardingtheDiscountedCashFlowmethoditself,itstatesthatthecompany
orenterprisevalueiscalculatedthroughthepresentvalueofthefuturefreecash
flowsthatthecompanywillgenerateinthefuture.Thesefuturefreecashflowsare
discountedtopresentvalueusingadiscountrate,toaccountforthetimevalueof
money,whichreflectstherisksandthefinancingcostsofthecompany.
AstheDCFmethodwillresultintheenterprisevalue,thediscountratemust
reflect all the creditors of the business, considering then equity holders,
debtholders,andpreferredshareholders.Hence,thediscountrateshouldaccount
forthereturnthatcreditorswillaskfortheriskthattheyassumebyinvestinginthe
company.
Freecashflowestimation
In order to estimate the future free cashflows of a business, we will first
determine a forecast period, which will vary depending on the nature of the
business,thematurityofthecompany,howstablethecompanyis,andhoweasyis
topredict itsprospects.Inthissense,theforecastperiodforamatureandstable
25
companywithstablepredictedprospectswouldrangefrom5to10years–oreven
moredependingonthenatureofthebusiness–.Forastartup,withhighlevelsof
forecastedgrowthandwithanuncertaintyonitsfarprojections,thehorizonofthe
futurefreecashflowsprojectionwillrangefrom3to5years.
Asthecompanywillnotstopitsactivityaftertheprojectedperiod,theterminal
valuewillthenbecalculatedinordertoaccountforthevalueofthefuturefreecash
flowsgeneratedfromtheyearaftertheprojectionperiodtothelongfuture.This
processwillbeexplainedlatelyinthesubsectionTerminalValue.
Oncetheprojectionperiodisknown,itistimetoestimatetheFutureFreeCash
Flows,which are the after-tax cash flows the company generates on a recurring
basis,aftertakingintoaccountnon-cashcharges,changesinOperatingAssetsand
LiabilitiesandrequiredCapitalExpenditures.FreeCashFlowscloselycorrespond
to theactualcash flowthat investorswouldreceiveeachyear if theybought the
entirecompany.
𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 · (1 − 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑡𝑎𝑥𝑟𝑎𝑡𝑒) + 𝐷&𝐴 − ∆𝑁𝑊𝐶 − 𝐶𝐴𝑃𝐸𝑋
ThenFreeCashFlowswillbeestimatedforeachoftheyearsoftheprojection
period.Forstartups,theevaluationofoperatingmarginscanbedifficulttoestimate
duetothelackofpastfinancialdataandthehistoricallossesthatthecompanyfaced
in the beginning of its operations. A possible solution tominimize this problem
wouldbetofocusonsimilarsuccessfulstartupsinthemarketandsettheexpected
profitability. Moreover, considering the required Capital Expenditures, for long
stage startups, these reinvestments will be growth-oriented and estimated to
deliverpotentialgrowthtothecompany.
DiscountRate
In order to account for the time value ofmoney, the future free cash flows
calculatedforeachoftheyearswithintheprojectionperiodneedtobediscounted
byadiscountratetoobtainthePresentValueofthoseFreeCashFlows.
Thediscountratenotonlyreflectsthetimevalueofmoney,butalsothereturn
thatinvestors–suchasdebtholdersandequityholders–requirebeforetheyinvest
26
inthecompany.Italsoreflectstheriskofthecompanysincehigherpotentialreturns
correspond to higher risk. Thus, the discount ratemust reflect, as accurately as
possible,thecostofcapitalemployedbythecompany.
Allelsebeingequal, smallercompaniessuchasstartups tendtohavehigher
Discount Rates than mature companies, since for startup companies, investors
expectthattheywillgrowmoreanddeliverhigherreturnsinthefuture.Atthesame
time,startupsarealsoriskierthanstableandmaturecompanies.
ThemostwidelyusedDiscountRate istheWeightedAverageCostofCapital
(WACC),inwhicheachcapitalcomponentismultipliedbyitsproportionalweight
withinthecapitalstructure.
𝑊𝐴𝐶𝐶 = 𝐸
𝐸 + 𝐷 + 𝑃 · 𝑘! +𝐷
𝐸 + 𝐷 + 𝑃 · 𝑘" ·(1 − 𝑇𝑎𝑥𝑟𝑎𝑡𝑒) +
𝑃𝐸 + 𝐷 + 𝑃 · 𝑘#
Where:
E:Marketvalueofequityshares
D:Marketvalueofnetdebt
P:Marketvalueofpreferredshares
kE:Costofequity
kD:Costofdebt
kP:CostofPreferredStock
Knowingthatmostof thestartupsarecompletely financedbyequity, inthat
casetheWACCwouldequalthecostofequity.Hence,consideringthatthecostof
equity is very relevant regarding the valuation of a startup using the DCF, it is
importanttounderstandtheprocesstogetit.
Themost commonway to calculate the costof equity is through theCapital
Asset Pricing Model (CAPM), which proposes that, in equilibrium, the expected
returnonanyriskyassetanditssystematicriskarelinearlycorrelatedthroughthe
betacoefficient,asitisshownbelowintheCAPMequation:
27
𝐸(𝑅$) = 𝑅% + 𝛽$ · C𝐸(𝑅&) − 𝑅%D
Where:
E(Ri):Expectedreturnonthecapitalforasseti(orcostofequity)
Rf:Risk-freerate(takenfromtheyieldofhigh-qualitybonds)
E(Rm):Expectedreturnofthemarket
[E(Rm)-Rf]:Expectedmarketriskpremium
βi:Betacoefficientforasseti
𝛽$ =𝑐𝑜𝑣(𝑅$ , 𝑅&)𝜎'(𝑅&)
Where:
cov(Ri,Rm):Covariancebetweenmarket’sreturnandasset’sreturn
σ2(Rm):Varianceofthereturnofthemarket
Knowingthatbetaisthesensitivityoftheexpectedexcessreturnsfromasseti
totheexpectedexcessmarketreturns,therearedifferentprocessesthatcompanies
usetoestimatethebetainamorestraightmanner:throughpasthistoricalbetaof
thecompany,orthroughtheestimationofthecompany’sownbetafrombetasof
publiccomparablecompanies.
Historicalbetasuggestsusingthebetaasthecorrelationbetweenthereturnof
the asset i and the market return during the last years. The drawback of this
approach for an early stage company, suchas a startup, is thathistoricaldata is
neededtocomputethebeta.Hence,asstartups lackofpastdata, thiscalculation
approachmightnotbeuseful.
Regarding the estimation of the beta through the betas of comparable
companies, this approachassumes that the “true”betaof a company isdifferent
fromwhathistoricaldatasuggestssincethe“true”riskinessofthecompanyismore
in-linewithhowriskysimilarcompaniesinthemarketarethantoitsownhistorical
trackrecord.
Inthismethod,usingasetofformulas,anun-leveringandre-leveringprocess
ofthecomparablecompaniesbetasisneededinordertoremovetheadditionalrisk
28
comingfromeachofthecapitalstructuresofthesecompanies,andadaptthebetas
withthecapitalstructureofthecompanythatwearevaluing.
Again,thereisanimportantpointtoconsiderforstartupvaluationregarding
theestimationofthebetathroughthePublicCompanyComparables.Startupsuse
tobeyoungandinnovativecompanieswithveryfewsimilarpeersinthemarket,
andwithanevensmallernumberofcomparablecompaniestradinginthepublic
market, making it very challenging to find similar companies to base the beta
estimation.Thus,especiallyforearlystagestartups,itmightbechallengingtofins
comparablepeers.
Consideringthesedrawbacksinthebetaestimation,areducednumberofVCs
usetheCAPMmethodtodeterminethediscountrate.Instead,theyusededuction
valuesaccordingtointernalreturnexpectationsthatthecompanymightdeliver,as
wellastheperceivedriskofthecompanyitselfandthemarketingeneral.
TherearedifferentadjustmentsthatcanbeintroducedintheCAPMmodelin
ordertocalculatethebetaofastartupconsideringthespecificriskofthecompany,
suchastheintroductionofasizepremiumandvaluepremium,whichareincluded
toaddresstherisksrelatedtothesizeandthevalueofthecompany.Moreover,these
adjustments could then be based on different categories within the company’s
structure,suchasorganizational,financialandtechnological,amongothers,leading
toapositiveornegativeimpactonthebetacoefficient,dependingontheirinfluence
on the company risk. In this sense, Gunter W. Festel, Martin Würmseher and
Giacomo Cattaneo propose in their "Valuation of Early Stage High-Tech Startup
Companies"papersomeadjustmentsthatarepresentedinFigure6.
29
Figure6:BetaadjustmentschemeforTechstartups
Source:Festel,Würmseher,Cattaneo;"ValuationofEarlyStageHigh-TechStart-UpCompanies";
InternationalJournalofBusiness
TerminalValueEstimation
The Terminal Value (TV), which represents the company’s far in the future
value,isanimportantelementoftheDCFmethodology,sinceitaccountsforalarge
30
proportionoftheoverallenterprisevalue,havinganevenbiggerimpactonthefirm
valueofyoungcompanies.
AlthoughthereexistdifferentmethodologiestocalculatetheTerminalValue,
practitioners use 2mainmethods: (i)Multiplesmethod and (ii) GordonGrowth
method.
ThefirstmethodstatesthattheTVcanbecomputedbyapplyingaforecasted
EVmultiple,takenfromtheanalysisofcomparablepeers,toaforecastedEBITDA,
EBIToranyothermarginofthecompanythatwearevaluating.Astheexactmultiple
ishardtoestimateyearsinadvance,differentmultiplesareusedandshownina
sensitivitytable.
On theotherhand, theGordonGrowthmethod assumes that the company’s
futureFreeCashFlowskeepgrowingfarintothefutureandthatthecompanykeeps
operatingforever.However,thepresentvalueoftheFreeCashFloweachyearkeeps
shrinkingsincetheDiscountRateishigherthanthegrowthrateofthoseFreeCash
Flows,whichisassumedtobesimilartothecountry’sinflationorGDPgrowth.
𝑇𝑉( = 𝐹𝐶𝐹( ·1 + 𝑔
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑟𝑎𝑡𝑒 − 𝑔
Where:
TVT:Terminalvalueatthelastforecastedyear(t=T)
FCFT:Freecashflowofthelastforecastedyear(t=T)
Discountrate:UsuallytheWACC
g:Terminalgrowthrate(similartothecountry’sinflationorGDPgrowth)
Either ifwecalculate theTerminalValueusing theMultiplesmethod,or the
GordonGrowthMethod,oranyothermethodnotcommented in thispaper,as it
representsthevalueofthecompanyinthelastforecastedyear,thisTVneedstobe
discountedtothepresentvalueusingthediscountratecomputedasstatedbefore.
31
Finalresult
Finally,oncetheFreeCashFlowshavebeencalculatedfortheprojectionperiod
and the Terminal Value has been computed using the methodologies proposed
above, it is time to discount them to the Present Value, using the discount rate
calculated before, adding afterwards the two together to finally obtain the
EnterpriseValue.
𝐸𝑉#)*+*,- =M𝐹𝐶𝐹-
(1 +𝑊𝐴𝐶𝐶)-
(
-./
+𝑇𝑉(
(1 +𝑊𝐴𝐶𝐶)(
3.1.2. ComparableCompanies
Comparable Companies is a traditional methodology based on the relative
valuation, since it values a company through the comparison to what similar
companiesareworth,usingmultiples.Themain ideaof thismethodology is that
companieswithsimilarcharacteristicsshouldtradeatsimilarmultiples.
This valuation method is mostly used to value mature companies with an
importantsetofcomparablepeerswithaccessibledata.Startupslocatedinagrowth
orexpansionstagecanalsobevaluedthroughthismethodology.
To carry out this method, it is important to correctly gather the data from
comparable companies, which is relatively easy to find, especially for listed
companies.Thesecompaniesarechosenaccordingtothefollowingcriteria:
1. Geography–Betterchosecompaniesinsimilargeographiesandmarkets
2. Industry–Companiesoperatinginthesameindustrygroup
3. Financials–Similarrevenues,marginsandexpectedgrowth,ifpossible
Oncethepeersareselected,differentmultiplesarecomputedforeachofthese
comparablecompanies,suchasRevenue,EBITDAorEBITmultiples(althoughother
multiplescanbeincludeddependingontheindustry),andwefinallygetarangeof
multiples.We then compute theaverageandmedian for eachof the ranges, and
multiplytheoutcomebythemarginorrevenueofthecompanythatwearevaluating
32
–i.e.multiplyEBITDAtoEV/EBITDAratio–tofinallygettheEnterpriseValue(EV)
ofthecompanywhichwillbeexpressedinarangeofvalues.
Therearespecialsituations,withstartups,forinstance,thatwedonotcompute
the average and median for each of the ranges. Instead, if we believe that the
companywillexperienceanastonishinggrowthinthenearfuturecomparedtothe
peers, and that will be able to increase themargins compared to the ones that
currentlypresents,wecouldusethe75thpercentileoftherange,forinstance,to
computethefinalEVrange.
Toconclude,sincethismethodusesthesecuritiesofothercompanies,which
arefairlypricedassumingthatthemarketsareefficient,itshouldprovidearealistic
range of the firm value,while othermethodologies such as theDiscountedCash
Flows are subject to far-in-the-future assumptions. For this reason, Comparable
Companiesisoneofthemostusedmethodsforpractitioners.
3.1.3. PrecedentTransactions
PrecedentTransactionsmethodologyisalsoatraditional,widelyusedrelative
valuationmethod based on the price paid on recent acquisitions of comparable
companies. The approach is very similar to Comparable Companies valuation,
althoughinthiscaseweincludeanadditionalcriteriontochoosethecomparable
PrecedentTransactions:
4. Time – Transactions occurred close to the current period, since the
marketschangeovertime
Also, it is importanttoconsidertherationalebehindthetransaction–M&Adeal,
LBO deal, etc.–, since synergies play an important role on the premium that
acquirerswillbewillingtopay.
Once the transactions are chosen according to the specified criteria,weproceed
withthesamemethodologyaspertheComparableCompanies.Wecomputearange
ofdifferentmultiplessuchasEV/EBITDAandEV/EBIT,forinstance,wheretheEV
33
representsthetransactionvalue,andwethencomputetheEVofourcompanyusing
themarginsanddataofthecompanythatwearevaluating.
Bearinmindthattheenterprisevalueobtainedthroughthisvaluationmethodmay
be higher than the values obtained through Comparable Companies or other
methods.Thereasonisthatthetransactionvalueusuallyconsidersthepremium
paid to control or acquire the underlying company, increasing then the actual
marketvalueofthecompany.
As per the startup universe, as this methodology requires public data from
comparabletransactions,itmightbechallengingtoimplementsincethenumberof
precedenttransactionsofcomparablecompaniesmightbelimited.
3.1.4. RealOptions
Differentvaluationapproachesusedbyacademicsandpractitionerstypically
assume that companieswill hold the assets passively,whereas theReal Options
method considers the right, but not the obligation, to modify the project by
expanding,contracting,deferringorabandoningit,forapredeterminedperiodof
timeandwithanimpliedcost.
So,wedefinearealoptionasachoiceavailabletothemanagersofa firmto
assessthedifferentinvestmentopportunitiesthatabusinessmayormaynottake
advantageofrealizing.Thisrealoptionispresentinaninvestmentwhenthereexists
apossibilityoffutureactionwhentheoutcomeofanycurrentuncertaintyisknown.
Inthissense,thismethodconsidersthatthebusinessdecisionscanbemodified,
impactingtheoutcomeoftheprojectdifferentlydependingonthedecisionchosen.
Themoreuncertainoruncleartheoutlookis,themorevaluableisthisflexibility.
Thisflexibilityisparticularlyvaluabletoaccountfortheintrinsicuncertaintyofthe
startup ecosystem, allowing us to consider different outcomes throughout the
lifetime of the company and introducing different scenarioswith the purpose of
understandingitsfairvaluation.
34
The main idea is to split the business that we want to value into different
mutuallyexclusiveprojectsormilestonesandtoidentifywhatarethemainsources
ofuncertaintyandtherespectiveimpactforthem,andhowtheycorrelatebetween
eachother.Then,wereflectthisinformationinadecisiontreeintroductionoption
exerciseconditions,i.e.simpleeffectiverulesforoptimaldecisions.Anexampleof
decisiontreeispresentedinFigure7.
Figure7:RealOptionsdecisiontreeexample
Source:TeresaClavería;“Elmétododevaloraciónporopcionesreales”;RepositorioComillas
Oncewehavebuiltourstartupdecisiontree,wecomputetherealoptionvalue.
The calculation of the real option value can be carried out mainly through two
approaches:(i)Binomialmodel;(ii)Black-Scholesmodel.
35
BinomialModel
The Binomial model follows an iterative approach in which there are two
possibleoutcomesforeachiteration,anupwardmoveoradownwardmoveinthe
decisiontree.
Followingthisidea,thismodelfirstlyreplicatesthecashflowsoftheoption–in
ourcaseacalloption–withcashflowsfromcommonstockanddebtasitisshown
inFigure8,inordertoendupfindingthecurrentvalueofouroption.
Bond Stock CallOption
Figure8:Binomialrepresentationforbonds,stocksandcalloptions
Source:HECParis,CorporateValuationcourse
Where:
p:Probabilityofup-statehappening
Rf:Risk-freerateofreturn
S0,C0:Currentstockandcalloptionvalue,respectively
S1U,C1U:Futurestockandcalloptionvalueintheup-state,respectively
S1D,C1D:Futurestockandcalloptionvalueinthedown-state,respectively
Inthecaseofthebond,theoutcomeofeithertheupordownstateisobviously
thesameandweassumethatitdeliverstherisk-freerate.However,inthecaseof
bothstockandcalloptionlogicallytheiroutcomeswillvary.
Forthestock,wedefineitsvalueinthenextperiodas:
𝑆/0 = 𝑢 · 𝑆1
𝑆/" = 𝑑 · 𝑆1
Where:
1p
Rf1-p
RfS0
p
1-p S1D
S1UC0
p
1-p C1D
C1U
36
u:Factorbywhichthevalueofthestockincreasesintheup-state
d:Factorbywhichthevalueofthestockdecreasesinthedown-state
Forthecalloption,wedefineitsvalueinthenextperiodas:
𝐶/0 = 𝑚𝑎𝑥{𝑢 · 𝑆1 − 𝐾, 0}
𝐶/" = 𝑚𝑎𝑥{𝑑 · 𝑆1 − 𝐾, 0}
Where:
K:Calloptionstrikeprice
Now,wecanreplicatethepayoffsofthecalloptionbybuildingupaportfolio
madeofbondsandstocks.Hence,byequalingthesetwopayoffsweobtain:
𝐶/0 = 𝑎 · 𝑆/0 + 𝑏 · 𝑅% = 𝑎 · [𝑢 · 𝑆1] + 𝑏 · 𝑅%
𝐶/" = 𝑎 · 𝑆/" + 𝑏 · 𝑅% = 𝑎 · [𝑑 · 𝑆1] + 𝑏 · 𝑅%
Where:
a:Stockportfolioallocation
b:Bondportfolioallocation
Sinceallthedataisknownexceptfortheallocationsineachasset,wecompute
theportfoliocompositionas:
𝑎 =𝐶/0 − 𝐶/"
(𝑢 − 𝑑) · 𝑆1
𝑏 =𝑢 · 𝐶/0 − 𝑑 · 𝐶/"
(𝑢 − 𝑑) · 𝑅%
Finally,wefindthecurrentvalueofouroptionas:
𝐶1 = 𝑎 · 𝑆1 + 𝑏 =𝑅% − 𝑑𝑢 − 𝑑 · 𝐶/0 +
𝑢 − 𝑅%𝑢 − 𝑑𝑅%
· 𝐶/"
37
Black-ScholesModel
The Black-Scholes model is the most well-known mathematical model for
valuingoptionsandassumesgeometricBrownianmotioninpriceswithconstant
drift and volatility. The development of this formula gave the Nobel Prize in
EconomicstoMyronScholesandRobertMerton–FischerBlack,thethirddeveloper
passedawaytwoyearsbefore–in1997aftertheirpublishingin1973.
TheBlack-Scholesmodelmakesthefollowingassumptions:
§ TheoptionisEuropeanandcanonlybeexercisedatexpiration;
§ Nodividendsarepaidoutduringthelifeoftheoption;
§ Marketsareefficient(i.e.,marketmovementscannotbepredicted);
§ Therearenotransactioncostsinbuyingtheoption;
§ The risk-free rate and volatility of the underlying are known and
constant;
§ Thereturnsontheunderlyingarenormallydistributed.
Inordertovaluetheoption,wejustneedtoinputtherequireddataintothe
Black-Scholesformula:
𝐶 = 𝑆 · 𝑁(𝑑/) − 𝐾 · 𝑒2)- · 𝑁(𝑑')
Where:
𝑑/ =ln 𝑆𝐾 + Z𝑟 +
𝜎'2 \ · 𝑡
𝜎 · √𝑡
𝑑' = 𝑑/ − 𝜎 · √𝑡
Where:
C:Calloptionprice
S:Stockprice
K:Exerciseprice:Costsassociatedwithundertakingtheproject
r:Timevalueofmoney:Risk-freerateofreturn
38
t:Timetomaturity:Maxtimetheinvestmentdecisioncanbedeferred
σ:Std.dev.ofstockreturns:Riskinessoftheunderlyingasset
N:Normaldistribution
RegardingtheRealOptionsmethod,themostvaluableadvantagethatwefind
istheflexibilitythatprovidestheinvestorwithwhenvaluingastartup.However,it
entailsahigh levelofcomplexityandknowhowwhichmightnotbeavailable for
everyone.
Regardingthetwomodelsthatwehaveseen,theBinomialmodelpresentsthe
clearadvantageofbeingextremelymathematicallysimple.Nevertheless,thismodel
canbeascomplexasthedesignerofthedecisiontreewants,sinceincludingextra
nodesinmulti-periodmodelsincreasessignificantlyitscomplexity.Inthecaseof
theBlack-Scholesmodel,themainissuecomesnotonlyfromthehighquantitative
complexitybutalsofromthehighdependencyonchoseninputs,whichatthesame
timemightbedifficulttodefine.
3.1.5. BookValue
Book Value method is a good way to assess valuations of companies that
accountsignificantassets,suchasinventory,receivables,amongothers,ortovalue
companieswithlowprofits.
Itisanasset-basedapproachinwhichBookValuerepresentstotalassetsminus
totalliabilitiesandiscommonlyknownasnetworth.Itrepresentstheamountthe
company is worth after selling all the assets and paying back all the liabilities,
consideringbothtangibleandintangibleassetsinthecalculation.
𝐵𝑜𝑜𝑘𝑉𝑎𝑙𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Book Value method is commonly used to cross-test other more common
methods, suchas theDCF,ComparableCompanies,etc.However, therearesome
specialsituationswherethisvaluationmethodcanbeusedasaprimaryvaluation
methodology:
39
• Companieswithlowornegativeprofits–Inthiscase,commonvaluation
methodscannotbeused.
• Small companies with powerful customer/supplier relations –
Successfulsmallcompanieswithstrongrelationswithitscustomersand
suppliers,whichareusuallynoncontractual andnon-transferable, are
usuallyvaluedattheirbookvalueplusamodestpremium.
TherearesomeadjustmentstobemadeintheBookValuemethodology.Some
sellerswillprobablywanttoconsiderthefactthatsomeassetsmayhaveagreater
market value than the value accounted in the balance sheet, such asmachinery,
equipment,buildings,etc.Ontheotherhand,buyersmightrequestanassessment
oftheassetsthatareearningmoneyforthebusiness,askingforanadjustmentin
the purchase price in case that some assets do not generate anymoney for the
company.
Regarding the use of this methodology for a startup valuation, since some
startups,speciallyearlystagefirms,aremorefocusedonintangibleassetssuchas
R&D, customer base, product development, among others, and the Book Value
methodismorefocusedonthetangibleaspectsofthecompany,thismethodfailsto
consider the intrinsic potential success of the businessmodel, being not always
helpfulinstartupvaluation.
3.1.6. LiquidationValuation
Similar to the Book Value, the Liquidation Valuation is a method in which
company’sassetsareassumedtobesoldtorepaycompany’sliabilities.Whatever
remainsrepresentstheEquityValueofthefirm.
The main difference with Book Value is that Liquidation Valuation only
considers the tangible assets of the company, since this valuation method
represents the total worth of a company’s assets if the firm were to go out of
businessanditsassetssold.
𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
40
Intangible assets such as goodwill, brand recognition and intellectual
propertiesareexcludedfromthiscalculationsincetheycannotbesoldseparately
fromthebusiness.
Since this methodology is commonly used in bankruptcy or liquidation
scenarios,sometimesthevalueoftheassetstobesoldareatdiscountorbelowits
bookvalue,duetotheadverseconditionsofthesaleandtheneedtocollectmoney
torepaydebtholdersfirstandequityholderslately.
All-in-all, most of the time Liquidation Valuation produces lower values
comparedtoothervaluationmethodologies,sinceitexcludesintangibleassetsand
usuallythetangibleassetsconsideredinthecalculationareaccountedatdiscount.
However,companieswithlowearningsbutwithsubstantialhardassetscouldfind
attractivetousethisvaluationmethodsinceitwouldproducehighervaluesthan
theonesobtainedthroughothercommonvaluationmethodssuchasComparable
CompaniesorDCF.
3.2. Non-traditionalValuationMethods
Afteranalyzingtheoptionsforlatestagestartups,wewillnowreviewwhatare
thenon-traditionalalternativevaluationmethodsthatmaybeusedforearlystage
startups.
3.2.1. VentureCapital
The Venture Capital method was developed by Harvard Business School
ProfessorBillSahlmanin1987andhasbeenimprovedbyhimselfseveraltimesuntil
now.Thismethodsetsavaluationbyconsideringtheexpectedrateofreturnofthe
investmentinthetargetstartuponceitisexited.Inshort, itstartsbydefiningits
expectedsellingpriceaftertheholdingperiod–usuallywithin3and7years–.From
there,onecalculatesbacktothecurrentpost-moneyvaluation.Althoughitcanbe
used in post-revenue companies, the Venture Capital method is often used in
valuationsof pre-revenue startupswhere it is easier to estimate a potential exit
valueoncecertainmilestonesarereached.
41
Aswesaid,thefirststepistodeterminetheexpectedvalueofthestartuponce
theinvestorexitsthecompanyafteritsholdingperiod.Todoso,weneedtocome
upwithanestimationof futuremetrics thatwilldrivetheexitvaluebyapplying
multiples from comparable companies and similar precedent transactions from
relatedbusinesses.Theoretically,anykindof trustworthymetricrelevant for the
businessinwhichthestartupoperatescanbeusedtoforecasttheterminalvalueof
thecompany,howeverthemosttypicalonesareforecastedrevenuesandearnings
–EV/revenuemultipleandearningsratiorespectively–.
Oncewehavetheterminalvalueofthestartupatthetimeoftheexit,weneed
todiscounttheexitvaluebacktothepresent.Bydoingsowefindthepost-money
valuation.Atthispoint,animportremarkiscrucial:thismethodvaluesthestartup
from the investor’s point of view, not the company’s one. In this sense, the
discounting rate tobe takenmustnotbe the company’sWACCbut the expected
returnontheinvestment(ROI)thattheinvestorislookingfor.
𝑃𝑜𝑠𝑡–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑃𝑉(𝐸𝑥𝑖𝑡𝑉𝑎𝑙𝑢𝑒) =𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙𝑉𝑎𝑙𝑢𝑒
𝑅𝑂𝐼
Once we have the post-money valuation, we convert it into the pre-money
valuationby simply subtracting the amount ofmoneydeployed in the company,
eitherattheentrytimeorinlaterinvestments.
𝑃𝑟𝑒–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑃𝑜𝑠𝑡–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Oneof themain limitationsof theVentureCapitalmethod is the fact that it
implicitlyassumesthattherewillbenoequityissuancesinthestartupinthefuture,
makingtheownershipoftheinvestortobethesameatthebeginningandattheend
oftheinvestmentperiod.Thisconsiderationdoesnotseemreasonablesince,aswe
discussed in Section 2.4, themainway of fundraising to fuel startups growth is
issuingnewequity.Nevertheless,thereareafewtechniquestotrytoaccountfor
this effect such as estimating the dilution level that can be producedwithin the
investor’sinvestmentperiod.
Similarly, the Venture Capital method does not take into account possible
payments made from the startup to the investor within the investment period,
42
whicharecommon,especiallywhentheinvestorisaventurecapitalfund–aiming
tominimizeitsinvestmentrisk–.
Another limitationcomes fromtheuseofmultiples tocompute the terminal
value of the startup. As we already discussed in Section 3.1.2 and Section 3.1.3,
multiplesalwaysentailacertainlevelofuncertainty,andevenmoreinthestartup
ecosystemifwethinkofthehighrateoffailureduetothebinarybusinessmodel,
the uniqueness of some disruptive businesses, and the fluctuations in industry
multiplesdrivenby“hot”periodsinwhichthoseriseartificiallybecauseofirrational
expectationsorhighconcurrencybetweeninvestors.
Despite theabove-mentioneddrawbacks, theVentureCapitalmethod iswell
reasonablybalancedintermsofquantitativeanalysisandsimplicityandseemsto
beusefulforsystematicplanningoffutureroundsofinvestment.
3.2.2. Berkus
TheBerkusmethodwas developed byDaveBerkus during the nineties and
updatedbyhimself20yearsafter.Fromhisperspectiveasa renownedbusiness
angelandventurecapitalist,herealizedthatwhiletherearemanywaystoproject
thevalueofacompanyforpurposesofpricinganinvestment,forecastedrevenues
aremetorachievedbyfewerthanoneinathousandstartups.Then,Berkuscame
upwithavaluationmethodthatdoesnotrelyon financialmetricsbutratheron
operatingrisk.
Followingthis idea,Berkusidentified5operatingrisksasthecrucialonesin
order to determine whether or not a startup will succeed: (i) Sound idea; (ii)
Prototype; (iii) Quality management team; (iv) Strategic relationships; and (v)
Productrolloutorsales.
The first risk ishavingaSound idea andaims to reduce thebasic valueand
product risk. To analyze it, we have to determine whether there exist similar
products in the market. If there are no similar products, the investor should
establish subjectively its own risk valuation. However, if there are products
43
reasonably alike the investorwill rate the riskby analyzing theirmarket fit and
marketpenetrationinwhichtheyarecurrentlyoperating.
ThesecondriskisPrototypeandaimstoreducethetechnologyrisk.Tovalue
thisriskitisneededtoanalyzeboththeprototypeofthestartupinwhichweare
considering to invest and most importantly the market reaction and customer
opinionaboutit.
Thethirdrisk isQualitymanagementteamandaimstoreducetheexecution
risk.Regardingthisrisk,itisimportanttounderstandwhetherthekeypeopleinthe
startupworkcollectivelyasacohesiveteamwithalignedobjectives.Itisalsovital
thatthisteamismultidisciplinaryanddiverselycomposed,andthateachindividual
hasadifferentiatedrolethatmatcheshisexpertisefield.
ThefourthriskisStrategicrelationshipsandaimstoreducethemarketriskand
competitiverisk.Thisriskrefers,ontheonehand,totheadvisorteamthestartupis
surroundedbyas an indicatorofhow trustworthy the company is.On theother
hand, it is also relevant toknowwhat investorshavealready investedandwhat
financingwaysthestartuphaschosenuptothispoint.
Finally,thefifthandlastriskisProductrolloutorsalesandaimstoreducethe
financialandproductionrisk.Totacklethisrisk,weneedtoanalyzethetractionof
theproductonceithasbeenlaunchedandthecustomerresponsetoit.
Once these five riskshavebeenconsidered,according to theoutcomeof the
analysis,Berkusassignupto$500ktoeachfactor–thesevaluesarethoughtforthe
Americanecosystemandhavetobeadaptedtotheappropriateindustrypricelevel
whenconsideringinvestinginothergeographies–,whichamounttoamaximumof
$2,5m startup valuation. However, Berkus states that there is no question that
startupvaluationsmustbekeptatalowenoughamounttoallowfortheextreme
risktakenbytheinvestorandtoprovidesomeopportunityfortheinvestmentto
achieveatentimesincreaseinvalueoveritslife.
44
AfirstlimitationtotheBerkusvaluationmethodisthatitcanonlybeusedfor
startups in which the investor believes in its potential to reach over $20m in
revenuesbythefifthyearofbusiness.
Anotherlimitationistherigidityofthemethodtoestablishwhatarethemain
risksforaspecificcompany.Itmaybearguedthatamarketplacedoesnotsharethe
samecrucialoperatingrisksasabiotechcompany,at leastnotcompletely.Then,
Berkushasrecentlystatedthatnowadayshismethodshouldbeusedasasuggestion
ratherthanarestrictiveform,adaptingittotheparticularitiesthatwecanfindin
eachbusiness.
Finally,wecanalsoarguethatthismethodistoosubjectivesince,intheend,
the risk rating has to be done by the investor without a particular scale or
methodologytogradeit.However,thissimplicityisalsooneofthemainadvantages
of the Berkus method, alongside with the independency of the valuation from
financialprojectionsthatveryrarelyaremet.
3.2.3. Scorecard
TheScorecardmethodwasdevelopedbythefamousbusinessangelBillPayne
in2010.Themainideaofthisvaluationmethodistocomparethecompanyinwhich
we are considering investing to other funded startups. Adjusting the average
valuation based on different factors such as industry or geography is possible
althoughthemostidealscenarioisthatinwhichallcomparablestartupssharethe
samefactors.Eventhoughitisalsopossibletoadjustbasedonstage,thismethodis
normallyusedforpre-revenuestartups.
The first step that Payne proposes consists on computing the average pre-
money valuation of similar startups. Since startups use not to be public and
financingroundsinformationusenottobedisclosed,gatheringthesedatacanbea
difficult task. In this sense, the author of the method published his Scorecard
MethodologyWorksheetbasedontheresultsofasurveytobusinessangelswhere
itwasshownthatNorth-Americanpre-revenuestartupswerevaluedbetween$1m
and$2m,witha$1.5massumedaverage.
45
Inthesecondstep,Paynedefinesthesevenmostrelevantfactorsforastartup
to be successful, assigning a relative weight to each of them which allows the
investortovarythepreviouslymentionedweightwithinacertainrange.Thefactors
andtheirrangesareshowninFigure9.Bydoingso,wecanadjusttheaveragepre-
moneyvaluationoftheindustrywiththeparticularitiesofourtargetstartup.
ComparisonFactor Range
StrengthofEntrepreneurandTeam 0%–30%
SizeoftheOpportunity 0%–25%
Product/Technology 0%–15%CompetitiveEnvironment 0%–10%
Marketing/Sales/Partnerships 0%–10%NeedforAdditionalInvestment 0%–5%
Otherfactors 0%–5%
Figure9:Scorecardcomparisonfactorsandrespectiverange
Source:BillPayneandAssociates
Finally,inthethirdstepweassigncomparisonfactorstotherelativeweights.
To sodo,wemust conduct an intensivemarket analysis tounderstandhowour
targetcompanystandswithrespecttoitscompetitors.Forinstance,iftheSizeofthe
opportunity for the startup is in line with its peers, we will assign a 100%
comparisonfactor.However,itwillbeabove100%if it ishigher,orbelowif it is
lower.Then,wewillcomputethefinal factorasthesummationoftheproductof
each comparison factor (CF) times its respective relative weight (RW), and we
multiplythisfinalfactorbythepreviouslycomputedindustryaveragepre-money
valuation.
𝑃𝑟𝑒–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝑃𝑟𝑒–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 ·M𝑅𝑊$ · 𝐶𝐹$
3
$./
Similarlytoothernon-traditionalvaluationmethods,themainlimitationsofthe
Scorecardvaluationmethodisthenecessityofgatheringpre-moneyvaluationsof
similar companies and the subjectivity of establishing relative weights and
comparative factors. Themain advantage is the simplicity and the high level of
personalizationofthemethod,whichcanbeveryusefulforexperiencedinvestors.
46
3.2.4. FirstChicago
TheFirstChicagomethodwasdevelopedbytheventurecapitaldivisionofFirst
ChicagoBankin1970,aimingtovaluesituation-specificbusinessesbycombining
market-orientedandfundamentalanalyticalmethods.Themainideaistoestablish
differentscenariosandtovalueeachofthemindependentlyand,intheend,tocome
upwithafinalvaluationconsideringtherespectiveprobabilityofeachscenario.
Hence,firstlyweneedtodefinedifferentfuturescenariosforthestartupthat
we are valuing. Theoretically, any number of scenarios is possible, however in
practiceusuallythreedifferentscenariosareconsidered:(i)Best-casescenario;(ii)
Mid-casescenario;and(iii)Worst-casescenario.Eachscenariowillbeindependent
from the others and will have each own financial projections, with different
revenues,costs,earnings,cashflowsandeveninvestmenthorizonsortimetoexit.
Usually,themid-casescenarioisthemostfeasibleandrealisticone,whichis
basedonanalystexpectationsor intensiveduediligenceprocesses.On theother
hand, the best-case scenario is an optimistic one, in which the hopes of the
management team are reflected and drives to the best financial outcomes.
Dependingonthebusinessinwhichthecompanyoperates, it ispossiblethatthe
marketdeterminesanaturalmaximumcapofthefinancialoutcome.Similarly,the
worst-casescenarioisthemostpessimisticone,inwhichthefearsoftheinvestor
arereflecteddrivingthevaluationtoitslowestpoint.Becauseofthebinarymodel
ofstartupsthatwehavealreadytalkedaboutindifferentoccasions,theworst-case
scenariooftenentailsthepossibilityoffailure,situationinwhichtheinvestormay
loseallhisinvestedcapital.
Inasecondstep,weneedtocomeupwithanestimationofthedivestmentprice
foreachscenario.Todoso,weneedtofindtheterminalvaluethatthestartupthat
wearevaluingwillhaveoncewedecidetoexitit.Thisterminalvalue,likewise,in
otherpreviouslyanalyzedmethods,iscomputedapplyingmultiples,followingthe
approachtoestimatevaluationbytakingasareferenceagroupofpeerssimilarto
ourtargetcompanyintermsofindustry,geographyandstage.
47
Oncewehave a terminal value for each scenario,weneed todetermine the
requiredrateofreturninordertobeabletoconductthevaluationsofeachscenario.
Althoughmanyprofessionalinvestorsdeterminetherateofreturninternally,the
CAPM–explainedindetailinSection3.1.1–canalsobeused.Nevertheless,therate
of return produced by the CAPM is usually adjusted in order to account for the
characteristic illiquidity of the startup ecosystem. In fact, since one criteria that
definesastartupistheequityfinancingandthe–almost–totalabsenceofdebt,the
rateofreturnthatwewillusetovalueeachscenariocorrespondstotheoutcomeof
ouradjustedCAPMformula.
𝑟 = 𝑅% + 𝛽$ · C𝐸(𝑅&) − 𝑅%D + 𝑙4
Where:
r:Requiredrateofreturn
Rf:Risk-freerate(takenfromtheyieldofhigh-qualitybonds)
E(Rm):Expectedreturnofthemarket
[E(Rm)-Rf]:Expectedmarketriskpremium
βi:Betacoefficientforasseti
lp:Liquiditypremium
Atthispointwecanalreadycomputethevaluationofeachscenario,whichwill
result from the summation of cash flows projected in the respective scenario
discountedwiththepreviouslyfoundrateofreturn,addedtotheterminalvaluethat
thestartupwillhaveatthetimeofexitdiscountedaswell.
𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛5 =M𝐶𝐹-5
(1 + 𝑟)-
6
-./
+𝑇𝑉5
(1 + 𝑟)6
Where:
ValuationS:ValuationunderscenarioS
h:Investmenthorizon
𝐶𝐹-5:CashflowatperiodtandunderscenarioS
r:Requiredrateofreturn
48
TVS:TerminalvalueunderscenarioS
Oncewehaveavaluationforeachscenario,wehavetoallocateprobabilitiesto
eachofthem.Naturally,theseprobabilitiesdependonourscenariodefinitionsand
thenumberofthem,hencetheymayvaryalotbetweendifferentstartupvaluations
and significantly rely on the skills and experience of the investor. Nevertheless,
WilliamSahlmanandDaniel Scherlisdefine the typical scenarioprobabilities for
venturecapitalinvestors,showninFigure10.
Scenario Probability
Best-casescenario 25%
Mid-casescenario 50%Worst-casescenario 25%
Figure10:Sahlman,ScherlisFirstChicagomethodscenarioprobabilities
Source:WilliamSahlmanandDanielScherlis;“TheVentureCapitalMethod”;HBS
Nowthatwehaveaproperandindependentvaluationforeachscenario,the
laststepistocarryouttheweightedsumofthesevaluations,resultinginthefinal
valuationofourtargetstartup.
𝑆𝑡𝑎𝑟𝑡𝑢𝑝𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 =M𝑝5 · 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛5
7
5./
Where:
N:Numberofscenarios
pS:ProbabilityofscenarioS
ValuationS:ValuationunderscenarioS
The First Chicago method provides the investor with a very high level of
freedomandflexibilityinordertoaccountforthemanydifferentsituationsthatthe
startupmayencounter–actuallyasmanyashewants–.However,thisisadouble-
edgedsword:thehigherthenumberofscenariosthehigherthecomplexityofthe
method. Another advantage is the possibility of taking into account possible
paymentsfromthetargetcompanytotheinvestorwithinitsholdingperiod,even
though makes the model more complex again. Finally, the use of multiples
49
introducesthepreviouslymentioneduncertaintyandissuesoffindingthenecessary
appropriatedata.
3.2.5. RiskFactorSummation
TheRiskFactorSummationmethodwasdevelopedbytheOhioTechAngels,a
group of early stage investors of Ohio. Thismethod, likewise, as the previously
explainedvaluationmethodssuchastheScorecardmethodortheBerkusmethod,
aims to come up with a pre-money valuation for pre-revenue companies but
consideringabroadersetoffactorsthatwillbeanalyzed.
As in the Scorecard method, first we have to find the average pre-money
valuationofcomparablecompaniesforourtargetstartup.Then,weadjustthisvalue
with twelverisk factors that theOhioTechAngelspropose.Concretely, the listof
risksthattheRiskFactorSummationmethodsuggestsconsideringisthefollowing:
i. Management
ii. Stageofthebusiness
iii. Legislation/Politicalrisk
iv. Manufacturingrisk
v. Salesandmarketingrisk
vi. Funding/capitalraisingrisk
vii. Competitionrisk
viii. Technologyrisk
ix. Litigationrisk
x. Internationalrisk
xi. Reputationrisk
xii. Potentiallucrativeexit
Foreachriskfactor,theinvestorhastoassignagradeinlinewiththefollowing:
§ +2 Verypositiveforthecompanygrowthandfutureexit
§ +1 Positiveforthecompanygrowthandfutureexit
§ 0 Neutralforthecompanygrowthandfutureexit
§ -1 Negativeforthecompanygrowthandfutureexit
50
§ -2 Verynegativeforthecompanygrowthandfutureexit
Apositivegrade(+1or+2)reflectsalowerthanaverageriskforthestartupthat
wearevaluing,aneutralgrade(0)reflectsthattherespectiveriskisinlinewithits
peers,andanegativegrade(-1or-2)reflectsthatthecompanyismoreexposedthan
itspeerstothisspecificrisk.
Hence,theaveragepre-moneyvaluationofthecomparablestartupsisfinally
positivelyadjustedforriskswithpositivegradesincreasingthevaluationby$250k
forevery+1and$500kfora+2.Ontheotherhand,theaveragevalueisnegatively
adjustedforriskswithnegativegradesdecreasingthevaluationofthetargetstartup
by$250kforevery-1and$500kfora-2.
The main advantage of Risk Factor Summation is that this method forces
investors to consider important exogenous factorsof risks thathemaynothave
considered otherwise. The downside is that this also implies an increase in the
subjectivityandthecomplexityofthemethod.
3.2.6. Cost-to-Duplicate
The Cost-to-Duplicate method, also known by the Cost-to-Recreatemethod,
valuesthestartupbyanalyzinghowmuchwouldcosttosetupanidenticalcompany
fromscratchaccordingtothefairmarketvalueofitsassets.However,thismethod
doesnottakeintoaccountfuturepotentialandintangibleassetssuchasbrandvalue
ormanagementstrength.
Inadditiontothephysicalassetsofthestartup,theCost-to-Duplicatemethod
accountsaswellforcoststhathavealreadybeenincurredsuchasdevelopingtheir
prototype,patentprotection,orresearchanddevelopment.
For the above mentioned limitations, this method is used as a Go/No-Go
decisionmakerortoseta floor inthevaluationrangeratherthantoassesa fair
valuationofthecompanyinwhichaninvestorisconsideringtoenter.Inthissense,
hewouldneverinvestinthestartupmorethanitwouldcosthimtoreplicatethe
business.
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4. CaseStudy:HelloFresh4.1. Maingoalsofthecasestudy
Theobjectiveofconductingacasestudyistoapplywhatwehavestudieduntil
thispointinarealscenario.Bydoingso,wewanttoprovehowdifficultisthejobof
a professional startup investor, who has to face the uncertainty inherent in the
ecosystemduetothebinarymodelandhighrisksassociated,whicharereflectedin
volatilevaluationsdependingonthemethodusedandthefactorsconsidered.
Moreover,wewanttounderstandbyourownexperiencewhichmethodsseem
to be more appropriate for this purpose and what are the main upsides and
downsides of each of them. In addition, we want to see how different are the
valuationsprovidedbyeachmethodandwhethertheyfinallyconvergeinacertain
reasonablevalue,meaningthattheuseofsomeofthemisthemostappropriateway
offindingafairfinalaveragevaluation.
With the above-mentioned objectives in mind, we will work in a real case,
valuingthestartupHelloFreshjustafteritsIPOonNovember2nd2017,withdata
gathered fromcompanyreports,brokerreports,equityanalystreports, initiating
coverage reports and other public data available. Hence, all the information
providedinthisreportwillbeasofDecember2017,toconsiderthesamedataand
information and company characteristics that was used to carry out the IPO
valuation.
4.2. Companyintroduction
4.2.1. Generalinformation
HelloFresh is an online company which delivers fresh, pre-portioned
ingredientsandrecipesonaweeklybasisviaasubscriptionmodel.Thecompany
was founded in Berlin in 2012 by Dominik Rickter, Thomas Griesel, and Jessica
Nilsson.
52
HelloFresh’scorebusiness is focused insending fresh,healthy,personalized,
andnutritiousstep-by-steprecipes,withtheexactfreshingredientsneededtocook
them,totheircustomer’shomeseveryweek.Thesemeal-kitsaredelivereddirectly
totheircustomersdoorataconvenienttimeandcontainsustainable,healthy,and
locally sourced ingredients to prepare the recipes above-mentioned.Most of the
recipesaredesignedtobepreparedin30to40minutes.
The company operates in 10 markets and finished the year 2017 with
approximately1.5millionactivecustomers,whoconsumedaround137.4million
meals,establishingthemasthegloballeadersintheircategory.
Figure11:HelloFreshlocations
Source:HelloFreshSEAnnualReport2017
JustafterthestartoftheiroperationsinBerlin,thecompanydecidedtooffer
nationwidecoverageinGermany,expandingthebusinessalsointheNetherlands
andUK.Lately,HelloFreshenteredthemarketsofAustria,Australia,UnitedStates,
Belgium,Canada,Switzerland,andLuxembourg.
To manage the business, HelloFresh does not divide their business into
operating segments based on the type of the business. Instead, the company is
organizedonthebasisoftwogeographicalregionswhichformtheiroperatingand
53
reporting segments, and divided by theUSA region, comprisingUnited States of
America,andtheInternationalregion,comprisingtherestofthecountrieswhere
thecompanyoperates.
4.2.2. BusinessActivities
HelloFresh established an innovative businessmodel, being one of the first
companiesinthemarkettooffermeal-kitsolutions.Theirmainideaistotransform
traditional food supply chain model into a sustainable business, eliminating
intermediariessuchasdistributorsandwholesalersandreducingsubstantiallythe
foodwastefromtheirsupplychain.
Inorder tomake thishappen,asof2017,HelloFreshworkedwith600 local
suppliers which let them operate in a just-in-time basis, ordering from their
suppliersonlytheingredientsandquantitiesthatwereconfirmedtobedelivered
totheircustomers,reducingthenthefoodwaste.Hence,thecompanyestablisheda
nearzero-inventorybusinessmodelforalltheperishableproducts,whicharethen
packedintheirrefrigeratedfulfilmentcentersanddeliveredtothecustomersusing
insulated packing or refrigerated vehicles. The food boxes are handed to the
customersthroughoutthecompany’slogisticpartnersfordeliveryordeliveredby
theirowndeliveryservice.Inthisaspect,customersreceiveaboxeveryweekatthe
time slot of their choice with perfectly portioned ingredients and the required
recipestotransformthemintomeals.Asof2017,mostofthedeliveryservicesthat
thecompanyofferswerefreeofchargetotheircustomers.
With theirmeal-kit plan, the company’s valueproposition is to approach an
enjoyable, customized, and personalized cooking experience using healthy and
nutritiousingredients,providinghighvalueformoneyandasuperiorproductand
serviceoffering.
54
Figure12:HelloFreshproduct
Source:HelloFreshSENon-FinancialReport2017
Regardingtheoffering,customerscanpickameal-kitplanaccordingtotheir
dietarypreferences,theirschedule,andthesizeofthehousehold.Althoughitcan
varydependingonthegeography,mostof thecustomerscanchoose from3to5
mealfoodboxes–oreven2to5insomelocations–perweekfor2to4people,from
differentdietaryplansrangingfromclassictoveggie,family,andothermorespecific
such as pork-free, no-fish, express, etc., which are personalized meal
recommendations based on their customer’s indications. Within each plan the
customerscanselectupto14differentrecipes,whichtypicallytakearoundthirty
minutestoprepareandthatchangeinaweeklybasis.
Thebusinessoperatesthroughaflexibleorderingmodelwherecustomerssign
uptoaplan,whichcanbecustomizedaccordingtoparameterssuchashousehold
size,deliverywindowanddietarypreferences.Oncethecustomersaresubscribed,
they have then to select their recipes in advance from a list ofweekly changing
recipes and pay only for those deliveries that they order, since the customer’s
paymentisdrawnonthedayofdelivery.Theprocessneedstobetriggeredonce
only –online– and then turns into a fully automated process thereafter. This
operatingmodelletcustomerpauseorcanceltheplanatanytime–typically5days
inadvance–withoutlosinganymoney.
55
4.2.3. Company’sFactsandFigures
In order to fully understand HelloFresh and its pre-IPO situation, we will
analyzethemostimportantfactsandfiguresthatthecompanypresents.
Firstly, we can see in Figure 13 that HelloFresh revenue stream has grown
massivelyup to2017and it isexpected tocontinuesignificantly increasinguntil
2021,althoughlogicallyatalowerpath.Moreover,inlinewithwhatwasexplained
inprevioussections,USrevenuecurrentlyrepresentagreatportionofthetotal–
c.60%in2017–anditisexpectedtokeepthislevelupto2021accordingtoBarclays
projections.
Figure13:HelloFreshrevenueevolution(2014-2021)
Source:CompanyreportsandBarclaysresearch
RegardingHelloFreshmargins,Figure14showshoweitherGrossmargin,and
EBITDAandEBITmarginshaveimprovedconsiderablysince2014,recoveringfrom
theirlowestpointin2015,andareexpectedtokeepgoingupforthefollowingyears,
breakingevenin2020fortheEBITDAandEBITmargins.Itisworthtomentionthat
inthiscase,theEBITDAandEBITtakenintoaccounttoperformtheanalysisarethe
onesadjustedbyBarclays,whicharemoreconservativethanthereportedones.
0%
100%
200%
300%
400%
500%
0
500
1.000
1.500
2.000
2.500
2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E
%YoY€m
RevenueUSA RevenueInternational Growth(%)
56
Figure14:HelloFreshmarginsevolution(2014-2021)
Source:CompanyreportsandBarclaysresearch
ConsideringthecurrentcoststructureofHelloFreshin2017whichisdisplayed
inFigure15,clearlyCOGSrepresentsthemaincost,amountingformorethanone
thirdofthetotal,followedcloselybyFulfillmentcosts.Thisisnotasurpriseifwe
thinkofHelloFreshbusinessmodel,inwhichtheybuyfoodfromitssuppliers,pack
it,andthendistributeittoitscustomers.Marketingisanotherrelevantexpense–
althoughlessthanitwastwoyearsagoaspresentedinFigure16,whenthecompany
waslessknownandneededmassivemarketingeffortstopromoteitself–,whichis
also in linewithwhatwe should expect from a startup. Finally, SG&A is a little
portionofthecoststructure,alsoconsistentwiththestartupecosystemandwith
operatingthoughtheInternet,whichrequireslittlelaborintensity.
-40%
-30%
-20%
-10%
0%
10%
45%
49%
53%
57%
61%
65%
2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E
EBIT(DA)MarginGrossMargin
GrossMargin Adj.EBITDAMargin Adj.EBITMargin
COGS37%
Fulfillment33%
Marketing24%
SG&A6%
57
Figure15:HelloFreshcostsbreakdown(2017)
Source:CompanyreportsandBarclaysresearch
Figure16:HelloFreshcostsasapercentageofsalesevolution(2015-2021)
Source:CompanyreportsandBarclaysresearch
Oncewehaveanalyzedrevenuesandcosts,wewillfocusontheglobalsituation
ofthecompany.Todoso,wehavebuilttheEconomicBalanceSheetofHelloFresh,
which is shown in Figure 17.We can see how non-current or fixed assets have
increased and are expected to continue doing so, as it is natural in a growing
companywhichisinprocessofexpansion.Inaddition,currentassetsarelowerthan
itscurrentliabilitiesand,asaresult,HelloFreshworkingcapitalrequirementsare
negative.Thisismainlyduetothefactthatthecompanycollectsthemoneyfromits
sales almost immediately while it takes between two to four weeks to pay its
suppliers.WecanalsonotethatHelloFreshtotalequityhasincreased–wewilllook
atitmoreindetailafterwards–,asithasdonethenetcashpositionthatthestartups
holds.Finally,itsdebtpositionisirrelevantcomparedtoitsequity,whichmatches
ourstartupcriteriadefinitionoftheSection2.1.
0%
10%
20%
30%
40%
50%
2015A 2016A 2017A 2018E 2019E 2020E 2021E
COGS(%Sales) Fulfillment(%Sales) Marketing(%Sales) SG&A(%Sales)
58
Figure17:HelloFreshEconomicBalanceSheet(2015-2021)
Source:CompanyreportsandJPMorgan,MorganStanley,Barclaysresearch
GoingnowdeeperintotheHelloFreshequity,thestartuphasbeenissuingnew
equitysinceitsfoundation2012tofuelitsgrowthstrategyasitshowsFigure18.In
thisregard,thefirstfinancingroundtookplacein2014,whereHelloFreshraised
€39m at €0.1bn pre-money valuation. The most recent at the IPO time equity
issuancewascarriedoutin2016,raising€85matapre-moneyvaluationof€2bn.
Figure18:HelloFreshcapitalraising(2012-2016)
Source:CompanyreportsandMorganStanleyresearch
EconomicBalanceSheet–EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021ENon-CurrentAssets 21 60 66 101 125 132 144
CurrentAssets 28 34 49 63 73 83 91CurrentLiabilities 61 66 106 123 146 166 186WorkingCapitalRequirements -33 -33 -58 -61 -73 -83 -95
CapitalEmployed -12 27 9 40 52 49 49
TotalEquity 88 20 294 226 222 295 434
Debt 10 64 45 36 36 36 36Cash&CashEquivalents 109 58 331 222 205 282 420NetFinancialDebt -99 6 -286 -186 -170 -247 -385
CapitalInvested -11 27 8 39 52 49 49
59
After the several capital increases shown before, the pre-IPO non-diluted
shareholder structure remained as Figure 19 presents, dominated by Rocket
Internetwitha48%ownershipasaclearmajorbutnon-controllingshareholder.
Additionally, in-the-money employee options outstand of more than 10% of
ownership.
Figure19:HelloFreshpre-IPOnon-dilutedshareholderstructure(2017)
Source:CompanyreportsandMorganStanleyresearch
4.2.4. Companyrisks
When analyzing a company, specially a startup, it is important to make an
assessmentabouttherisksthatcanchallengethecompanyinthepresentornear
future.Havingaclearimageabouttherisksthatthecompanywillfacewillhelpto
understandthecurrentmarketpositionofthefirmandassessthefuturesuccessof
thebusiness.
Analyzingthecompanybothinternally–operationsandbusinessmodel–and
externally –market and competition– we have classified the company risks as
follows:
1. HelloFreshpresentsa limited track recordasa company since itwas
founded in2012.Thebusinessmodel isbasedonhigh-growth, asset-
lightmodelwhichreliesonnegativeWorkingCapital,sincethecompany
48%
15%
7%
4%3%4%0,1%
18,9% RocketInternet
HoringJeff
PhenomenVenturesLP
Vorwerk&Co.
QatarInvestmentAuthority
OtherShareholders
TreasuryShares
Other
60
does not pay suppliers until 2-4 weeks after delivery and takes
customer’spaymentonthedayofdelivery.
2. Low customer retention, considering that among the4.4mhousehold
thattriedtheproductuntilthesecondquarterofFY2017,only1.3mof
themwereactivecustomers.
3. Complexity tomaintain the zero-inventoryapproachwhen scalingup
thebusiness,whichcangeneratelogisticproblems.
4. Since the company is still unprofitable as of December 2017, if the
companyisunabletoscaleupthebusinesstoreachprofitability,then
lossesandcashburncouldcontinue.
5. Low barriers to entry which can directly affect HelloFresh’s market
position.Thereisanimportantthreatcomingfromsupermarketchains,
sincetheycancopyHelloFresh’stechnology,whichcombinedwiththeir
current logistics and network of local presence, can become an
importantcompetitor.LogisticcompaniessuchasAmazoncanalsooffer
animportantthreat.
6. Thecompanywillfaceimportantmarketingcoststoincreaseboththe
customerbaseandtheretentionrate.
7. Strictqualitycontrolstoberealizedregularly.SinceHelloFreshdelivers
freshfoodtoitscustomers,thereisariskassociatedwithfoodsafety.
Any problem regarding the food conditions can negatively affect the
brandimageandcustomerperceptionofthefirm.
4.3. IndustryOverview
4.3.1. Industry’sFactsandFigures
The meal-kit industry where HelloFresh operates represents a fragmented
sector, following the typical characteristicspresent in industrieswithoperations
related to the production ormanufacture of foods. Since food is a differentiated
product,differentcompanieswill likelycoexist,offeringawiderangeofproducts
adjustedtodifferenttastes.
61
According to data extracted from Euromonitor as of 2016, the global food
industry represented an aggregated value of €7.5tn, with an online penetration
accountingthe2%ofthismarket.ConsideringonlythecountrieswhereHelloFresh
operates, the food industry accounts for€2.5tn, being€800bn generated by the
restaurantindustry,whoseonlinepenetrationisaround3%–quitesmallcompared
toother industries–and€1.7trilliongeneratedbythegrocery industry–withan
online penetration of 1%–. Regarding the meal-kit industry, it is more likely to
disruptthegroceryindustryratherthantherestaurantindustryduetothebusiness
natureofHelloFresh.
Focusing now on the meal kit-industry itself, data from Euromonitor and
Morningstarstatesthatthisindustryrepresentsasmallpartoftheoverallmarket
food, with a current estimated value of €1.9bn in the US andwith an expected
growth to €8.1bn by 2021. As commented, meal-kit market represents a small
portionof theglobal food industry,which is currentlyworth€7.5tnandwithan
expectedgrowthto€9.0tnby2021.
Figure20:Foodandmeal-kitindustryvolumes[2016and2021]
Source:EuromonitorandMorningstar
The growth forecasted both for the global food industry and the meal-kit
market, will be driven by three main trends, which will be aggregated to the
increasingpenetrationthatonlineservicesisofferinginthefoodindustry.
1. Increase on the healthy food demand. According to Technomic,
around68%ofconsumersindevelopedcountrieseithereatortrytoeat
2016– GlobalFoodMarket:€7.5tn 2021– GlobalFoodMarket:€9.0tn
2016 2021
USMeal-Kit:€1.9bn USMeal-Kit:€8.1bn
62
healthyfoodtofollowahealthylifestyle.Consumersaremorelikelyto
eathealthyingredientsandmealsathomethanawayfromhome.
2. Stressfulandbusylifestyleleadpeoplefocusonconvenienteating.
Customersareincreasingthetimespendonshoppingonlinetohavea
less stressful experience and save time. As a result, the popularity of
proportionedfoodsisincreasingquickly.
3. Increaseontheinteresttowardshighqualityproducts.Peopleare
willingtopaymoreforfoodoptionsfororganicandqualityfood.
4.3.2. CompetitiveLandscape
As seen in the recent past years, the onlinemarket has been increasing its
presence in developed countries to account for high penetration numbers in
industries such as fashion and accommodation.However,within the global food
industry,thepenetrationseenasof2016isquitelow–3%forrestaurantsand1%
forthegroceryindustry–which,aggregatedtothelowbarrierstoentry,attracteda
significantnumberofcompetitors.Thesecompetitorsoperateinawidevarietyof
businessmodelsacrossseveralverticalswithinthefoodindustry.
Themostimportantthreattocompaniesoperatinginthemeal-kitindustryare
thegroceryretailers.Regardingtheonlinetakeawayplatforms,althoughtheywould
beable to takeadvantageof their technological capabilities,as theyoperateasa
marketplace connecting customers with restaurants, they do not seem to be
threateningcompetitorsinthefuturewithinthemeal-kitmarket.Otherimportant
playerssuchasonlineretailersmightentertothemeal-kitindustry.
All in all, themeal-kit sectoroffers importantopportunities to explore,with
manyplayerstryingtogetintothem.However,itisimportanttonotethatbarriers
toachievescaleareconsiderableanditmaybechallengingtosustainablyoperate
in this competitive ecosystem. Players with the ability to adapt their inventory
challengestotheirbusinessscalabilitywillsucceed.
63
4.3.2.1. Meal-kitproviders
Asof2016,HelloFreshisthelargestandonlyglobalplayerwithinthemeal-kit
deliverymarket.However,accordingtoastudyrealizedbyPackagedFacts,there
are c. 150 meal-kit delivery services in the market, which have been trying to
differentiatefromtherestbyofferingdifferentmeal-kitexperiencessuchasvegan
mealkits,orplansfocusedonprofessionalathletes,forinstance.Withintheseother
players,themoremeaningfulcompetitorsinthissegmentare:
• LinasMatkasse–Swedishfresh-foodsubscriptionservicelaunchedin2008
withoperationsinScandinaviaandtheNetherlands.Profitablesince2013,
thecompanygeneratedrevenuesof€116min2016.LinasMatkassedelivers
2.5mmealspermonth.
• BlueApron–Launchedin2012intheUnitedStates,thecompanyoperates
in the meal-kit industry, offering similar services to the ones offered by
HelloFresh.Thecompanywentpublic in June2017,afterexperiencingan
outstandingrevenuegrowthof113%,from$340mofrevenuein2015,to
$795min2016.
• Otherimportantcompetitors–Playersoperatinginthemeal-kitsegment
with slightly different business models, ranging from “a la carte” to
subscription, are Gousto, Green Chef, Plated, Home Chef, FreshDirect,
SimplyCook, Quitoque, Handpick, Munchery, Hungryroot, Sun Basket,
Shuttlecook,SimplyCook,GobbleandPeachdish,amongothers.
4.3.2.2. SupermarketChains
Amongtheplayersoperatingwithinthefoodindustry,thelargestthreattoa
meal-kitprovidersuchasHelloFreshcomesfromtraditionalgroceryplayersthat
aimtobemoreactiveinthebusiness,offeringnewservicessuchasmeal-kitplans.
Nevertheless,meal-kitprovidersarespecialistsinofferingattractiverecipesbacked
bydata-drivenapproachtofood,operatinginamoreflexiblemanner,beingableto
vertically integrate thevaluechain to reduce thenumberofStockKeepingUnits
(SKUs) compared to a traditional grocery retailer, taking advantage of more
attractiveeconomics.
64
In an attempt to maintain their market share in the retail sector, many
supermarkets seem to be interested either in acquiring a meal-kit provider or
implementing themeal-kit servicewithin their product offering. As an example,
majorsupermarketchainslikeWaitrose,TescoandOcadohavemovedtothemeal-
kitdeliverymarketby launching theirownproductoffering.AsofMay2017,40
branches of Tesco have been stocking meal-kits to be sold. Moreover, many
supermarketsarepartneringwithmeal-kitproviders,suchasHelloFresh,whosells,
asof2017,theirdinnermeal-kitsinSainsbury’sinLondon.
4.3.2.3. Amazon
Duetoitsbusinessnatureanditsbrandpower,Amazonisanimportantthreat
to companies operating in the meal-kit delivery market. As of July 2017, the
companydecidedtoenterinthemeal-kitmarketbylaunchingtheirAmazonFresh
service,whichwasavailableinsomeUSstatesandonlyforAmazonPrimemembers.
ThebusinessmodeloftheAmazon’smeal-kitserviceisquitedifferentfromtheone
offeredbyHelloFreshorBlueApron, being“a lacarte”withoutanysubscription
required, and with delivery fees for those orders below $40. Although in 2017
AmazonFreshoperatedinasmallscale,offeringthisserviceinUSmetroareas, it
couldbecomeabiggerfocusareaaftertheacquisitionofWholeFoodsbyAmazon.
4.4. CompanyValuation
Theimportanceofacompanyvaluationistounderstandhowmuchthefirmis
worthatthemomentinordertocarryoutfinancingrounds,companysale,andalso
toanalyzethefairvalueofthetradablesharesoutstandinginthemarket.
Inthecaseofstartups,theprocessofunderstandingitsvalueisanimportant
point for the company. As startups usually are financed through equity, both
foundersandinvestorsareinterestedinknowingthefairvalueofthecompanyto
negotiate,notonlytheamountofmoneyraisedinthefinancinground,butalsothe
percentageofownershipthatinvestorswillreceive.
65
Inthisparticularcase,thegoalofthispaperistocomputeacompanyvaluation
analysis focusing on the startup above described. As seen in precedent sections,
HelloFreshcarriedoutseveralfinancingroundsbetween2014and2016,raisinga
total amount of €322m. The company became listed on the Frankfurt Stock
ExchangesinceitsIPOinNovember2017.Hence,thispaperwillanalyzethevalue
ofthecompanyasofDecember2017.Thedecisiontochoosethisdateismainlydue
totheavailabilityofinformationandrelyingdata,takingintoaccountthefactthat
the companywas still considered to be a startup since it was still unprofitable,
mainlyfinancedthroughequity,andwithanewanddisruptingbusinessmodel.
This paper has analyzed the value of the company using different valuation
methods,bothtraditionalandnon-traditional.Thetheoreticalexplanationofeach
ofthemethodsisdescribedintheSection3ofthispaper.
Fromapracticalpointofview,wegatheredourfinancialdatafromestimations
developedbydifferentinvestmentbanks–JPMorgan,MorganStanleyandBarclays–
andpublishedindifferentbrokerreports,aswellasfromotherpublicavailabledata
suchascompanyreports.JPMorgan’sforecaststurnouttobethemostoptimistic
onesabouttheprospectsofHelloFresh,whileBarclayswasthemostpessimistic.
Morgan Stanley’s expectations were in between. Given that each forecast was
different,wedecidedtocomputeanaveragescenario,whichwewillusetocompute
thevaluationofthecompany.
4.4.1. DiscountedCashFlows
As stated in the Section 3.1.1, the Discounted Cash Flows is a widely used
valuationmethod very useful to valuemature and stable companies, as well as
companiesthathavegeneratedrevenuesandpositivefreecashflows.Hence, the
DCF is a very valid and useful method to valuate late stage startups such as
HelloFresh.
AlthoughHelloFreshstartedgeneratingsignificantrevenuesin2014,in2017
the companywas still not profitable, forecasting net incomebreakeven in 2020.
However,theoutstandingrevenuegrowththatthecompanyhasbeenexperiencing
since its foundation, accounting for a 71%CAGRFY15 – FY17, combinedwith a
66
projectedCAGRFY17–FY21of23%,andapositivetrendofpercentageofGross
Margintorevenues,letbrokersbelievethatthecompanywillbeprofitableatthe
EBITDAandFCFlevelinFY19.
Figure21:HelloFreshweightedaveragescenarioincomestatement
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
FortheDCFanalysis,sinceitisbasedinprojectionsoffinancialperformance,it
isimportanttotackleandconsiderthemainfactorsthatcanaffectthecompany’s
performance, considering that the company will work in solving the following
challenges:
• Lowbarrierstoentry,whichincreasesthecompetition
• Increasethecustomerretentionratestoreducethemarketingcosts
• Scalabilityofthebusinesswithoutincreasingtheassetcostbase
• Asset-lightmodelreliantonnegativeworkingcapitalmightbesensible
totoplinemomentum
FreeCashFlowprojections
Consideringthatthestartuppresentsahighuncertaintyduetoitsimportant
growthprospectsanditsunprofitablesituation,theprojectedperiodfortheFree
CashFlowshasbeenrangedbetween2018and2021,obtainingthepresentvalueof
thefuturefreecashflowsasofyear-end2017.
WeightedAverageScenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021ERevenue 305 597 892 1.217 1.537 1.810 2.058EBITDA -94 -83 -77 -55 15 95 165D&A 0 -1 -1 -3 -8 -11 -12EBIT -114 -90 -93 -77 -12 70 138NetFinancialInterest -1 -4 -6 -1 -1 -1 -1EBT -106 -92 -96 -74 -9 72 140IncomeTax 0 0 2 -2 -3 -7 -13EffectiveTaxRate 0,0% 0,0% 2,1% -2,5% -9,2% 27,5% 13,3%
NetIncome -106 -92 -94 -76 -13 64 127EPS(EUR) n.a. -0,87 -0,62 -0,51 -0,09 0,40 0,81
67
Figure22:HelloFreshfreecashflowscalculation
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
Discountrate
TocomputethediscountratetobeappliedinthefutureFreeCashFlowsand
theTerminalValue,wehaveusedtheWACC,consideringthefollowingassumptions:
Figure23:HelloFreshdiscountratecalculation
Source:JPMorgan,MorganStanley,BarclaysandDeutscheBank
Itisimportanttomentionthatthediscountrate,orWACC,hasbeenassumed
witha100%equity.Althoughthecompanyhassomedebtliabilitiesshownonthe
balancesheet,theproportiondebt-over-equityisverysmall,sincethecompanyis
mainly financed by equity, with a debt-over-assets ratio being close to zero.
Moreover,inordertoaccountfortheriskanduncertaintyofthestartupecosystem,
wedecidedtoconsideronlythecostofequityasthediscountrate,obtainingthen
moreconservativevalues.
Regarding thevaluesof the risk-free rate, riskpremiumandbeta, theyhave
been assumed according to broker consensus from JP Morgan, Morgan Stanley,
BarclaysandDeutscheBank.
FreeCashFlow –EURm 2017A 2018E 2019E 2020E 2021EEBIT -93 -77 -12 70 138EffectiveTaxRate 2% -2% -9% 28% 13%NOPAT -91 -79 -13 51 120+D&A 1 3 8 11 12–ChangeinWorkingCapital -29 -3 -12 -11 -11–Capex 10 29 36 21 26FreeCashFlow -108 -51 20 73 146
WACCBeta 1Equityriskprimium 6%Riskfree 3%Discountrate 9%
68
TerminalValue
TocomputetheterminalvalueasofDecember2021,ithasbeendonewiththe
GordonGrowthMethod,consideringthefollowingassumptions.
Figure24:HelloFreshterminalvaluecalculation
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
Again, the perpetuity growth assumption has been taken from broker
consensus.RegardingtheDiscountRate,itrepresentsthecostofequityasexplained
intheprecedentsection,whereastheFCF–2021Ecomesfromthecalculationofthe
futureFreeCashFlowof2021E.
DiscountedCashFlowanalysis
Once the projection period has been settled, the FCF and Terminal Value
calculated,andthediscountratedetermined,thenextstepistodiscounttheFCF
and TV to 2017 year-end, sum them up and obtain the Enterprise Value of the
analyzedcompany.
Figure25:HelloFreshDCFvaluationmodel
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
TerminalValueDiscountrate 9%Perpetuitygrowth 3%FCF-2021E(EURm) 146TVasof2021E(EURm) 2513
Page 1DiscontedCashFlow –EURm 2017A 2018E 2019E 2020E 2021EEBIT -93 -77 -12 70 138EffectiveTaxRate 2% -2% -9% 28% 13%NOPAT -91 -79 -13 51 120+D&A 1 3 8 11 12–ChangeinWorkingCapital -29 -3 -12 -11 -11–Capex 10 29 36 21 26FreeCashFlow -108 -51 20 73 146TerminalValue 2.513Discountperiod 1 2 3 4Discountrate 9% 9% 9% 9%Discountfactor 0,91743 0,84168 0,77218 0,70843DiscountedCashFlow -46 17 56 1.884
69
Figure26:HelloFreshDCFimpliedvaluation
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
Considering theprojections taken fromthebrokerconsensuswith thegiven
assumptions for the WACC and Terminal Value, we get an Enterprise Value of
€1,9bnwithanimpliedmarketsharepriceof€13,7asofDecember2017.
Nevertheless,theassumptionsconsideredinthecalculationoftheDiscounted
CashFlowsanalysisaretakenfrombrokerconsensus,whichslightlyvarybetween
each other by small variations on the WACC and Perpetuity Growth rate
assumptions, affecting on the final Enterprise Value result. In order to take into
accountthesevariationsintheassumptionsandtounderstandhowtheEnterprise
ValueandSharePricechangewithavariationontheWACCandLong-Termgrowth,
asensitivityanalysishasbeencarriedout.
Figure27:HelloFreshEnterpriseValue(EURm)sensitivitytable
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
Page 1ImpliedValuationEnterpriseValue(EURm) 1.911
NetDebt(EURm) -286EquityValue(EURm) 2.196
Sharesoutstanding(m) 160ShareValue(EUR) 13,7
Page 11.911 7,0% 7,5% 8,0% 8,5% 9,0% 9,5%0,50% 1.868 1.712 1.578 1.460 1.357 1.265
1% 2.021 1.842 1.688 1.556 1.440 1.3381,5% 2.202 1.993 1.816 1.665 1.534 1.4202,0% 2.420 2.171 1.965 1.791 1.642 1.5132,5% 2.685 2.386 2.141 1.938 1.766 1.6193,0% 3.017 2.648 2.352 2.111 1.911 1.7413,5% 3.444 2.975 2.611 2.320 2.082 1.884LT
GrowthRate
WACC
70
Figure28:HelloFreshShareValue(EUR)sensitivitytable
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
Moreover, this sensitivity analysis shows us the possible ranges that the
EnterpriseValuewouldtakeassumingdifferentvaluesforWACCandLong-Term
Growthrate.SinceallthebrokerreportsthatwereanalyzedagreedinaLTGrowth
Rateof3%andaWACCbetween8%and9%,theEnterpriseValueandSharePrice
ValuerangesconsideredaspossibleoutcomesfortheEnterpriseValueandShare
Price,arehighlightedinlightblueinthetablesabove.
4.4.2. ComparableCompanies
The Comparable Companies or Peer Comps method is a common relative
valuation methodology, very useful and reliable when the range of comparable
companies is wide. Since the business model of HelloFresh is quite new and
innovative,thereareverylimitedpubliccompaniesthatcanbeconsideredasapeer
with a truly comparable businessmodel.Moreover, according to the projections
shownintheFigure21onSection4.4.1,HelloFreshisnotexpectedtobeprofitable
until2019,factthatenhancestheideatofocusonEV/Salesmultiples,bothpresent
and forward multiples. For all these reasons, in this case study this valuation
methodologyisusefulasacross-checkwiththeothervaluationmethods.
Ascommented,projectionsofHelloFresh financialsexpect that thecompany
willdeliverarevenueCAGRFY17–FY21of23%,from€892min2017to€2.058m
in2021,withthebusinessturningprofitableatEBITDAandFCFlevelin2019.Over
time,thecompanywillbeabletooperatewithEBITDAmarginsinhightomid-teens
levels.Consideringthatthebusinesshasverylimitedpeerswithatrulycomparable
14 7,0% 7,5% 8,0% 8,5% 9,0% 9,5%0,50% 13,5 12,5 11,6 10,9 10,3 9,71,00% 14,4 13,3 12,3 11,5 10,8 10,11,50% 15,5 14,2 13,1 12,2 11,4 10,72,00% 16,9 15,3 14,1 13,0 12,0 11,22,50% 18,6 16,7 15,2 13,9 12,8 11,93,00% 20,6 18,3 16,5 15,0 13,7 12,73,50% 23,3 20,4 18,1 16,3 14,8 13,6
WACC
LTGrowthRate
71
businessmodel, and with the guideline of the broker consensus, we decided to
considernotonlydirectbusinesspeersbutalsocompaniesoperating inthefood
marketplace industry and online retailers, taking into account that HelloFresh
operatesonline.
Directpeers
BlueApronistheonlypubliccompanywithatrulycomparablebusinessmodel.
AscommentedintheSection4.3.2.1,thecompanywasfoundedin2012andasof
2017onlyoperatesintheUS.BlueApronbecamepublicinJune2017.
Foodmarketplacecompanies
Therearedifferentcompaniesoperatinginthefoodmarketplaceindustry.For
thiscasestudy,andfollowingtheguidelineoftheconsideredbrokers,wehavetaken
ascompanycomparablesometakeawayplatformssuchasDeliveryHero,JustEat
and Takeaway.com. Although these companies do not operate in the meal-kit
industry,thereareseveralfeaturessharedwiththebusinessmodelofHelloFresh
(disruptivecompanieswitharelatively lowonlinepenetration in theiroperating
markets).Onepointtoconsideristhefactthatthesecompaniesgeneraterevenues
through commissionswithoutbeing engaged in thedeliverypart, accounting for
highermarginscomparedtoHelloFresh.
Onlineretailcompanies
Companies such asASOS,Ocado, Zalando, Zooplus,Boohoo andYooxNet-A-
Porterarerelativelyyoungcompanies,operatingthroughtheonlineservices,which
shareswithHelloFreshthechallengeofthesupplychaintosourcetheproductand
carryoutthedeliverytothecustomer.WeflagthatthegrowthrateofHelloFreshis
higherthanthisgroupofcompanies.
Analyzing theexpectedperformanceofeachof thepeers,which is shown in
Figure29,weobserveageneralcorrelationbetweenrevenueCAGRFY16–FY19,
andEV/Salesmultiple.
72
Figure29:CorrelationbetweenCAGRFY16-19andEV/Salesmultiple
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
WeexpectHelloFreshtopresentaEV/Salesmultiplebetween2,0x–2,5x,similarto
thepeerswithexpectedrevenueCAGRFY16-FY19closetotherevenueCAGRof
HelloFreshexpected for thesameperiod.Carryingout theComparableCompany
analysis,wefindouttheresultsdisplayedinFigure30.
Figure30:HelloFreshcomparablecompaniesanalysis
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
AlthoughthemetricsshownaboverepresentEV/SalesandEV/EBITDAmultiples,it
is important tonote thatwewillonlyuse theSalesmultiple inouranalysis.The
reasonbehindthisdecisionisrelatedtothefactthatthecompanyisexpectedto
becomeprofitableatEBITDAlevelinmid-2019,whichwouldimplyaverylowEV
outcomethroughtheEV/EBITDAanalysis.
BlueApron
DeliveryHero
JustEat
Takeaway.com
ASOS
Ocado
ZalandoZooplus
Boohoo
0%
10%
20%
30%
40%
50%
60%
- 2,0x 4,0x 6,0x 8,0x 10,0x 12,0x 14,0x
Company Country MarketCap EnterpriseValue$m $m FY17A FY18E FY19E FY17A FY18E FY19E
DirectpeersBlueApron US 749 713 0,7x 0,7x 0,6x - - -Foodmarketplaces
DeliveryHero Germany 7.570 6.868 9,3x 6,6x 5,0x - - 65,7xJustEat UK 7.348 7.439 10,4x 8,0x 6,7x 33,9x 23,5x 17,2xTakeaway.com Netherlands 2.483 2.375 11,5x 8,7x 6,9x - 67,1x 29,5xOnlineretailers
ASOS UK 6.752 6.544 2,3x 1,8x 1,8x 37,1x 27,5x 21,2xOcado UK 2.980 3.232 1,6x 1,5x 1,3x 25,5x 21,5x 19,7xZalando Germany 13.800 12.712 2,2x 1,9x 1,5x 38,6x 30,2x 23,2xZooplus Germany 1.146 1.102 0,9x 0,7x 0,6x 110,7x 49,6x 32,0xBoohoo UK 2.720 2.604 3,5x 2,6x 2,0x 33,5x 36,5x 25,5xYooxNet-A-Porter Italy 4.920 4.902 1,9x 1,6x 1,4x 23,7x 17,8x 13,5xAverage 4,4x 3,4x 2,8x 43,3x 34,2x 27,5xMedian 2,3x 1,9x 1,7x 33,9x 28,9x 23,2x
EV/Sales EV/EBITDA
73
Figure31:PublicCompsvaluationmodel
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
Figure32:HelloFreshpeers’EV/Salesmultiples
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
Fortheenterprisevaluecalculation,webelievethatitismoreappropriatetobase
ourcalculationonthemedianofthepeer’smultiples,ratherthantheaverage,since
therearesomeoutliersthatweidentified,correspondingtotheFoodMarketplace
companies,thatcandistortiontheaveragemultipleoutcome.Theseoutlierspresent
ahigherrevenueCAGRFY16–FY19compared toHelloFreshand therestof the
selected peers, which would justify their high revenue multiples. Moreover, we
EnterpriseValuefromEV/SalesinEURmFY17A FY18E FY19E
Peer'sAverage 4,4x 3,4x 2,8xImpliedHelloFreshEV(EURm) 3.940 4.147 4.267Peer'sMedian 2,3x 1,9x 1,7xImpliedHelloFreshEV(EURm) 2.022 2.251 2.561
NetDebt(EURm) -286 -186 -170EquityValue(EURm) 2.308 2.437 2.731
Sharesoutstanding(m) 160 160 160ShareValue(EUR) 14,4 15,2 17,1
0,7x 0,7x 0,6x
11,5x
8,7x
6,9x
4,4x3,4x
2,8x2,3x 1,9x 1,7x
-
2,0x
4,0x
6,0x
8,0x
10,0x
12,0x
FY17A FY18E FY19E
MinMaxMeanMedian
74
decidedtocarryouttheEVcalculationthroughthemedianofthepeers’multiples
inordertobemoreconservative,sincethevaluesobtainedthroughthemedianof
themultiplesarelowercomparedtothevaluesobtainedthroughtheaverageofthe
samemultiples.
Havingsaidthat,thevaluesobtainedthroughtheComparableCompanyvaluation
methodsuggestanEnterpriseValuerangedbetween€2.022mand€2.561manda
sharepriceintherangeof€14,4and€17,1pershare.
4.4.3. RealOptions
InordertovalueHelloFreshusingtheRealOptionsmethod,wehavedecided
tofollowtheBinomialModel.Firstly,asexplainedinSection3.1.4,wehavedefined
twopossiblescenarios.Sincewebasedouranalysisondifferentinvestmentbanks
estimations,weassimilatedourUp-Statetothemostoptimisticbusinessplan–i.e.
the one developed by JP Morgan–, and our Down-State to the most pessimistic
businessplan–i.e.Barclays’one–.
TocomeupwiththestockpricethatHelloFreshwouldhavehadundereach
scenario,weperformedthesameDCFvaluationanalysisexplainedinSection4.1.1
tocomeupwitheachofthem.Wegavesomeflexibilitytothemodelbytakingto
possible stock prices, min and max, considering the WACC to be 9% and 8%
respectively.TheresultsareshowninFigure33.
Figure33:RealOptionssharepricecomputationunderUp-StateandDown-State
Source:JPMorgan,Barclays,companyreportsandownanalysis
Max Min Max MinEnterpriseValue(EURm) 3.417 2.782 1.397 1.133NetDebt(EURm) -286 -286 -286 -286EquityValue(EURm) 3.702 3.068 1.682 1.419Sharesoutstanding(m) 160 160 160 160ShareValue(EUR) 23,1 19,2 10,5 8,9
Up-State Down-StateFutureStockValue
75
Then,tocomputethecurrentstockprice,weusedtheHelloFreshlastfinancing
round,whichtookplaceinDecember2016andinwhichthecompanyraised€85m
reachingavaluationof€2bn.
Figure34:RealOptionscurrentsharepricecomputation
Source:MorganStanley,companyreportsandownanalysis
Regardingthestrikepriceoftheoption,weconsideredthatapotentialinvestor
wouldonlybeinterestedinowningHelloFreshsharesiftheywereabletogivehim
anequalorhigherreturnthanhisexpectedrateofreturn,i.e.HelloFreshcostof
equity,computedinSection4.4.1andamountingto9%.So,wecomputedthestrike
priceasthecurrentstockvaluetimestheinvestorrequiredrateofreturn.Theonly
remaininginputwastherisk-freerateofreturn,forwhichwetookthesamevalue
asintheDCFmethod,correspondingto3%.
ThecomputationsandfinaloutcomesareshowninFigure35.
CurrentStockValueEquityValue(EURm) 2.000Sharesoutstanding(m) 160ShareValue(EUR) 12,5
76
Figure35:RealOptionsvaluationmodel
Source:MorganStanley,companyreportsandownanalysis
4.4.4. BookValue
TheBookValuemethodisaverysimpleoneinwhichweassumetheenterprise
valueofthecompanytobethesameasitsbookvalue.
Following this concept, we computed the book value of Hello Fresh as the
differencebetweenitsassetsandliabilitiesandthencalculateditssharevalueas
showninFigure36.
RealOptionsMethod Min MaxRf :Risk-freerateofreturn 3% 3%So :Currentstockvalue(EUR) 12,5 12,5Su :StockvalueatUp-State(EUR) 19,2 23,1Sd :StockvalueatDown-State(EUR) 8,9 10,5K :Strikeprice(EUR) 13,6 13,6Ce:Investorexpectedrateofreturn 9% 9%
u :Up-Statefactorofvalueincrease 1,5 1,9d:Down-Statefactorofvaluedecrease 0,7 0,8
Cu :OptionvalueatUp-State 5,5 9,5Cd :OptionvalueatDown-State 0,0 0,0
a :Stockportfolioallocation 0,5 0,8b :Bondportfolioallocation 10,0 16,9
RealOptionsValuation(EUR) 16,7 26,3
Sharesoutstanding(m) 160 160EquityValue(EURm) 2.680 4.216
NetDebt(EURm) -286 -186EnterpriseValue(EURm) 2.395 4.030
77
Figure36:BookValuevaluationmodel
Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis
4.4.5. VentureCapital
ApplyingtheVentureCapitalmethodtovalueHelloFresh,wefirstlycomputed
theterminalvaluethatthecompanywouldhaveoncethepotentialinvestorexited
thecompany.Inthissense,assuminganinvestmenthorizonoffouryears–i.e.until
2021–,weusedthe2021forecastedsalesandEBITDAandthefurthestrespective
multiples –i.e. 2019 forwardmultiples–. Regarding thesemultiples,we used the
sameasinthePublicCompsvaluationinSection4.4.2.
Tocomputethereturnoninvestment(ROI)thatapotentialinvestorwouldaim,
weusedthepreviouslymentionedcostofequityof9%astheexpectedannualrate
ofreturnandthe4-yearinvestmenthorizon.
ThecomputationsandresultsaredisplayedinFigure37.
BookValueMethodTotalAssets(EURm) 446TotalLiabilities(EURm) 422BookValue(EURm) 24
NetDebt(EURm) -286EquityValue(EURm) 309
Sharesoutstanding(m) 160ShareValue(EUR) 1,9
78
Figure37:VentureCapitalvaluationmodel
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
4.4.6. FirstChicago
To value HelloFresh using the First Chicagomethod, we first defined three
possiblescenarios.WeusedtheforecastsofJPMorgan,MorganStanleyandBarclays
fortheBest-Casescenario,Mid-CasescenarioandWorst-Casescenariorespectively.
Weassign25%probabilityforbothBest-CaseandWorst-Casescenarios,and50%
fortheMid-Casescenarioasrecommendedbythemethoditself.
Then,wecomputedtheterminalvalueundereachscenariointhesamewayas
intheVentureCapitalmethod,inSection4.4.5.TheoutcomeisshowninFigure38.
Figure38:FirstChicagoscenariosdefinition
VentureCapitalMethod EV/Sales EV/EBITDASales2021(EURm) 2.058 2.058EBITDA2021(EURm) 165 165Compsmultiple 1,7x 23,2xTerminalValue(EURm) 3.431 3.835
ROI 141% 141%Expectedannualrateofreturn 9% 9%InvestmentHorizon 4 years 4 years
Post-MoneyValuation(EURm) 2.430 2.717
Expectedcapitalraised(EURm) 363 363Pre-MoneyValuation(EURm) 2.067 2.354
NetDebt(EURm) -286 -286EquityValue(EURm) 2.353 2.640
Sharesoutstanding(m) 160 160ShareValue(EUR) 14,7 16,5
EV/Sales EV/EBITDA EV/Sales EV/EBITDA EV/Sales EV/EBITDAScenarioprobability 25% 25% 50% 50% 25% 25%
Sales2021(EURm) 1.960 1.960 2.034 2.034 2.182 2.182EBITDA2021(EURm) 216 216 193 193 87 87Compsmultiple 1,7x 23,2x 1,7x 23,2x 1,7x 23,2xTerminalValue(EURm) 3.266 5.009 3.390 4.478 3.636 2.018
Mid-CaseScenarioScenarioDefinition
Best-CaseScenario Worst-CaseScenario
79
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
Finally,assumingasinthepreviousmethodaninvestorexpectedrateofreturn
of9%anda4-year investmenthorizon,andconsidering thatHelloFreshwillnot
distribute any dividend to the investor during the holding period, the valuation
modelandoutcomearedisplayedinFigure39.
Figure39:FirstChicagovaluationmodel
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
4.4.7. RiskFactorSummation
Finally,thelastvaluationmethodusedtovalueHelloFreshistheRiskFactor
Summationmethod.
Firstly,weassignedtoeachofthekeyriskfactorsidentifiedbythemethod,by
comparingHelloFreshwith itspeers. Inthiscase,aswearevaluinganEuropean
startup, we multiplied the recommended adjustment of $250k per point by a
conversionfactorof0.5–accountingforthedifferenceinvaluationsbetweenEurope
andtheUS–.HelloFreshriskassessmentisshowninFigure40.
FirstChicagoMethod EV/Sales EV/EBITDAExpectedannualrateofreturn 9% 9%InvestmentHorizon 4 years 4 years
Expectedannualdividendpayments 0 0
EnterpriseValue(EURm) 2.423 2.831
NetDebt(EURm) -286 -286EquityValue(EURm) 2.709 3.116
Sharesoutstanding(m) 160 160ShareValue(EUR) 16,9 19,5
80
Figure40:RiskFactorSummationriskassessment
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
Then,weappliedtheresultingtotaladjustmenttothepeers-averagedvaluation
tofindHelloFreshfairvalue.Inthisstage,aswedidinothervaluationsmethodsin
whichmultiplesareinvolved,wetriedtodoitthroughnotonlyEV/Salesmultiples
but also othermultiples such as EV/EBITDA or P/E. However, since HelloFresh
presentsbothnegativeEBITDAandearningsfor2017,itwasnotpossible.Thefinal
outcomeisshowninFigure41.
Figure41:RiskFactorSummationvaluationmodel
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
RiskAssessment Grade AdjustmentManagement 0 0Stageofthebusiness +2 250.000Legislation/Politicalrisk +1 125.000Manufacturingrisk -1 -125.000Salesandmarketingrisk +1 125.000Funding/capitalraisingrisk 0 0Competitionrisk -1 -125.000Technologyrisk +2 250.000Litigationrisk 0 0Internationalrisk -1 -125.000Reputationrisk -1 -125.000Potentiallucrativeexit +1 125.000TotalAdjustment(EUR) 375.000
RiskFactorSummationMethod EV/Sales EV/EBITDARevenue2017(EURm) 892 892EBITDA2017(EURm) -77 -77Compsmultiple 2,3x 33,9xPeers-averagedValuation(EURm) 2.022 -
TotalAdjustment(EURm) 0,375 -EnterpriseValue(EURm) 2.022 -
NetDebt(EURm) -286 -EquityValue(EURm) 2.308 -
Sharesoutstanding(m) 160 -ShareValue(EUR) 14,4 -
81
4.4.8. ValuationFootballField
OncewevaluedHelloFreshusingdifferentmethods,wedevelopedaFootball
Fieldanalysisinordertodeterminethefinalvaluationofourstartupfocusingon
thetwomainoutcomesofourvaluation,itsEnterpriseValueanditsShareValue.
Thisanalysiswillalsoallowustoidentifyoutliersandmethodsthatwereclearly
notabletocomeupwithanappropriatevaluation.
RegardingtheEnterpriseValue,theresultsareshowninFigure42.
Figure42:SummarytableoftheHelloFreshEnterpriseValuefootballfieldanalysis
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
At a first sight, we can note that the valuation provided by the Book Value
methodmassively differs from the others due to its extremely low value. If we
consider the rational of themethod, as it was explained in Section 3.1.5, it only
captures the current picture of the analyzed company, but it does not take into
accountitsfutureprospects.Thisisperseagreatdrawback,butitisevenworse
whenvaluingstartups,whicharepreciselycharacterizedbythepotentialofscaling
itsbusinessandreachingamuchmaturestateoftheirbusiness.Forthisreason,the
BookValuemethodisdiscardedforourfinalHelloFreshvaluation.
Examining the resulting valuations, we can realize that the Real Options
method,althoughitdidnotprovidesuchanextremevaluationastheBookValueit
deliveredasignificantlyhighervaluationthantherest.Moreover,thisvaluationis
alsocomprisedwithinawiderange,withahighdifferencebetweenitslowestand
highestvalues.
Finally,wecanalsoobserve–orremember fromSection4.4.7– thatwith the
RiskFactorSummationmethodwewereabletoobtainasinglevaluation,notbeing
ValuationFootballField–EnterpriseValue –EURm Min Max Diff Weight1 Weight2DCF 1.911 2.352 442 20,00% 25,00%PublicComps 2.022 2.561 539 20,00% 25,00%RealOptions 2.395 4.030 1.635 10,00% 0,00%BookValue 24 24 0 0,00% 0,00%VentureCapital 2.067 2.354 286 20,00% 25,00%FirstChicago 2.423 2.831 407 20,00% 25,00%RiskFactorSummation 2.022 2.022 0 10,00% 0,00%Weighted-AverageValuation1 2.126 2.625 498 100% 100%Weighted-AverageValuation2 2.106 2.524 419 100% 100%
82
possibletoestablishavaluationrangecomprisedwithinaminimumandmaximum
value.Weconsiderthatthisfactdiminishesthereliabilityoftheoutcome.
Becauseoftheabovementioned,whenperformingtheFootballFieldanalysis
of the HelloFresh valuationwemade the decision of discarding the Book Value
method for our final HelloFresh valuation. In addition, we carried out two final
valuations. In the first one, we included the Real Options and the Risk Factor
Summationmethods,althoughwegavethemlowerweightthantotherest.Inthe
secondonewediscardedthesetwolastmethodsaswell.
SincetheeffectsproducedbytheRealOptionsandtheRiskFactorSummation
methodsareopposed–the firstonepushesup thevaluationand the secondone
pushesitdown–,thefinalHelloFreshvaluationdoesnotdifferssomuchfromthe
oneobtainedwithoutthesetwomethods.Eventhough,weconsideredthelastone
as the most reliable, so that we picked it as the final outcome of our analysis,
resulting in an Enterprise Value of between€2.1bn and€2.5bn. The results are
plottedinFigure43.
Figure43:HelloFreshEnterpriseValuefootballfieldgraph
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
OncetheFootballFieldanalysisisperformed,wewanttoknowwhathasbeen
themethodwhichhasproducedthemostaccurateresultbyitsowncomparedto
thefinalvaluation.Inthissense,wecomparedthedeviationbetweentheaverage
2,0
2,4
2,1
2,4
2,0
1,9
2,0
2,8
2,4
4,0
2,6
2,4
€1bn €2bn €3bn €4bn €5bn
RiskFactorSummation
FirstChicago
VentureCapital
RealOptions
PublicComps
DCF
2,52,1
83
valueofeachselectedmethodandtheaverageofthefinaloutcomerange–shownin
Figure44–.Bydoingso,werealizedthattheonewhichperformedmostaccurately
wasthePublicCompsmethod.
Figure44:AccuracyofeachmethodanalysisforEnterpriseValue
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
RegardingtheShareValue,theresultsareshowninFigure45.
Figure45:SummarytableoftheHelloFreshShareValuefootballfieldanalysis
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
ThesameobservationsextractedinthecaseoftheFootballFieldanalysisofthe
EnterpriseValueholdfortheShareValue,resultinginaHelloFreshfinalShareValue
ofbetween€14,9and€17,4.TheresultsareplottedinFigure46.
AccuracyoftheMethod–EnterpriseValue –EURm Average Error Error(%)DCF 2.132 -184 -7,9%PublicComps 2.292 -24 -1,0%VentureCapital 2.211 -105 -4,5%FirstChicago 2.627 312 13,5%Weighted-AverageValuation2 2.315 0 0,0%
ValuationFootballField–ShareValue –EUR Min Max Diff Weight1 Weight2DCF 13,7 16,5 2,8 20,00% 25,00%PublicComps 14,4 17,1 2,6 20,00% 25,00%RealOptions 16,7 26,3 9,6 10,00% 0,00%BookValue 1,9 1,9 0,0 0,00% 0,00%VentureCapital 14,7 16,5 1,8 20,00% 25,00%FirstChicago 16,9 19,5 2,5 20,00% 25,00%RiskFactorSummation 14,4 14,4 0,0 10,00% 0,00%Weighted-AverageValuation1 15,1 18,0 2,9 100% 100%Weighted-AverageValuation2 14,9 17,4 2,4 100% 100%
84
Figure46:HelloFreshShareValuefootballfieldgraph
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
Whencarryingoutthesamepreviouslyexplainedaccuracyanalysisbutforthe
ShareValue,wereachedthesameconclusion;thePublicCompsmethodwastheone
whichdeviatedthelessfromthefinalvaluationoutcomeagain.
Figure47:AccuracyofeachmethodanalysisforShareValue
Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis
14,4
16,9
14,7
16,3
14,4
13,7
14,4
19,5
16,5
25,9
17,1
16,5
€10 €13 €15 €18 €20 €23 €25 €28 €30
RiskFactorSummation
FirstChicago
VentureCapital
RealOptions
PublicComps
DCF
17,414,9
AccuracyoftheMethod–ShareValue –EUR Average Error Error(%)DCF 15,1 -1,1 -6,5%PublicComps 15,7 -0,4 -2,6%VentureCapital 15,6 -0,6 -3,5%FirstChicago 18,2 2,0 12,6%Weighted-AverageValuation2 16,2 0,0 0,0%
85
5. Conclusions
Atthebeginningofthisresearchpaper,wehaveseenthat,althoughnowadays
the termstartup ismassively spread, it isnot alwaysappropriatelyused. In this
sense, we identified the main criteria which identify companies as startups:
operatinginabinarybusinessmodel,holdingnegativefreecashflows,andbeing
equity financed. Nevertheless, not all startups look alike, andwe can categorize
themintosixdifferentmaturitystages–fromearliesttolatest:pre-seed,seed,early,
growth, expansion and exit–, each one with its own particularities in terms of
objectives,needs,risksandfinancing.
Thepreviouslymentionedneedoffinancing,mainlycarriedoutthroughequity
issuances, brings us to the next point of our paper: the necessity of valuing the
startup.However,giventheidiosyncrasyofthistypeofcompanies,whichpresent
negativefreecashflowsandoperateinmostofthecasesinnichemarketswithvery
fewcompetitorsandverylittlepublicandhistoricdataavailable,alongsidethehuge
uncertaintythatinvolvesthebusinessmodelitself,makesthistaskahuge–andat
thesametimeanextremelyinteresting–challenge.
Inthissense,wedivedintotheavailableoptionsthatapotentialinvestororthe
ownerofastartuphimselfcanuseinordertocomeupwiththefairvalueofthe
company.Wedividedthemethodsthatcanbeusedintotwotypes:thetraditional
ones,whichmaybecommonlyusedaswelltovaluematurecompanies,andthenon-
traditionalones,whichhavebeendevelopedduringtheyearsforpractitionersand
expertsinthemattertosurpasstheexitinglimitationofthetraditionaloneswhen
thosecannotbeused.
Finally,we dared to apply those studied valuationmethods in the real case
studyinordertotestthemanalyzingtheHelloFresh’scompanyvaluepost-IPOin
2017.Inthisregard,weputtheminpracticeandcarriedoutafootballfieldanalysis
of the outcomes of each valuation method, resulting in an enterprise value of
between€2.1bnand€2.5bn,andasharevalueofbetween€14.9and€17.4.
Comparing these results with the actual HelloFresh share performance, we
realizedthatourrecommendedsharevaluewasprettymuchinlinewithwhatithad
86
turnedouttobetheactualsharepricetwoyearsaftertheIPO–seeFigure48–.We
think that the initial difference between our recommended share price and the
actual one possibly comes from the conservatism over the expectations of
HelloFresh, the potential threat of other big players getting in the business and
disrupting it, and the difficulties to scale of the business itself. Nevertheless,
HelloFreshshowedthatitcouldmeetitsforecasts,andthemarketpricedit.Inthe
most recent times, we can see how the share price has dramatically increased
because of the Coronavirus crisis that we are currently suffering, from which
HelloFreshcantakeprofit.
Figure48:HelloFreshsharepriceevolution
Source:YahooFinance
All inall,we candefinitely conclude thatvaluinga startup is a complexand
challengingprocess,moredrivenbytheknow-howandexpertiseonthefieldofthe
onewho performs the valuation than formature companies, not being an exact
sciencebutratheranart itself.Thatsaid,usingdifferentmethods,andrationally
choosingordiscardingthemtocomeupwithafinalvaluationmightleadtoasound
resultwhich,usedwisely,mightalsoleadtoimpressivecapitalgainsderivedfrom
rationally-selectedinvestmentopportunities.
€5
€15
€25
€35
€45
ShareValueRange COVID-19Crisis HelloFreshSharePrice
87
Appendix
1. HelloFreshIncomeStatement
1.1. WeightedAverageHelloFreshIncomeStatement
1.2. JPMorganHelloFreshIncomeStatement–OptimisticScenario
88
1.3. MorganStanleyHelloFreshIncomeStatement–NeutralScenario
1.4. BarclaysHelloFreshIncomeStatement–PessimisticScenario
89
2. HelloFreshBalanceSheet
2.1. WeightedAverageHelloFreshBalanceSheet
2.2. JPMorganHelloFreshBalanceSheet–OptimisticScenario
JPMorgan–Optimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EPP&E 6 38 36 44 52 52 57
OtherIntangibleAssets 15 21 22 23 23 23 23
DeferredIncomeTaxAssets 0 1 8 16 25 35 45
TotalNon-CurrentAssets 21 60 66 83 99 109 125
Inventories 6 10 14 17 20 22 24
TradeReceivables 12 9 23 31 39 46 53
OtherCurrentAssets 11 14 14 14 14 14 14
Cash&CashEquivalents 109 58 313 256 272 406 605
TotalCurrentAssets 137 91 365 319 345 488 696
TotalAssets 159 152 431 402 444 597 821
ShareCapital 115 117 117 117 117 117 117
CapitalReserves 94 113 470 470 470 470 470
OtherReserves 22 27 37 49 58 65 72
AccumulatedLosses -142 -236 -348 -419 -414 -292 -99
OtherComprehensiveIncome -1 -1 -1 -1 -1 -1 -1
ShareholdersEquity 88 21 276 217 231 359 560
Non-ControllingInterests 0 0 0 0 0 0 0
TotalEquity 88 21 276 217 231 359 560
Non-FinancialLiabilities 10 16 16 16 16 16 16
Long-TermDebt 0 46 28 28 28 28 28
TotalNon-CurrentLiabilities 10 62 44 44 44 44 44
FinancialLiabilities 0 2 2 2 2 2 2
TradeandOtherPayables 46 43 86 115 144 168 191
Provisions 3 4 4 4 4 4 4
IncomeTaxLiabilities 0 0 0 0 0 0 0
Non-FinancialLiabilities 13 19 19 19 19 19 19
TotalCurrentLiabilities 61 69 111 141 170 194 217
TotalEquity&Liabilities 159 152 431 402 444 597 821
90
2.3. MorganStanleyHelloFreshBalanceSheet–NeutralScenario
2.4. BarclaysHelloFreshBalanceSheet–PessimisticScenario
MorganStanley–Neutralscenario– EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EPP&E 6 38 37 62 73 87 100
OtherIntangibleAssets 15 21 25 23 21 20 20
DeferredIncomeTaxAssets 0 1 5 5 5 5 5
TotalNon-CurrentAssets 21 60 67 90 99 112 125
Inventories 6 10 14 12 14 17 19
TradeReceivables 11 9 14 31 38 45 50
OtherCurrentAssets 11 14 19 19 19 19 19
Cash&CashEquivalents 109 58 340 245 237 298 442
TotalCurrentAssets 137 91 387 307 308 379 530
TotalAssets 159 152 453 395 407 490 654
ShareCapital 125 127 161 161 161 161 161
CapitalReserves 94 113 442 442 442 442 442
OtherReserves 12 17 30 30 30 30 30
AccumulatedLosses -142 -236 -328 -398 -408 -350 -212
OtherComprehensiveIncome -1 -1 -2 10 20 30 42
ShareholdersEquity 88 20 303 245 245 313 463
Non-ControllingInterests 0 0 0 0 0 0 0
TotalEquity 88 20 303 245 245 313 463
Non-FinancialLiabilities 9 6 0 0 0 0 0
Long-TermDebt 1 56 42 42 42 42 42
TotalNon-CurrentLiabilities 10 62 42 42 42 42 42
FinancialLiabilities 0 2 3 3 3 3 3
TradeandOtherPayables 46 43 77 77 90 104 119
Provisions 3 4 3 3 3 3 3
IncomeTaxLiabilities 0 0 1 1 1 1 1
Non-FinancialLiabilities 13 19 24 24 24 24 24
TotalCurrentLiabilities 62 68 108 108 121 135 150
TotalEquity&Liabilities 159 152 453 395 407 490 654
Barclays–Pesimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EPP&E 6 38 37 83 126 129 135OtherIntangibleAssets 15 21 24 43 45 43 42DeferredIncomeTaxAssets 0 1 5 5 5 5 5TotalNon-CurrentAssets 21 60 66 130 176 176 181
Inventories 6 10 14 20 25 29 34TradeReceivables 12 9 14 24 31 36 42OtherCurrentAssets 11 14 19 19 19 19 19Cash&CashEquivalents 109 58 340 164 107 143 215TotalCurrentAssets 137 91 387 227 181 228 309
TotalAssets 159 152 453 357 358 404 490
ShareCapital n.a. n.a. n.a. n.a. n.a. n.a. n.a.CapitalReserves n.a. n.a. n.a. n.a. n.a. n.a. n.a.OtherReserves n.a. n.a. n.a. n.a. n.a. n.a. n.a.AccumulatedLosses n.a. n.a. n.a. n.a. n.a. n.a. n.a.OtherComprehensiveIncome n.a. n.a. n.a. n.a. n.a. n.a. n.a.ShareholdersEquity 88 21 303 216 190 214 279
Non-ControllingInterests 0 0 0 0 -1 -1 0TotalEquity 88 21 303 215 190 214 278
Non-FinancialLiabilities 10 16 12 12 12 12 12Long-TermDebt 0 46 29 0 0 0 0TotalNon-CurrentLiabilities 10 62 42 12 12 12 12
FinancialLiabilities 0 2 3 3 3 3 3TradeandOtherPayables 45 43 77 99 124 146 168Provisions 3 4 3 3 3 3 3IncomeTaxLiabilities 0 0 1 1 1 1 1Non-FinancialLiabilities 13 19 24 24 24 24 24TotalCurrentLiabilities 61 69 108 130 155 177 199
TotalEquity&Liabilities 159 152 453 357 358 404 490
91
3. HelloFreshCashFlowStatement
3.1. WeightedAverageHelloFreshCashFlowStatement
3.2. JPMorganHelloFreshCashFlowStatement–OptimisticScenario
Source Scenario WeightJPMorgan Optimistic 33,3%MorganStanley Neutral 33,3%Barclays Pesimistic 33,3%
WeightedAverageScenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EChangeinWorkingCapital 24 -1 29 3 12 11 11OperatingCashFlow -66 -76 -55 -53 24 101 167Capex -6 -36 -10 -29 -36 -21 -26InvestingCashFlow -18 -42 -13 -46 -41 -24 -29FinancingCashFlow 174 67 344 -10 0 0 0
TotalCashFlow 90 -51 277 -109 -16 77 138Cash&CashEquivalentsatEndofYear 109 57 331 222 206 282 420
FreeCashFlowCalculation –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EEBIT -114 -90 -93 -77 -12 70 138EffectiveTaxRate 0,0% 0,0% 2,1% -2,5% -9,2% 27,5% 13,3%NOPAT -114 -90 -91 -79 -13 51 120+D&A 0 1 1 3 8 11 12–ChangeinWorkingCapital -24 1 -29 -3 -12 -11 -11–Capex 6 36 10 29 36 21 26FreeCashFlow -132 -51 -108 -51 20 73 146
JPMorgan–Optimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EProfitorLoss -117 -94 -112 -71 5 122 193
NetFinancialInterest 1 4 6 2 1 1 0
IncomeTax 0 0 0 0 0 0 1
D&AandImpairments 1 4 12 17 18 12 10
OtherAdjustments 18 6 10 12 9 7 11
ChangeinWorkingCapital 23 -1 24 19 18 16 15IncomeTaxPaid 0 0 -7 -8 -9 -10 -10
InterestPaid 0 -1 -6 -2 -1 -1 -1
OtherOperatingCashFlow 8 6 0 0 0 0 0
OperatingCashFlow -66 -76 -73 -32 40 146 218
Capex -6 -35 -9 -23 -22 -9 -16
SoftwareDevelopmentExpenditures 0 0 -2 -2 -3 -3 -4
OtherInvestingCashFlow -12 -7 0 0 0 0 0
InvestingCashFlow -17 -43 -10 -25 -25 -12 -20
CapitalContributionsfromShareholders 184 23 0 0 0 0 0
NetIPOProceeds 0 0 357 0 0 0 0
Increase/DecreaseinDebt 0 44 -18 0 0 0 0
RepurchaseofSharesintoTreasury -10 0 0 0 0 0 0
FinancingCashFlow 174 67 339 0 0 0 0
TotalCashFlow 91 -52 256 -57 16 134 199
Cash&CashEquivalentsatBeginningofYear 20 109 58 313 256 272 406
EffectsofExchangeRateChanges -1 -1 0 0 0 0 0
Cash&CashEquivalentsatEndofYear 109 57 313 256 272 406 605
92
3.3. Morgan Stanley HelloFresh Cash Flow Statement – Neutral
Scenario
3.4. BarclaysHelloFreshCashFlowStatement–PessimisticScenario
MorganStanley–Neutralscenario– EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EEBIT -116 -90 -89 -71 -11 68 160D&A 1 4 8 12 15 18 21ChangeinWorkingCapital 23 -1 31 -15 3 5 7IncomeTaxPaid 0 0 0 0 0 -10 -23InterestPaid 0 -1 -4 1 1 1 1OtherOperatingCashFlow 26 12 8 13 10 10 12OperatingCashFlow -66 -76 -46 -60 18 92 178
Capex -6 -37 -14 -35 -25 -31 -35Acquisitions -3 0 0 0 0 0 0OtherInvestingCashFlow -9 -5 0 0 0 0 0InvestingCashFlow -18 -42 -14 -35 -25 -31 -35
CapitalContributionsfromShareholders 184 23 0 0 0 0 0NetIPOProceeds 0 0 363 0 0 0 0Increase/DecreaseinDebt 0 44 -16 0 0 0 0RepurchaseofSharesintoTreasury -10 0 0 0 0 0 0FinancingCashFlow 174 67 347 0 0 0 0
TotalCashFlow 90 -51 287 -95 -7 61 143
Cash&CashEquivalentsatBeginningofYear 20 109 58 340 245 237 298EffectsofExchangeRateChanges -1 -1 -5 0 0 0 0Cash&CashEquivalentsatEndofYear 109 57 340 245 238 298 441
Barclays–Pesimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
Adj.EBITDA-Barclays -111 -85 -78 -78 -4 47 87
ChangeinWorkingCapital 25 -1 31 6 14 12 12
IncomeTaxPaid 0 0 -3 -7 -9 -12 -15
InterestPaid 0 -1 -4 -2 -2 -2 -2
OtherOperatingCashFlow 20 11 8 13 16 19 22
OperatingCashFlow -66 -76 -46 -69 15 64 104
Capex -6 -35 -9 -28 -62 -24 -28
SoftwareDevelopmentExpenditures 0 -2 -4 -4 -9 -3 -4
OtherInvestingCashFlow -12 -5 -1 -46 -2 -1 -1
InvestingCashFlow -17 -43 -14 -78 -72 -29 -33
CapitalContributionsfromShareholders 184 23 0 0 0 0 0
NetIPOProceeds 0 0 363 0 0 0 0
Increase/DecreaseinDebt 0 44 -16 -29 0 0 0
RepurchaseofSharesintoTreasury -10 0 0 0 0 0 0
FinancingCashFlow 174 68 347 -29 0 0 0
TotalCashFlow 91 -51 288 -176 -58 36 72
Cash&CashEquivalentsatBeginningofYear 20 109 58 340 164 107 143
EffectsofExchangeRateChanges -1 -1 -5 0 0 0 0
Cash&CashEquivalentsatEndofYear 109 58 340 164 107 143 215
93
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