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July 18, 2011
Venture Financing
and Valuation
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Quick Background
San FranciscoTech M&AAdvisory
Tokyo
Class of 2012
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AGENDA
FinaFina
ncinncinggNewNewVentVenturesures
ValuiValui
ngngNewNewVentVenturesures
TheTheTermTerm
SheeSheett
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Financing NewVentures
The Overview
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So you have a
business and you needfinancing
Step 1: Profile yourbusiness
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Capital Intensive,ProvenTechnologies
Capital Intensive,New Technologies
Small Businesses
Technology or Business ModelNovelty
Low High
Low
High
CapitalRequirement
NewTechnologie
s / BusinessModel
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Venture Capital(Create Big Co.)
Capital Required to AchieveBreakeven Cashflow
Low Medium
Low
High
Scalability of Business
Not ViableBootstrap(Create a small
company)
Venture Capital
Boot Strap
Low BarriersHigh Barriers
Source: Get Venture, Mark Peter Davis. http://www.markpeterdavis.com/getventure/2010/07/how-to-raise-vc- presentation.html
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Investment Stage
Seed Start-upFirst
Round
Second
Round
ThirdRound
Expansion
Mgmt.Buyou
t
Restructurin
g
Idea toOpportunity &Initial ProductDev.
Launch tosustainability Growth Turnaround
Family, Friends,Angel Investors Venture
Capitalists
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Breakdown of Prominent VCs Portfolio
Source: HBS, Analysis by Professor William Sahlman based on 468 investments over the period 1990-2006
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Two types of VCs
INDEPENDENT VCs CORPORATE VCs
VS.
Limited
Partners(Pension Funds,Wealthy
Individuals,Endowments)
Corporate
TreasuryFunding
7-10 years Unlimited
TimeHorizon
Limited / None Extensive
StrategicSynergies
Stronger Weaker
Monitoring
Stronger Weaker
FinancialDiscipline
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Local Funding sources for TechStartups
http://www.founderinstitute.com/http://www.rajacapital.com/http://e27.sg/wp-content/uploads/2011/01/mpinc.png8/6/2019 Financing and Valuing Your Startup
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Valuing New
Ventures
Valuation
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Two things you need to know aboutvaluation
Its an art, not ascience
Its in the contextof a financing
negotiation
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Venture Valuation
AssumeStartUp needs $3.5mm in investmentto carry its operations for the next fiveyearsIn year 5, StartUp projects that it cangenerate $2.5mm in net income andbe valued at a Price-to-Earning (PE)ratio of 15xStartUp vi sits Kawano Capital to ask for $$
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Venture Valuation
Fact SummaryInvestment $3.5 million
Term 5 years Year 5 Net Income $2.5mm Year 5 PER 15xRequired IRR for Kawano Capital 50%
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Venture Valuation
(1 + IRR ) years x(investment )
(1 + .50 ) 5 x ( 3.5 )
Required future value of
investment
$26.6million
PER x Year 5 net
income15 x 2.5
Future Terminal Value
$37.5million
$3.5million
Required Ownership Stake
Entry Valuation
=70.9%
=$4.9m(Post-money)
$4.9m $3.5m
=$1.4m(Pre-money)
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That was easy (?)
In real life, investment are staged andrarely do entrepreneurs receive the fullfunding required in a single fundinground
Investors will most like would like tostage the investments to reduce risk
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Multiple Rounds of Investment
Required future ownership stake
future value(investment)terminal value(company)
=final%
Investment
TermIRR FinalOwnership
Round 1 $1.5mm 5 yr 50% 30.4%Round 2 $1.0mm 4 yr 40% 7.3%Round 3 $1.0mm 3 yr 25% 3.3%
(1 + IRR ) years x(investment )PER x Year 5 netincome
=
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Multiple Rounds of Investment
Required future ownership stake
Retention % = 1 (total future final ownerships fromsubsequent rounds)
Current
Ownership =Investment
TermIRR FinalOwnership
Retention
CurrentOwnership
Round 1 $1.5mm 5 yr 50% 30.4% 89.3% 34.0%
Round 2 $1.0mm 4 yr 40% 7.3% 96.7% 7.6%
Round 3 $1.0mm 3 yr 25% 3.3% 100% 3.3%
FinalOwnershipRetention %
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Multiple Rounds of Investment
Investment
TermIRR CurrentOwnershi
p
Pre-money
Valuation
Post-Money
Valuation
Round 1 $1.5mm 5 yr 50% 34.0% $2.9m $4.4m
Round 2 $1.0mm 4 yr 40% 7.6% $12.2m $13.2m
Round 3 $1.0mm 3 yr 25% 3.3% $29.3m $30.3m
Entry Valuation
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So which is better for the entrepreneur?
Single-stagedinvestment Staged investmentVS.
FounderOwnership
FinancialSecurity
Less(29%)
More(59%)
More Less
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Valuation Deadlocks
Valuation Deadlock
Well put that asidefor now
Stated discount to thenext round of
investment
Staged investments
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The Term Sheet
Valuation is only half the trouble
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AN
OT HE Rk
e y
s u c c e s
s f a c
t o
r
Sometimes more important than thevaluation
THETERMSHEE
T
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Lesson One
Investors rarelybuy
commonequity
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CONVERTIBLE PREFERRED
STOCK
Definition: Hybrid security thatcan be converted fromsubordinated debt into equity atthe holders discretion
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EXAMPLE
Kawano Capital invests $4mm inconvertible preferred stock inStartUp for 40% of the firm(Post-money valuation of $10mm)
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Firm Enterprise
Firm EnterpriseValue
$4m $10m
60%
40%
Convertible PreferredStock
$4mm
Post-moneyvaluation
VCstake
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VCstake
Firm Enterprise
Firm EnterpriseValue
$4m $10m
60%
40%
Convertible PreferredStock
$4mm
Protectdownside
Post-moneyvaluation
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Pitch right for your type of company Deal terms have value , its easier
to negotiate these than the valueitself
Do not run out of cash
Demonstrate that you are capableof attracting the right team
Who you raise money from is critical Local vs. abroad
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END
Some Ending Thoughts
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2011 LAUNCH Conference, SF
Takahito Iguchi , CEO
Tonchidot
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Be ENERGETIC!!
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