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

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Presentation on theme: "IGNITE 2008 How Investors Value Technology Companies Art, Science, Maths and Realities What Entrepreneurs Need to Know Professor Alan Barrell and Peter."— Presentation transcript:


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

3 Slide 2 Agenda – Welcome to the Real World Valuation – when and why is it important ? Thinking about INVESTORS – they have the ££££/$$$$ Deciding on best sources of Finance The Background – Economics, Markets and Values Case Based discussions – the art of the possible Valuation calculations and methods – where do they fit ? Special problems of Emerging Technologies Valuing the Future….Crystal Balls vs PCs

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5 Slide 4 Stay Cool! Dilbert - Scott Adams

6 Slide 5 Stay Cool! Dilbert - Scott Adams

7 Slide 6 Stay Cool! Dilbert - Scott Adams

8 Slide 7 Valuation – how and why? To indicate value to potential investors What is a company worth? - What someone will pay for it What is this determined by? -Other investment choices ( there are usually MANY !)

9 Slide 8 A Search for Fair Value – see any Science here? Issue dateValue at issue 1 Year On BookhamApril 2000£1.2 billion £231 million Lastminute. Com. March 2000 £571 million £54 million OrchestreamJune 2000£212 million £52 million Just2clicksFeb 2000£130 million £ - - - -

10 Slide 9 The Changing Horizon – World Economics affects Company Valuations Environment Issues The death of deference New employment patterns Organisations Globalisation Technology

11 Slide 10 The Changing Face of Globalisation – Realities for Europe, US and The World Two fifths of the Worlds people live in the two fastest growing large economies – China and India – FACT Education, Wealth Creation and New Knowledge are at the heart of Economic Planning in Asia Growth in Asia is far ahead of Europe. The desire to LEAD is strong in Asia CASH is in place in the Asian economies – as well as brainpower. Growth of FDI and VC.

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13 Slide 12 Some Economic Indicators – How are key Countries doing? How does it affect investing? Can the trend continue? Chinas $s growing at 200billions a quarter! Inward and outbound investing – trends Sovereign Wealth Funds Chinese and Indian VC investing Chinese and Indian Angel Investors are growing in number and getting organised GDP % ChangeInd. Prod. %Trade Balance US $ Bn Foreign Reserves US $ Bn China+ 9.5+ 8.9+601.65 Trillion And growing! India+ 8.6+ 8.0- 25130 Britain+ 2.9+ 0.1- 49 Euro Area+ 2.1+ 1.0+ 86 USA+ 3.9+ 3.5- 679

14 Slide 13 The Phenomenon of Ancient China – Creativity and Inventiveness – some of the Inventions – many NOT financed or exploited – little return for inventors… The first lamps Magnetic Compass The Camera Gunpowder Paper for writing Printing Iron and Steel Smelting Copper and Bronze ware Oil Drilling and Production Coal Mining Pottery and Porcelain Wine making and tea and tea culture Early Astronomy Sericulture – gave us Silk Seismography Traditional Medicine and Anaesthetics Acupunture Vaccination against Smallpox The Hot Air Balloon The Soushi Calendar Decimal and Binary Mathematics

15 Slide 14 When a market BOOMS - Venture Capital Investments in E-Commerce (U.S.A.) When Greed overcame Fear Source: Venture Economics Netscape IPO 3 rd largest in Nasdaq History IPO $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Total Invested ($ million)

16 Slide 15 Cambridge Venture Capital Scene – Estimated total value of funds: in excess of £1.5billions Venture Capital Funds with Regional Associations – at the height of a boom - UK and Europe - Cambridge Region only - UK only Less than £1.0 million More than £3.0 million INVESTMENT SIZE CRILGenericsPrelude 3i ICT Life Sciences Avlar FNI Venture Capital Merlin Amadeus Prime Technology Ventures Pall Mall Ventures Alta Berkeley ET Capital Siemens VC Abingworth Create Ventures Cambridge Gateway TTP Ventures

17 Slide 16 1990 1995 2000 2005 2010 Expectations WWW Invented Netscape Christmas 1999 Christmas 1998 E-tailers shakeout begins Internet in every business Investor disillusionment Business disappointment Robust e-businesses survive & thrive Pioneer investors LateInvestors Early investors But….Boom can lead to BUST- valuation implications? Return of Fear…. Down Rounds....Discuss…. R&DMarketingProfitability Cash Flow Peak of IrrationalExpectations Bygrave; GartnerGroup, 11/99 IPO Fever RationalExpectations

18 Slide 17 US Angels – The REAL early stage funders ! In 2000 US business Angels invested more than $200billions in early stage companies This was much more than the so called venture capital industry which did not reach investment levels that year of $150 billions. In the difficult year of 2002 – when VCS sat on hands – Cambridge Angels kept the early stage and emerging business sector alive and well Cambridge Angels are adopting the US success model and working more closely together.

19 Slide 18 The Competitive Threat Todays Peacock is tomorrows feather duster – There is ALWAYS competition….

20 Slide 19 Sources of Competitiveness Creativity Risk Speed Reputation Cost Values Learning Information

21 Slide 20 Valuations and Technology Development – Survival of the Fastest… All international phone calls 1971 All airline passengers 1975 All mobile phones 1984 All emails 1992 All SMS 1998 Source: Analysys, World Bank and ITU

22 Slide 21 Three Converging Revolutions Three Pervasive Technology Platforms BIO TECH Pharmaceuticals Diagnostics Research/Info Tools Industrial Genomics Bioinformatics Proteomics INFO TECH Hardware Software Communications NANO TECH Electrical Structural Biomedical Energy & Environment Biosensors Biochips Bioelectronics Microfluidics Nanobiotechnology Drug Delivery Nanodevices Nanosensors Nanoelectronics

23 Slide 22 Universities and centres of academic excellence Exploitable, converging Technologies Entrepreneurs with marketable ideas and products Business angels and established seed funds Sources of early stage venture capital Core of successful large companies Quality management teams and talent Supportive infrastructure Affordable space for growing businesses Access to capital markets Attractive living environment and accommodation source :- Gibbons - Stanford University 1998 Characteristics of high technology regions- Catalysts for Growth – Centres of Investment – is this the environment where most of us are?....

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25 Slide 24 The emergence of high-technology clusters in Greater Cambridge 50,000

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27 Slide 26 Overlapping Technologies support Overlapping Business Clusters HEALTH KNOWLEDGE CREATION INFORMATION and COMMUNICATIONS TECHNOLOGY Basic Research Sound & vision Bio-pharmaceuticals Computing Publishing Medical services Bio-informatics Medical devices and scientific instruments University/ Research Institutes Inkjet printing Wireless Telecoms Networking Technology ConsultingMedical research Education

28 Slide 27 Show Me The Money! Basics – Investment Readiness How organised are we ? Company structure ? Management Team? Intellectual Property? Vision, Purpose,Plans and Positioning Ideas? Advisors ? Greyhairs and Wisdom ? Basics – eg Accounts and Controls ? Rumsfeld Questions – What we DONT know?

29 Slide 28 Sources Of Business Finance Maturity Risk Our Money Family and Friends Business Angels Early Stage VC Expansion Capital B A N K F I N A N C E ?? Seed Funds Pre-IPO

30 Slide 29 Converging Interests and Influences Innovating in the Overlap and Adding Value – working together – across functions as well as across borders – public funds are available EDUCATION & RESEARCH including Universities INDUSTRY & BUSINESS GOVERNMENT National & Local

31 Slide 30 Stages Of Investment (1) 3.Early stage Companies that have completed the proof of principle, own some IPR, have a management team substantially in place, requiring funds for manufacturing and/or licensing, and sales 1.Seed Developing IPR, unlikely to have full time employees, and may well have no business premises. Working on proof of principle 2.Start up Companies in the process of being set up, with limited trading. Involved in product development and initial marketing

32 Slide 31 Stages Of Investment (2) 4.Expansion Established companies, with a full management team and generating sales, and require further finance to break into new markets. The definition Expansion often creates confusion 6.Later stage Many variants – M and A, MBO, MBI etc. 5.Pre IPO Final round prior to a listing on a recognised Stock Exchange. Can be referred to as Expansion funding

33 Slide 32 Show Me The Money – Its more than valuation Understanding the Money Supply Chain Research and Help – and where to find it Whats Best for Our Business ? Money on its own may not bring the Value you need Friends, Banks, Angels, VCs et al. Grants – including DTI R & D Grants Resourcefulness, Resilience and Recovery Learning from encounters with investors Attention to detail – nitty gritty

34 Slide 33 The Early Stage Business Balance – what do investors look for and see? When valuing ? The role of Chairman and NXDs Inspired Leadership Enthusiasm Bullshit Courage OptimismVision Creativity Management Research & Analysis Caution Process Financial Control Market Knowledge

35 Slide 34 1) The Bibles – BVCA and EVCA Handbooks and Websites 2) VCs can be small, large, regional,national, international,privately held or publicly quoted. UCFs growing in number. 3) RDA and Govt supported VCs are emerging to fund up to £250K or £500K 4) VCs can be general or industry focussed 5) All VCs have clear investment criteria. 6) VCs are firmly regulated by the FSA, or other National Regulatory bodies. 7) Some are regulated in the Channel Islands. 8) Corporates make direct investments AND some have free standing VC operations. Sources Of Business Finance The Venture Capital Jungle – where Valuations are a specialty

36 Slide 35 Engaging The Funders Preparing the case - how to start -Do we need help ? - Intermediaries-Corporate Finance. Is the Business Model Clear? Keep Business Plans Simple! Targeting funders - Investors have specific criteria ?Angels, Banks, Seed Fund, Corporates or VCs – or a mix Matching agendas Sponsors for spin-outs Organisations and people - the forward plan

37 Slide 36 One Funds Investment Criteria Cambridge Gateway Fund Innovative core technology Protected/protectable I.P. Sectors - I.T., Telecomms, Life Sciences Beyond proof of concept - not seed, not start-up Management team, Business Model and Plan in place Potential to exploit global markets Ready for roll out

38 Slide 37 Investors due diligence agenda:- –Technology and I.P. –Market - is it really there? –People - can they do it? –Exit options and drive Due Diligence on Investors:- –Investment criteria –Track record –People, relationships, references –Clarity of expectations –Available finance - including follow on –Willingness to syndicate and to participate Due Diligence is a two way thing: it will affect valuation get it RIGHT !

39 Slide 38 Exploring the Spirit of Adventure and Discovery – and on to Entrepreneurs An early case of an Angel Investment Adversity and achievement – rewards for persistence Investors look for special people Inspiration and Passion show in different ways Investors invest in…People mostly Knowing the Investor mindset



42 Slide 41 A Brainpower Hero

43 Slide 42 Einstein on IMAGINATION…. Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world Albert Einstein 1879 - 1955

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45 Slide 44 You look at things and ask - why? but I dream of things that never were and ask - George Bernard Shaw why not? Why MINDSET matters – whats an Entrepreneur ?

46 Slide 45 Schumpeter (1911) on Entrepreneurs Entrepreneurs blow gales of creative destruction. Role of the entrepreneur in transforming economies by developing: New products New methods of production New ways of organizing Untapped raw materials Enhanced competitive performance Josef Schumpeter Vienna 1911

47 Slide 46 Is there RISK involved?....Oh dear…. How do we manage risk ?....

48 Slide 47 As an Investor - Would you invest in this team ?

49 Slide 48 If you or I had done so in 1978 – we wouldnt be working here now ! Microsoft Corporation, 1978

50 Slide 49 Time for a final little story, about a bright little boy….

51 Slide 50 Who became a brilliant young man….

52 Slide 51 Inventor and champion of Intellectual Property Rights……..

53 Slide 52 NOT just the inventor of the Electric Light….. Thomas Edison – he built an Empire on Intellectual Property – Capturing Imagination and creating / adding value

54 Slide 53 Lets look at some Realities – Cases we have known Contrasting financing means and valuation – Ink Jet Printing Technology, Passion and Energy dont always prove sufficient – Active RF A Funding Fable – Valuation Obsession almost killed the company

55 Slide 54 Contrasting Case Studies – same business sector – similar companies – similar valuations. Equity finance is not the ONLY way – but valuation counts any way Domino Venture Capital IPO – LSE 43 X oversubscribed Growth financed by rights issues Significant acquisitions to buy new technology (e.g. laser coders) Always profitable Half yearly reporting 1,500 shareholders Regular dividends Shareholder driven – business ratios and bottom line focus Founder realised £21 millions Willett Organic growth & bank borrowing No equity investments No public offerings New technology developed within – at controlled costs (e.g. laser coders) Always profitable No public reporting other than annual accounts No Dividends for first 10 years Growth and ambition driven Owners re-investment policy minimise reported bottom line and taxes Founder realised £60millions – cash.

56 Slide 55 Pilgrims Progress – A true story…

57 Slide 56 Pilgrims History Born Cambridge 1967 Educated London & Cambridge BSc Computer Engineering Early work - Cambridge & Oxford

58 Slide 57 Pilgrims History Then… To Silicon Valley Euphonix Inc – Palo Alto Atari Corporation – Sunnyvale Chromatic Research Inc – Sunnyvale

59 Slide 58 Pilgrims Experience Project Management Real Time Systems ASIC Design Systems Architecture Digital Multimedia User Interface Design Technical Leadership

60 Slide 59 Pilgrims Company in UK – activeRF Ltd Back to Cambridge in 1997 Passion to start own company Bitten by the Entrepreneurial bug! A One man band … or more correctly – One man & his dog

61 Slide 60 Tagging Crumpet

62 Slide 61 Tagging Crumpet Dog collars to security systems

63 Slide 62 The original concept (Jan 1999)

64 Slide 63 Early Chronology – Post Dog Collar! October 1998 – Incorporation October 1998 - February 1999 – One man & his dog Angels to the Rescue!

65 Slide 64 Commercial micro-location

66 Slide 65 Share class board Power Evolution at active RF – valuation implications Founder Angels Employees VCs CEO Ordinary Options Preferred Founder Angels Passive Shareholders

67 Slide 66 CEO The Company Factions in Conflicts of Interest – value and control diminish…. FounderAngels Chairman and Board VC Employees Ordinary Shareholders

68 Slide 67 activeRF Limited – slippery slope Dog collars to security systems The leap from Lab to Industry Cultural success Technical failure What happened to the revenues? Management evolution and the CEO Valuation from zero to £250K to £5.5m to £250K to zero.

69 Slide 68 VentureAdventurevs.

70 Slide 69 antenova Limited – how it started – Pilgrim again…. IP acquired and brought to Cambridge £120k Angels, Family & Friends

71 Slide 70 Case Study: Antenova – a funding fable Disruptive technology which could change the world – from University collaboration Outstanding management – technical and operations Inexperienced in fundraising Valuation obsession Where has all the money gone? Salvation, adequate funding and continued progress

72 Slide 71 Thinking Of Angels! – we keep referring to them !

73 Slide 72 Some Angel Groups Active in Cambridge Cambridge Angels - Serial Entrepreneurs, Cambridge locations Cambridge Capital Group – geographically more spread – Cambridge centric investors I.Q. Capital – was Great Eastern Investment Forum Glen House Capital Strategies Ltd Sophia Business Angels

74 Slide 73 Connections

75 Slide 74 Financing Tomorrows Businesses – Optimizing your value Technical Expertise Marketing Expertise Contacts Decision Making skills Presentation skills Dealmaking skills Money-raising skills Other Financial skills Possible exit routes and practical help with exit 7 What else you get from Business Angels….


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78 Slide 77 If at first you dont succeed….try again….but learn from the mistakes!

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80 Slide 79 Inspiration SHOWS – investors have emotions! Excellence can be achieved, if we: Care more than others think is wise, Risk more than others think is safe, Dream more than others think is practical, Expect more than others think is possible. Deborah Johnson-Ross

81 VALUATION is a major topic – serious study needed ! For more information……

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