Presentation by Dr. Andreas O. Tobler October 19, 2010 Tento projekt je spolufinancován Evropským sociálním fondem a státním rozpočtem České republiky

Determining the value of a growing company is a critical step. It will come into play when raising capital from investors, selling assets, granting stock options to employees or buying out a partner.

Value your company too low, and you can give too much of it away. Value your company too high, and you may turn investors away when you're raising future rounds of capital

The process of determining a company's value is part art and part science The science is in the mathematics: looking at cash flows, revenues and assets and crunching the numbers. The art is in knowing how to apply those numbers appropriately and credibly

Cash flow, revenues & assets? ➤ Usually none of the three are existent or only barely existent in a start-up ➤ No cash flow, no revenues and no assets – nothing to crunch Is it all art and no science?

Entrepreneurs need to put a justifiable value on their startups in order to raise money, and… Investors need to put a justifiable value on their investments to generate liquidity

The value of your company is what the market says?! You might think it's worth more. You might even know it's worth more But if you are unable to raise money above the valuation an investor is prepared to pay, then you will have to accept this “market valuation”

Caveat! If you raise money from friends & family rather than professional investors, it often happens that your company has been overvalued or undervalued (more likely, overvalued)… the price established with friends & family does not necessarily give you a “market price” – even if your business grows and prospers

On the other hand… by definition, startups don't have a history of financial performance on which to base a valuation. Therefore, it's up to you to develop a process for valuing the company …but based on what?

Comparables Find out how much similar companies in your industry and geography are worth …not as easy as it seems in your industry! Network with other biotech companies that have received funding, talk to “insiders” e.g. contacts at investment banks, lawyers, accountants etc.

Comparables First, try to find a “ballpark” number, i.e. determine how much comparable companies are valued at when they reach profitability

Comparables Select companies with similar value characteristics such as risks, growth rate, capital structure and the size and timing of cash flow. Easiest in public companies; see for example: knowledge- bank/surveys/article/nz10900.htmlhttp:// knowledge- bank/surveys/article/nz10900.html

Financial forecasts Although it is exceptionally difficult to forecast revenue at a biotech startup, you'll need to do this to determine value - and eventually to defend your valuation If your business is not profitable, it is not worth anything!

Financial forecasts A biotech businesses typically takes time to become profitable… the trick of valuing startups is to focus on the future

Financial forecasts There are various different financial approaches to estimating the value of a start- up One of the most common approaches is estimating future free cash flow and calculating the net present value via the Discounted Cash Flow [DCF] method

Financial forecasts Biotech startups are often valued as a collection of one or more experimental drugs, each drug representing a potential market opportunity Using DCF analysis of all the promising drugs in the portfolio, one can determine the value of a company.

Financial forecasts Start-up biotech companies often have several drugs in their developmental pipeline. In general, only those drugs in phase I, II, or III are included for valuation. A drug candidate that is in the discovery or non-clinical stage is not a good bet, with less than a 1% chance of reaching the market. Therefore drugs in the non-clinical stage are often assigned zero value by professional investors!

Financial forecasts Venture Capital Method is a method often applied in the private equity industry. It accounts for the fact that start-ups have typically negative cash flow and earnings in the early stages and highly uncertain but potentially substantial future rewards.

Financial forecasts The Venture Capital Method takes this profile into consideration by talking a multiple based on future positive cash flow and earnings. This value is then discounted, again to the present value at a high discount rate (40% to 75%)

Other Considerations ➤ Quality of management team ➤ Current state of technology ➤ Current state of companies in similar market ➤ Current market conditions ➤ Size of the market and company’s potential to acquire market share ➤ Track record of entrepreneur; repeat entrepreneurs get better valuation ➤ Distribution of bargaining power between VC and entrepreneur

Much like an artist, you need to use creativity in valuing your biotech startup businesses