An eValuation Model An eValuation Model Presentation to Investors-R-Us Board of Directors Presentation by: 2B (or not 2B) Consulting Neil Gall Marek Ryfko Richard Schwartz Mayank Sharma Jawad Tareen March 18, 2000

2 Problem Statement Develop a set of criteria and application and assessment guidelines for use in evaluating the investment and financial potential of e-business plans.

3 Agenda Uniqueness of E-Commerce Traditional Valuation Methods New Model Rationalization Case Study Implementation Conclusion

4 The Changing Face of Business Physical Product Digital Product Physical Agent Digital Agent Digital Process Physical Process Traditional Commerce E-Business Adapted from Electronic Commerce: A Managerial Perspective by Efraim Truban et. al. 1999

5 How E-Commerce is Different Pace of Change is Faster than Legislation and Regulation Traditional Valuation Models do not Fully Capture the Value of E-Business Companies Continuous Evolution in Terms of Customer Value Generally Require Large Investment in Marketing as Opposed to Capital Expenditures

6 E-Business Models E-TailingAuction (C2C)CommunityProfessional ServicesPortalExchange (B2C and B2B)Search Engine

7 Traditional Firms Main Assets are Facilities & Equipment Debt Raised for Firms Operations and Asset Acquisition Funding from Investment Banks Lending Based on Cash Flows of the Firm E-Business Main Assets are Customers Huge Marketing Expense Debt Largely Unavailable - Investors want Equity Funding from Venture Capital Firms Cash Flow not Used for Firm Valuation Dot Coms that issue Debt are rated by Moodys as JUNK (e.g. Amazon, E*Trade) Traditional vs. E-Business Firm Valuation Considerations

8 Traditional Valuation Methods MethodProblems Payback Arrival of Earnings Ascertaining FC & VC P/E or P/S Es are initially negative Sales does not mean returns Op. Cash Flows are negative Evaluation of Risk Disc. Cash Flows

9 Traditional Valuation Methods Operating Profit ??? Capital intensity meaningless MethodProblems EVA Real Options Complexity of use No time value of option Market Cap inflated Customers are ill-defined Market Cap / customers Requirement of a New E-Business Framework

10 What Should the New Model Look Like? Tangibles Intangibles eValuation

11 The eValuation Model + Gross Revenue # of Customers Earnings # of Customers Risk Free Rate + WACC + Market Return x [ # of Customers x (1 + Growth) ] x [ Intangibles ] Value =

12 The eValuation Model Revenue Streams Content Access e-Commerce Advertising Affiliate Programs Customer Types Subscribers Buyers Visitors

13 The eValuation Model Costs Customer Acquisition Updating Content Logistics in sales process Marketing & Promotion Overhead Earnings Reflects the payback time Earnings reduce the risk profile Returns get factored in the model

14 The eValuation Model Discount Factor Factors in risk free rate & cost of capital Risk premium assigns the riskiness of the venture Earnings are co-related to a reduced risk premium # of Customers & Growth Rates Establishes the importance of the customer Growth rate incorporates penetration rate

15 Customers = Assets VALUE PROPOSITION COMPETITIVE SUSTAINABLE ADVANTAGE CUSTOMERS What do customers really value? How original is the idea? What needs are going to be met? What is the management skills set ? What are the back-end processes? What are the technological resources?

16 Value Proposition

17 Competitive Sustainable Advantage Management & HR Tax & Legal Processes Technology Alliances COMPETITIVE SUSTAINABLE ADVANTAGE Quality of Management Organizational Structure Compensation Training Employee Attraction/Retention Electronic Signature Jurisdiction Trademark Registration Payment Taxation Fulfillment Operations Virtual Communities Site Design Data Warehousing Database Management Scalability of Infrastructure Security Outsourcing Suppliers Partners Affiliates

18 Intangibles Score Card

19 The eValuation Model Captures the Complete Value Tangibles Intangibles eValuation

20 Mitigating the Risks Customization (Overlapping Businesses - e.g. AOL) Growth is Constant and based on Current Economic Situation (No Seasonality or Recession Market) Subjective Attribution of Weights to Intangibles by Venture Evaluators Hurdle eValuation Figure needs to be established based on appropriate eBusiness model

21 Model Customization E-Auction Houses (e.g. eBay) # of Customers & Growth easier to establish Customer Interface more critical in Intangible evaluation E-Brokerage (e.g. E*Trade) Revenue / Customer easily measurable Technological Infrastructure weighted more heavily

22 Customization of Intangibles Tax & Legal Alliances Technology Marketing Management & HR Products/ Services Strategy Processes CRM

23 Case Study vs.

24 Comparing Models eValuation Current Valuation

25 Analysis of Intangibles eV Index =.67 eV Index =.86

26 eValuation Analysis $135.5 Million 30 Million Visitors - $52 Million 30 Million Visitors % x [ 30 Million Visitors x ( ) ]x [0.67] = $ Million = $ 1,468.2 Million

27 Current vs. eValuation Model Relative Relationship Market Capitalization: eValuation: = $ Million = $ 1,468.2 Million = $ 83.2 Billion = $ Billion Y!:L Ratio: 10.85:1 Y!:L Ratio: 11.90:1

28 Case Study Wrap-Up eValuation model considers both Tangibles as well as Intangibles eValuation Model is to start-ups what Market Capitalization is to established E-Businesses Offers Go or No Go Criteria based on investor specific business model Hurdle Rate

29 Implementation Plan Phase 1 Framework questions specification Training Industry templates specification Web publication preparation Feedback Maintenance& Support Training Phase 2 Phase 3 Phase 4 Web publication Traffic generation

30 Implementing the eValuation Model SpeedCost Acceptance

31 What About Larbi? Client Develops Business Plan Client Researches Funding Alternatives Online Client Completes Online Profile Contact is Initiated with Investors-R-Us Face-to-Face Interview eValuation Performed Funding Decision

32 Conclusion + Gross Revenue # of Customers Earnings # of Customers Risk Free Rate + WACC + Market Return x [ # of Customers x (1 + Growth) ] x [ Intangibles ] Value =