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Class 9 Notes Valuation © Andrew W. Hannah
Agenda Midterm Grades Homework due tonight Reflecting… RecommendationsWinning Angels - valuation ContentSoft recommendation Reflecting… Recommendations Valuation © Andrew W. Hannah
Reflecting… What investors do – raise, invest, harvest Angels vs. VC’sHistory and trends Fund economics Investment models Deal sourcing and screening (filters) Deal evaluation (the entrepreneur and the pitch) Due diligence Deal Structure Valuation Contracts and terms © Andrew W. Hannah
Investment RecommendationsGoals Present a clear picture of the company, product and opportunity Present the diligence results in a manner that supports the recommendation Basis for the recommendation Markets – size, growth rate, key features Competition – direct and indirect, key features, strength and weaknesses Comparables – business model, financials, valuation Valuation – how much? Exit and when? © William Hulley and Andrew W. Hannah
Investment Recommendations (Cont.)What is included in the company’s plan? The Overview – a presentation of the company’s plan Market Customer Product Management Competition Competitive Advantages Financial Overview The Diligence Comparables Valuation Recommendation – yes or no and why The diligence memos (as appendices) ContentSoft Example © William Hulley
Valuation © Andrew W. Hannah
Why Are Companies Worth What They Are Worth?ICGE, Ariba, Cisco © Andrew W. Hannah
The Fundamentals of a Stock PriceShare Price= Company Valuation / # of shares Company Valuation = Share Price * # of shares Share price is what we follow but what is really fluctuating is valuation © Andrew W. Hannah
So What Is Valuation Anyway?Theory versus practice Theory : Discounted Cash Flows Discounted = Net Present Value Cash Flows = Expected cash inflows less expected cash outflows Inflows = Cash from customers Outflows = Costs to run the company © Andrew W. Hannah
Present Value Basics Future Value You have $1I guarantee you 10% interest for three years (or inflation is at 10%) Your value: Year 1: $1.10 Year 2: $1.21 Year 3: $1.33 You are indifferent! $1.33 in three years $1.00 today © Andrew W. Hannah
Simple NPV What is the NPV? Discount Rate = 10% Time = three yearsSo…. Discount Rate = 10% Time = three years Future Value = 1.33 What is the NPV? © Andrew W. Hannah
Back to Valuation… Valuation (NPV) = Discount Cash Flows over some period of time Discount Rate = 100% (cost of capital) Year FCF $10 $20 $30 PV Fctr PV $10 $10 $7 NPV $ vs. $27 © Andrew W. Hannah
The Real Calculation + DCF year ‘n’ / (cost of capital – growth rate)NPV = Discounted Cash Flows (DCF) + DCF year ‘n’ / (cost of capital – growth rate) Terminal Value = the new part Discount rate = cost of capital Rate you could borrow/obtain money at to grow your business Lower the risk the lower the cost of capital Low risk = Bank debt (8% or Prime + x%) Higher Risk = Public Offering (20%) Highest Risk = Venture capital (50%? 75%? Higher) Growth rate = expected annual increase in cash flows © Andrew W. Hannah
NPV Formula – Cleaned UpNPV = Future Value/ (1 + d) ^t Future Value = cash flow d = discount rate Reflects cost of capital Risk free rate + risk factor t = time (“years”) Terminal Value: cash flows in perpetuity = [FCF (year n)/ (d – g)]/ (1 + d) ^ n g = growth rate of FCF in perpetuity © Andrew W. Hannah
Valuation Example Discount Rate = 10% Growth Rate = 4%Year TV FCF $10 $20 $ $30 PV Fctr PV $10 $ $ $413.22 NPV $466.19 TV= [$30/(10% - 4%)]/ 1.21 = $413.22 (Revisit ICGE and CSCO) © Andrew W. Hannah
In the End.. Are cash flow projections realistic Growth ratesValuation is based on expectations: Are cash flow projections realistic Growth rates Risk of execution (discount rate) Sustainable position Ability to innovate © Andrew W. Hannah
Valuation Methods For Entrepreneurial CompaniesDiscounted cash flow? Multiples of public companies and sale of private companies: Sales Earnings (current/future) Customers? Negotiation Remember: discount rates = risk and required rate of return = cost of capital © Andrew W. Hannah
Valuation Methods By StageUse of Proceeds Pre-Money Determinant Key MV Drivers “Plan in Hand” Proto-type Research Formulaic ($2 - $6 M) Founder Experience Post-Seed (“A”) Proof of concept Negotiation ($8 - $15) Tangibles/ Intangibles Early Growth (“B”) Mgmt Team Customers Negotiation ($15 - $30M) High Growth (“C”, “D”) Expansion Acquisition? Comp Driven ($45 - $55M) Public/Private Transactions © Andrew W. Hannah
What Makes a Difference?The team’s experience Stage of development Customers Protectable IP Economic conditions Size of the opportunity Other © Andrew W. Hannah
Valuation Strategy Entrepreneurs must triangulate (dcf and public & private multiples) VC’s: Discount projections Look for 55% discount factor Look hard at public and private multiples Entrepreneurs best strategy: create an auction © Andrew W. Hannah
Pre- and Post-Money ValuationPre-money valuation = value of the company before the investment round Post-money valuation = value of the company after the investment round Example You own 50% of a company Pre-money valuation = $10 million You are raising $5 million What is the post-money valuation? What is your new ownership percentage? © Andrew W. Hannah
Next Week Contracts and Control Diligence Card “B” – comparablesWA: 179 – 222 (this is different than the syllabus) © Andrew W. Hannah
Raising Entrepreneurial Capital Chapter 3: Options in Venture Financing– Early Stage Equity Capital.
What gets our attention?-- First meeting and beyond PRESENTATION:
Entrepreneurial Finance Venture Planning Chapter 13 Dowling Fall 2005.
MG 298 Entrepreneurship Shivram V. MG 298 Entrepreneurship September 2 Shivram Venkatasubramaniam.
Stocks and Their Valuation
Stocks and Their Valuation Chapter 10 Features of Common Stock Determining Common Stock Values Preferred Stock 10-1.
Venture Finance Fall 2002 Slide 1 Wrapping Up Section 1 Sourcing Investment Models Screening © Andrew W. Hannah.
Venture Capital and Private Equity Session 3 Professor Sandeep Dahiya Georgetown University.
Venture Finance Fall 2002 Slide 1 Class 7 Notes Due Diligence Part 1 © Andrew W. Hannah.
Venture Finance Fall 2002 Slide 1 Class 10 Notes Deal Structure: Ownership and Control © Andrew W. Hannah.
8-1 CHAPTER 8 Stocks and Their Valuation Features of common stock Determining common stock values Efficient markets Preferred stock.
The McGraw-Hill Companies, Inc., 2000
Lecture 7 The Value of Common Stocks Managerial Finance FINA 6335 Ronald F. Singer.
1 Funding Plan & Management Plan Business Plan Preparation Funding Plan & Management Plan Frank Moyes Leeds School of Business University of Colorado.
Venture Finance Fall 2002 Slide 1 Investment Models and Deal Filters Venture and Angel Panel The Venture Capitalist Case © Andrew W. Hannah.
CHRIS DELL’AMORE COLGATE FINANCE CLUB 2/12/11 Introduction to Discounted Cash Flow Analysis.
The Value of Common Stocks Chapter 4. Topics Covered How Common Stocks are Traded How To Value Common Stock Capitalization Rates Stock Prices.
Venture Capital Investing Fall 2002 Slide 1 Venture Capital Investing Overview of the Course And Overview of Private Equity © Andrew W. Hannah.
Venture Finance Fall 2002 Slide 1 Class 6 – Class Project PolyTronics and Project Overview © Andrew W. Hannah.
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