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Class 9 Notes Valuation © Andrew W. Hannah.

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Presentation on theme: "Class 9 Notes Valuation © Andrew W. Hannah."— Presentation transcript:

1 Class 9 Notes Valuation © Andrew W. Hannah

2 Agenda Midterm Grades Homework due tonight Reflecting… Recommendations
Winning Angels - valuation ContentSoft recommendation Reflecting… Recommendations Valuation © Andrew W. Hannah

3 Reflecting… What investors do – raise, invest, harvest Angels vs. VC’s
History 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

4 Investment Recommendations
Goals 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

5 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

6 Valuation © Andrew W. Hannah

7 Why Are Companies Worth What They Are Worth?
ICGE, Ariba, Cisco © Andrew W. Hannah

8 The Fundamentals of a Stock Price
Share 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

9 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

10 Present Value Basics Future Value You have $1
I 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

11 Simple NPV What is the NPV? Discount Rate = 10% Time = three years
So…. Discount Rate = 10% Time = three years Future Value = 1.33 What is the NPV? © Andrew W. Hannah

12 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

13 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

14 NPV Formula – Cleaned Up
NPV = 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

15 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

16 In the End.. Are cash flow projections realistic Growth rates
Valuation is based on expectations: Are cash flow projections realistic Growth rates Risk of execution (discount rate) Sustainable position Ability to innovate © Andrew W. Hannah

17 Valuation Methods For Entrepreneurial Companies
Discounted 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

18 Valuation Methods By Stage
Use 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

19 What Makes a Difference?
The team’s experience Stage of development Customers Protectable IP Economic conditions Size of the opportunity Other © Andrew W. Hannah

20 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

21 Pre- and Post-Money Valuation
Pre-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

22 Next Week Contracts and Control Diligence Card “B” – comparables
WA: 179 – 222 (this is different than the syllabus) © Andrew W. Hannah

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