30186

30186 Venture and development capital
Lecture 12
Claudio Zara
Reference: SS&B chapter 9

(par. 9.1, 9.3 & 9.5)
The Theoretical Framework of New Venture

Valuation
Section goal: introducing the theoretical

framework to value a new enterprise.
2
Claudio Zara - claudio.zara@unibocconi.it
Agenda
1. The many uses of valuation

2. Valuation methods
3. Issues for the Empirical Method
4. Cross connections
3
1.
The many uses of valuation
4
How do VCs and other outside investors select the projects

in which they invest? And how do they settle on the
ownership stakes, terms and conditions they require in
exchange for investing?
A valuation process is a combination amongst:
the assessment of both ability and capability of the

entrepreneur/managerial team
the merit of the concept (the business model)
the economics of the project and its expected value
The process is given by 1/3 theory and 2/3 magic!

5

Hungry House video analysis
In HH video we watched a rough valuation process

Revenues business model: customer base, customer
leverage (how many times a customer sends orders), order
value (indirect turnover) and commission value (direct
turnover) (1)
Forecasted figures:
Competitors
analysis (2) (3)
Economics
( .000)
FY1
FY2
FY3
Turnover
440
2000
3200
Expenses
400
1000
1200
Profit
40
1000
2000
6

The deal structure:

Entrepreneurs starting offer: 100k for 11% equity (implicit
PostMV = 909.091)
First offer: 50k for 25% equity (implicit PostMV = 200k)
Second offer:
Milestone: revenues
Reaching FY1 goal: dropping to 20%
Reaching FY2 goal: dropping to 15%
Target PostMV @ FY2 around 330k (1/3 of entrepreneurs

starting offer)
7

The forecasted IRR for Angel investors (success scenario):

Financial figures are in
Capital invested @ time 0
Equity stake
HP - Holding Period (years)
Expected EBITDA @ time HP
Exit multiple on EBITDA (.x)
Net Debt
Forecasted IRR
Forecasted Cash Multiplier
100.000,00
30%
3,00
2.000.000,00
6,00
0,00
230,19%
36
IRR = 3
2000000 6 30%
1
100000
Cash( x) =
(1)
2000000 6 30%
100000
8

The investment flow
A
F
9
Chapter 14
Three most important uses for VC activity:

Valuing the share price (at both investment and way out)
Measuring the expected return for the investment in
terms of both IRR and cash multiplier (x)
Fixing value goals for the management/entrepreneur of
the venture
Other possible applications:
Strategic Planning
Partnership formation and dissolution
Initial public offering (IPO)
Stock options and Employee stock ownership plans (ESOPs)
Mezzanine financing/Venture debt
Negotiating a merger or sale of a venture
10
2.
Valuation methods
11
Value = Present worth of the right to receive (risky) future

cash flows:
it depends on time holding period
and on risk underlining the future cash flow
What is a value and what is a price
Valuation methods:
Analytical methods: they rely on a complex process based on

business/project fundamental data to assess a companys fair
value
Empirical (Relative Value) methods: they rely on an observation
of prices of comparable assets inside the financial markets
12
Analytical methods:
DCF method
Empirical methods:
Comparable companies (refer to stock prices)
Comparable transactions (refer to private market prices)
Cross connections:
DCF applies comparables for benchmarking, capital
markets data and beta comparables
Comparables apply fundamental data for EV = E + NFP and
to compute value (i.e. EBITDA x)
Hybrid methods: (1)
Venture Capital (a single scenario) method
First Chicago (several scenarios) method
13
3.
Issues for the Empirical Method
14
We can consider different multipliers on different levels:

Equity level and Enterprise (business) level
Referring to capital market (public companies) and market of
transactions (private companies)
Accounting based and non Accounting (so called
industry/business drivers) based
With a focus on accounting measures, the most popular multipliers

are:
Equity level: P/E, P/BV, P/FCFE
Enterprise level: EV/EBITDA, EV/S, EV/UCF
P=Price; E=Earning; BV=Book Value; FCFE=Free Cash Flow to Equity; EV=Enterprise Value;
S=Sales; UCF=Unlevered Cash Flow
15
How to estimate a multiplier:

a) consider a suitable comparable with a disclosed price (P1) and a
a fundamental measure such as sales, EBITDA, operational
income (X1)
b) the multiplier is equal to P1 / X1
c) we assume the target company has the same ratio: P1/X1 =
P2/X2
d) the expected EV for the target company is given by: P2 = X2
(P1/X1)
An example:
1) EV/EBITDA multiplier = 6x (last actual/trailing 12 months)
2) EBITDA target company = 1.5 ml (last actual/trailing 12
months)
3) EV target company = 6x * 1.5 ml = 9.0 ml
16
Connection amongst:
multiplier typologies
company stage in its life cycle
for a TBF multiplies are often useful to forecast its value @ the exit
stage/liquidity event
For this reason multipliers are also used to assess the

continuing/terminal value (CV/TV) in the DCF valuation
(corresponding to the implicit forecast period)
17
4.
Cross connections
18
4. Cross connections
A CEF invested 10 ml in a new tech based company against 75.05% of shares. The investment
maturity is expected equal to 4 years. DCF valuation showed a fair value of 20.5 ml,
corresponding to an EBITDA multiplier 6x, based on the last actual EBITDA figure. The
expected EBITDA at time 4 is 4.36 ml. The price at the liquidity event is expected corresponding
to 7x on EBITDA. The company didnt have any debt and it does not distribute any dividend.
The PMV at time 0 (investment stage): 10.000.000/75.05%=15.989.340
The assessed upside: 20.5 ml (DCF) 16 ml (Price) = 4.5 ml
The equity stake expected price @ liquidity event = 4.36*7*75.05%=22.905 ml
The expected gross IRR: ((22.905/10)^(1/4))-1=23,02%
19

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30186 Venture and development capital

Reference: SS&B chapter 9

The Theoretical Framework of New Venture

Section goal: introducing the theoretical

1. The many uses of valuation

The many uses of valuation

1. The many uses of valuation

How do VCs and other outside investors select the projects

A valuation process is a combination amongst:

the assessment of both ability and capability of the

The process is given by 1/3 theory and 2/3 magic!

1. The many uses of valuation

In HH video we watched a rough valuation process

1. The many uses of valuation

The deal structure:

Target PostMV @ FY2 around 330k (1/3 of entrepreneurs

1. The many uses of valuation

The forecasted IRR for Angel investors (success scenario):

1. The many uses of valuation

1. The many uses of valuation

Three most important uses for VC activity:

Other possible applications:

Value = Present worth of the right to receive (risky) future

What is a value and what is a price

Analytical methods: they rely on a complex process based on

Issues for the Empirical Method

3. Issues for the Empirical Method

We can consider different multipliers on different levels:

With a focus on accounting measures, the most popular multipliers

3. Issues for the Empirical Method

How to estimate a multiplier:

3. Issues for the Empirical Method

For this reason multipliers are also used to assess the

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