How to valuate your company, with Capricorn Venture Partners (Finance for Startups- part 2)

Capricorn Venture Partners How to value your company?

Finance for Start-Ups May 28, 2013

CAPRICORN VENTURE PARTNERS

In short

2 All rights reserved

Partners-owned

20 people organisation, 20 years existence

Licensed asset manager – AIFMD compliant

Over € 250 million under management

Capricorn Venture Partners


ICT

€ 15 million

CLEANTECH

€ 112 million

Quest for Growth

€ 106.8 million** December 31, 2012

Quest Cleantech Fund

€ 11.0 million** December 31 , 2012

HEALTHTECH

€ 42 million

Head office, Leuven, Belgium

DISCLAIMER

The views expressed in this presentation do not necessarily reflect the views of the Capricorn Venture Partners or its investment managers.


HOW TO VALUE YOUR COMPANY?



Venture capital reality

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Most capital get raised to address specific operational needs before

significant value has been created. In those instances the strategic

interest of new and existing investors to obtain or maintain a certain

percentage interest in the company prevails over the valuation models.

In most cases traditional valuation models become only relevant at

exit.

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Conventional Valuation Techniques

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• Discounted cash flow

• Price / earnings ratio

• Price / EBITDA ratio

• Price / sales ratio

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Issue

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Cash flow, earnings, EBITDA, sales, … ?????

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Alternative Valuation Techniques

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• Peer comparison

• Technology value

• Pre-money versus post-money

• 1/3 sweat - 1/3 IP – 1/3 €’s

• Your value is 1 to 2 times the money you can raise

• The price a fool is prepared to pay

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Who is afraid of dilution?


What do you prefer?

Pre-money versus post-money

• Always differentiate between pre-money and post-money

• pre-money = value of the company before the transaction

• post-money = value of the company after the transaction

• post-money = pre-money + capital increase

• post-money = invested amount / percentage in the company

• post-money = total number of shares after the transaction x price per share

• Always differentiate between actual and fully diluted shareholding

• fully diluted = including all shares resulting from conversion, stock options, warrants, or any other rights related to securities of the company

• Use price per share and total number of shares fully diluted as the

legally binding values

• Keep it simple


A simple cap table example

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price per share investment shares seed series A series B series C series C + SOP

€ € #

founders 100.000 1.000.000 80% 44% 28% 22% 20%

seed investor 1 250.000 250.000 20% 11% 7% 5% 5%

Series A investors 2 2.000.000 1.000.000 44% 28% 22% 20%

Series B investors 3 4.000.000 1.333.333 37% 29% 26%

Series C investors 4 4.000.000 1.000.000 22% 20%

stock option plan 509.259 10%

pre money 1.000.000 2.500.000 6.750.000 14.333.333

post money 1.250.000 4.500.000 10.750.000 18.333.333 20.370.370

total 10.350.000 5.092.593

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A simple cap table example - exit

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price per share investment shares series C + SOP exit multiple

€ € # €

founders 100.000 1.000.000 20% 15.709.091 157

seed investor 1 250.000 250.000 5% 3.927.273 15,7

Series A investors 2 2.000.000 1.000.000 20% 15.709.091 7,9

Series B investors 3 4.000.000 1.333.333 26% 20.945.455 5,2

Series C investors 4 4.000.000 1.000.000 20% 15.709.091 3,9

stock option plan 509.259 10% 8.000.000

pre money

post money 20.370.370 80.000.000

total 10.350.000 5.092.593 7,7

exit value 80.000.000

stock-options 10%

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DEMONSTRATE NON-FINANCIAL VALUE CREATION



Measuring non-financial value

• Separate KPIs/VIPs for the current year and towards exit

• 2013 points should reflect management KPI’s and our priorities

• By preference “measurable” or “achieved yes/no” points

• Not every cell needs to be filled

• Colour coded

• Blue : status at start of year/neutral/work in progress

• Green : realised

• Orange : critical but solution identified

• Red : critical no solution identified

• Italic : changed versus previous quarter



THE PITFALLS FOR START-UPS



5 reasons why you will fail

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1. Don’t underestimate the time to market

4. It is not easy to convince a million consumers

5. In love and in business you have to let go sometimes

3. Big data is not a free for all

2. Beware of “It’s kind of a …”

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2 reasons why you will be succesful


Team IP strategy

Team

• Get business & entrepreneurial experience in the team

• Do not force researchers in a CEO role

• Build multidisciplinary teams (not all engineers!)

• International exposure and language skills

• Humans are not scalable

• Hiring new key persons that you have to pay more as the founders?

• No function in a start-up company is forever

• Keep you friends as friends

• Foresee “good leaver – bad leaver” conditions in shareholders

agreement and stock option plans


IP strategy

• Define and challenge your IP strategy!

• Protection or freedom to operate?

• Does a patent has value without the associated business?

• Is a licence model a valid business model?

• Are you prepared for a patent due diligence by a US law firm in view

of a $ xxx million acquisition?

• Any change of control clauses in your contracts with customers,

suppliers, license agreements


IP strategy is more than patents

• Trademarks

• Website

• Trade Secrets

• Contractual IP

• Employment and assignment of invention agreements

• Consultancy contracts

• Contracts with suppliers and customers

• License agreements

• Your network


Importance of patents

• Patents are important in any phase of a VC investment !

• As an information source for deal selection

• Before making an investmento Strong and clean IP

o Full ownership of patent(s) by the company remains the preferred model!

o Exclusive license with transfer rights and right/obligation to defend source IP?

o FTO - Freedom to operate is key

• During the investment period

• At exit (most likely via M&A transaction)


THE PITCH



Pitching is a lot like dating

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1. Don’t order the most expensive thing on the menu

4. Have realistic expectations

5. Learn how to deal with disappointments

3. Be aware that you will be stuck with eachother for a while

2. Be yourself

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For further inquiries

Contact:

Tom Vanhoutte ([email protected])


Lei 19/1, B-3000 Leuven, Belgium

Tel +32 16 284100 Fax +32 16 284108

http://www.capricorn.be


How to valuate your company, with Capricorn Venture Partners (Finance for Startups- part 2)

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