Startup Valuation - Roig & Vicén - vDraft2

MasterThesis

StartupValuation

Authors:

AleixRoig,GrandeÉcole–MajorinFinance

CarlosVicén,GrandeÉcole–MajorinFinance

Underthesupervisionof:

Prof.PatrickLegland,AffiliateProfessor–FinanceDepartment

May2020

2

3

Acknowledgements

Thisresearchpaperwouldnothavebeenpossiblewithout thehelpofmany

people that collaborated directly or indirectly on its realization. Hence, through

theselines,wewouldliketoexpressourgratitudetothem,lettingthemknowhow

importanthavebeentousnotonlyduringthethesisrealizationprocess,butalso

throughoutallourmaster’sexperience.

First,wewouldliketothankourthesissupervisorMr.PatrickLeglandforhis

invaluablecontributioninthisthesis,givingusimportantanddetailedguidelines,

orientation,andmaterial,andhelpingustremendouslyduringtherealizationofthis

researchpaper.

Wewouldalso liketothankouruniquefriendsandcolleaguesfromHECfor

alwaysgivingustheirviewonourthesisdiscussionsandshowingustheirbestboth

professionallyand,moreespecially,personally.

Finally,wewanttothankourfamiliesforgivingustheopportunitytobepart

ofHECParis,anexperiencethatgoeswellbeyondtheacademicaspect,becoming

oneofthegreatestmilestonesinourprofessionalandpersonallives.

4

TableofContents

LISTOFFIGURES...................................................................................................................7

1. INTRODUCTION............................................................................................................9

2. STARTUPS.....................................................................................................................10

2.1. DEFINITION.............................................................................................................................10

2.2. ECOSYSTEM.............................................................................................................................11

2.3. MATURITYSTAGES...............................................................................................................15

2.3.1. Pre-SeedStage...................................................................................................................15

2.3.2. SeedStage............................................................................................................................16

2.3.3. EarlyStage..........................................................................................................................16

2.3.4. GrowthStage......................................................................................................................17

2.3.5. ExpansionStage................................................................................................................17

2.3.6. ExitStage.............................................................................................................................17

2.4. FINANCING..............................................................................................................................18

2.4.1. Equity.....................................................................................................................................18

2.4.1.1. Pre-Seed..................................................................................................................18

2.4.1.2. SeedRound.............................................................................................................19

2.4.1.3. SeriesA....................................................................................................................19

2.4.1.4. SeriesB....................................................................................................................19

2.4.1.5. SeriesCandMore................................................................................................20

2.4.2. Debt.........................................................................................................................................20

2.4.2.1. VentureDebt.........................................................................................................21

2.4.2.2. WorkingCapitalLineofCredit......................................................................21

3. STARTUPVALUATION..............................................................................................22

3.1. TRADITIONALVALUATIONMETHODS..............................................................................24

3.1.1. DiscountedCashFlow.....................................................................................................24

3.1.2. ComparableCompanies.................................................................................................31

3.1.3. PrecedentTransactions.................................................................................................32

3.1.4. RealOptions........................................................................................................................33

3.1.5. BookValue...........................................................................................................................38

5

3.1.6. LiquidationValuation.....................................................................................................39

3.2. NON-TRADITIONALVALUATIONMETHODS....................................................................40

3.2.1. VentureCapital..................................................................................................................40

3.2.2. Berkus....................................................................................................................................42

3.2.3. Scorecard.............................................................................................................................44

3.2.4. FirstChicago.......................................................................................................................46

3.2.5. RiskFactorSummation..................................................................................................49

3.2.6. Cost-to-Duplicate..............................................................................................................50

4. CASESTUDY:HELLOFRESH....................................................................................51

4.1. MAINGOALSOFTHECASESTUDY.......................................................................................51

4.2. COMPANYINTRODUCTION...................................................................................................51

4.2.1. Generalinformation........................................................................................................51

4.2.2. BusinessActivities............................................................................................................53

4.2.3. Company’sFactsandFigures......................................................................................55

4.2.4. Companyrisks....................................................................................................................59

4.3. INDUSTRYOVERVIEW...........................................................................................................60

4.3.1. Industry’sFactsandFigures........................................................................................60

4.3.2. CompetitiveLandscape..................................................................................................62

4.3.2.1. Meal-kitproviders...............................................................................................63

4.3.2.2. SupermarketChains...........................................................................................63

4.4. COMPANYVALUATION.........................................................................................................64

4.4.1. DiscountedCashFlows...................................................................................................65

4.4.2. ComparableCompanies.................................................................................................70

4.4.3. RealOptions........................................................................................................................74

4.4.4. BookValue...........................................................................................................................76

4.4.5. VentureCapital..................................................................................................................77

4.4.6. FirstChicago.......................................................................................................................78

4.4.7. RiskFactorSummation..................................................................................................79

4.4.8. ValuationFootballField................................................................................................81

5. CONCLUSIONS..............................................................................................................85

APPENDIX..............................................................................................................................87

6

1. HELLOFRESHINCOMESTATEMENT........................................................................................87

1.1. WeightedAverageHelloFreshIncomeStatement.............................................87

1.2. JPMorganHelloFreshIncomeStatement–OptimisticScenario................87

1.3. MorganStanleyHelloFreshIncomeStatement–NeutralScenario...........88

1.4. BarclaysHelloFreshIncomeStatement–PessimisticScenario...................88

2. HELLOFRESHBALANCESHEET...............................................................................................89

2.1. WeightedAverageHelloFreshBalanceSheet......................................................89

2.2. JPMorganHelloFreshBalanceSheet–OptimisticScenario.........................89

2.3. MorganStanleyHelloFreshBalanceSheet–NeutralScenario...................90

2.4. BarclaysHelloFreshBalanceSheet–PessimisticScenario............................90

3. HELLOFRESHCASHFLOWSTATEMENT................................................................................91

3.1. WeightedAverageHelloFreshCashFlowStatement........................................91

3.2. JPMorganHelloFreshCashFlowStatement–OptimisticScenario...........91

3.3. MorganStanleyHelloFreshCashFlowStatement–NeutralScenario.....92

3.4. BarclaysHelloFreshCashFlowStatement–PessimisticScenario.............92

BIBLIOGRAPHY....................................................................................................................93

7

ListofFigures

FIGURE1:VOLUMEANDNUMBEROFSTARTUPEXITSWORLDWIDE(2011-2018).......................12

FIGURE2:WORLDWIDEDISTRIBUTIONOFSTARTUPSBYINDUSTRY(2017)..................................13

FIGURE3:STARTUPMATURITYSTAGES.................................................................................................15

FIGURE4:TYPEOFVALUATIONMETHODSUSUALLYUSEDREGARDINGSTARTUPMATURITYSTAGE..23

FIGURE5:STARTUPVALUATIONMETHODSCOMPARISON.......................................................................23

FIGURE6:BETAADJUSTMENTSCHEMEFORTECHSTARTUPS.............................................................29

FIGURE7:REALOPTIONSDECISIONTREEEXAMPLE...............................................................................34

FIGURE8:BINOMIALREPRESENTATIONFORBONDS,STOCKSANDCALLOPTIONS...............................35

FIGURE9:SCORECARDCOMPARISONFACTORSANDRESPECTIVERANGE..............................................45

FIGURE10:SAHLMAN,SCHERLISFIRSTCHICAGOMETHODSCENARIOPROBABILITIES......................48

FIGURE11:HELLOFRESHLOCATIONS......................................................................................................52

FIGURE12:HELLOFRESHPRODUCT.........................................................................................................54

FIGURE13:HELLOFRESHREVENUEEVOLUTION(2014-2021)..........................................................55

FIGURE14:HELLOFRESHMARGINSEVOLUTION(2014-2021)..........................................................56

FIGURE15:HELLOFRESHCOSTSBREAKDOWN(2017).........................................................................57

FIGURE16:HELLOFRESHCOSTSASAPERCENTAGEOFSALESEVOLUTION(2015-2021)................57

FIGURE17:HELLOFRESHECONOMICBALANCESHEET(2015-2021)..............................................58

FIGURE18:HELLOFRESHCAPITALRAISING(2012-2016)..................................................................58

FIGURE19:HELLOFRESHPRE-IPONON-DILUTEDSHAREHOLDERSTRUCTURE(2017)...................59

FIGURE20:FOODANDMEAL-KITINDUSTRYVOLUMES[2016AND2021]........................................61

FIGURE21:HELLOFRESHWEIGHTEDAVERAGESCENARIOINCOMESTATEMENT................................66

FIGURE22:HELLOFRESHFREECASHFLOWSCALCULATION..................................................................67

FIGURE23:HELLOFRESHDISCOUNTRATECALCULATION.....................................................................67

FIGURE24:HELLOFRESHTERMINALVALUECALCULATION...................................................................68

FIGURE25:HELLOFRESHDCFVALUATIONMODEL...............................................................................68

FIGURE26:HELLOFRESHDCFIMPLIEDVALUATION.............................................................................69

FIGURE27:HELLOFRESHENTERPRISEVALUE(EURM)SENSITIVITYTABLE.....................................69

FIGURE28:HELLOFRESHSHAREVALUE(EUR)SENSITIVITYTABLE..................................................70

FIGURE29:CORRELATIONBETWEENCAGRFY16-19ANDEV/SALESMULTIPLE...........................72

FIGURE30:HELLOFRESHCOMPARABLECOMPANIESANALYSIS............................................................72

FIGURE31:PUBLICCOMPSVALUATIONMODEL......................................................................................73

8

FIGURE32:HELLOFRESHPEERS’EV/SALESMULTIPLES......................................................................73

FIGURE33:REALOPTIONSSHAREPRICECOMPUTATIONUNDERUP-STATEANDDOWN-STATE......74

FIGURE34:REALOPTIONSCURRENTSHAREPRICECOMPUTATION......................................................75

FIGURE35:REALOPTIONSVALUATIONMODEL......................................................................................76

FIGURE36:BOOKVALUEVALUATIONMODEL.........................................................................................77

FIGURE37:VENTURECAPITALVALUATIONMODEL...............................................................................78

FIGURE38:FIRSTCHICAGOSCENARIOSDEFINITION..............................................................................78

FIGURE39:FIRSTCHICAGOVALUATIONMODEL.....................................................................................79

FIGURE40:RISKFACTORSUMMATIONRISKASSESSMENT....................................................................80

FIGURE41:RISKFACTORSUMMATIONVALUATIONMODEL..................................................................80

FIGURE42:SUMMARYTABLEOFHELLOFRESHENTERPRISEVALUEFOOTBALLFIELDANALYSIS.....81

FIGURE43:HELLOFRESHENTERPRISEVALUEFOOTBALLFIELDGRAPH.............................................82

FIGURE44:ACCURACYOFEACHMETHODANALYSISFORENTERPRISEVALUE....................................83

FIGURE45:SUMMARYTABLEOFTHEHELLOFRESHSHAREVALUEFOOTBALLFIELDANALYSIS.......83

FIGURE46:HELLOFRESHSHAREVALUEFOOTBALLFIELDGRAPH.......................................................84

FIGURE47:ACCURACYOFEACHMETHODANALYSISFORSHAREVALUE..............................................84

FIGURE48:HELLOFRESHSHAREPRICEEVOLUTION..............................................................................86

9

1. Introduction

Startupsrepresentoneofthemosticonicbusinesssectorsofourtime,always

present fromthenewstotheuniversities.Manyof themostvaluablecompanies,

eitherinfinancialtermsorregardingtheirimpactandpresenceinthesociety,have

madetheirwayfromstartupstogloballeaders,completelyreshapingindustriesand

changingourdailylifeand,andwhynottosayit,thelifeoftheirfounders,making

themmorethanrich.

Fromtheinvestorspointofview,thisnichehasincreasinglybeenahotmarket

with extremely good opportunities for wise –and lucky– investors to capture

massive returns,making theventure capital industryoneof themost renown in

financeandoneofthemostdesirableplacestoworkinformanyfinancelovers.

Theneedtoraisecapitaltofuelthegrowthandexpansionofthestartupsand

theneedtoinvestthecapitalthatventurecapitalfirmscollectfromtheirinvestors

connect these twogroups.However, in either case theymust facea challenge to

culminatethissymbioticrelationship:thetwopartsneedtoagreeonthefairvalue

ofthecompany.

This isacrucialpoint forbothstartupsandventurecapitalistsand itcanbe

managed through a correct company valuation using different methodologies

adaptedtothestartupecosystem.Hence,theprincipalgoalofthisresearchpaperis

to understand how to value a startup and which are the most common

methodologies to do so. Anyone interested in finance is aware of the typical

valuationsmethodstotrytocomeupwiththefairvalueofacompany,howeverthe

particularities that the startupecosystempresentsmakes thisprocess especially

difficultandchallenginginthisindustry.

So,weaimtofirstlyunderstandwhatarethespecificitiesthatstartupsentail,

andhow they translate into the different valuationmethods that canbe used in

ordertoovercometheissuesthatonehastofacetoproceedwiththevaluationofa

startup.Moreover,wewilltestthisprocesswithourownexperiencebycarryingout

thevaluationofHelloFresh,astartupthatwentpublicin2017.

10

2. Startups2.1. Definition

Nowadays, startup is a word widely and mainstream used. However, the

conceptbehindthiswordisusuallyvagueornotveryclear.Manypeopleusethe

terminology startup to refer to young companies founded by one or more

entrepreneurs,whichhaveexperiencedveryhighgrowthtrends,andoperateinany

technologicalfield.

Nevertheless, there are many companies with simple and genuine ideas

operatingindifferentsectorsthatobjectivelyandrationallyshouldbeconsidered

asstartups,buttheyfalloutofthiscategorybymostofthepeople.Thisisbecause

thesecompaniesdonotmatchthecriteriastatedabovesince,forinstance,theydo

notinvolvetechnologyintheiroperations.Similarly,therearemanycompaniesthat

fallintothiscategorywhichshouldnotbeconsideredassuch.

In this context, wewill start by setting a clear ground for our analysis and

definingpreciselywhatdoesstartupmeantous.Accordingtotheconceptsseenin

class,therearethreemaincriteriathateverycompanymustmeettobeconsidered

astartup:(i)Binarymodel;(ii)Negativefreecashflows;and(iii)Equityfinanced.

Firstly,itmustnotbepossibletoclearlystatethattheideathatthecompany

puts in practice through its operation will or will not work, i.e. it has a binary

businessmodelresultinginabinarysuccess.

Secondly, the companymust have experienced negative free cash flows and

accumulatedlossesduringitslife,i.e.itisnotprofitableyet.

Thirdlyandlastly,thecompanymustbefinancedwithequity.Usuallyitisonly

equityfinanced,howeverit ispossiblethatthestartuppresentsanon-significant

amountofdebtwhichmaycomefrom,forinstance,convertiblecreditsor,incaseof

socialenterprises,aidfromgovernmentsorfoundations.

Hence, according to the classification criteria stated above,many companies

thatareconsideredstartupshouldnotbetoldassuch,sincetheirbusinessmodels

11

arebasedinareliablesuccessprovedfromtheexperienceofothercompanieswith

similar operating methods. Meanwhile, companies operating beyond the

technological sector, which usually are set apart from the startup classification,

shouldbeconsideredasstartupaslongastheymeetthecriteriastatedbefore.

2.2. Ecosystem

Despite the dot com bubble originated at the end of the nineties and its

subsequent downfall, the creation of new and innovative companies has been

occurringduringthelast30years.

Whileintheoldendaysitwasextremelydifficulttocreateasuccessfulbusiness

withoutan importantamountofcapital to facethe initialset-upcosts,nowadays

startups can be initiated without incurring in large initial expenses. The

technologicalimprovementoccurredduringthelastthreedecades,combinedwith

the globalization and the increase of resources such as information access, data

analysis and the increase of customer base, have boosted the creation of new

startups,whichprovideproductsand–mostly–servicestotheemergingneedsof

thedifferentsocieties.

Asstartupsneedacertainamountofcapitaltostarttheiroperations,afactthat

provestheupwardtrendofthestartupecosystemistheincreaseoftheinvestments

made on startups. Investment in new and innovative companies have recently

becomeverypopular,withanincreasingnumberofinvestorswhichrecognizethe

uniquepotentialfortunetobemadebyinvestingoracquiringtherightstartup.Asa

matterof fact,between2012and2017,startup fundingacrossall industriesand

regions grew by 50 percent, with special sectors such as artificial intelligence,

roboticsandadvancedmanufacturingthatpresentedimportantfundingincreases.

The increase on the creation of new startups can also be identified by the

number of exits of venture-backed startups. Although only 0.2 percent of new

businessesreceiveventurecapitalfunding,around50percentoftherecentUSIPOs

areventure-backed.

12

Figure1:Volumeandnumberofstartupexitsworldwide(2011-2018)

Source:Statista,Globalstartups–Statistics&Facts

While the technological improvements and digital transformation play an

importantroleinthedirectionofhowthemarketsareorientedandoperated,these

factorsalso influenceonthetypesofstartupsreleased in themarket. In fact, the

appearanceofnewindustries–suchas instantvideo-messaging–isalso linkedto

theappearanceofnewstartupsoperatinginthesesectorstocovernewsocialneeds.

Butnotonly startupsare created fromscratch to cover thenewdemandsof the

evolving society. Also, there are entrepreneurs who seek to optimize existing

businessmodelswiththeaimtooffernewsolutions–suchasfintechcomparedto

thetraditionalbankingsystem–adaptingexistingbusinessmodelstotheevolving

socialrequirementsanddemandsofthesociety.

Regardingtheworldwidedistributionofstartupsbyindustry,accordingtothe

data shown inFigure 2, in 2017most of the startupsweredirectly or indirectly

linkedtotechnology,beingfintech,healthcareandartificialintelligencethesectors

withmoreoperatingstartups.

1000

1500

2000

2500

3000

3500

4000

4500

0

50

100

150

200

250

300

2011 2012 2013 2014 2015 2016 2017 2018

Volumeandnumber ofstartup exitsworldwide (2011-2018)

Volumeofstartupexits($bn) Numberofstartupexits

13

Figure2:Worldwidedistributionofstartupsbyindustry(2017)

Source:Statista,Globalstartups–Statistics&Facts

RegardingthecurrentCoronaviruscrisisinwhichweareimmerse,althoughit

is too early to extract strong conclusion with actual data, there are some key

consequencesthatarealreadypossibletonote.

Intermsoffunding,therewasahighdropoffinancingroundsclosedinthefirst

twoweeksaftertheWorldHealthOrganizationdeclaredthespreadofthevirusas

apandemic,theecosystemwasalmostfrozen.Afterthisinitialperiodthingshave

started to improve, especially for specific industries that are expected to benefit

from the crisis such as the healthtech and the medtech, and online delivery

industries.

Nevertheless,despitethepick-upandthetractiongainofsomesectors,overall

the activity has clearly slowed down, with startup investors still looking for

attractive opportunities, but reducing both the number of investments and the

moneydeployedon them, i.e. fewer roundswith lower valuations. In this sense,

SanderVonk,ManagingPartneratVoltaVenturessaysthat“atVoltaVentureswe

expectasteepdeclineinthenumberofdealsinQ2withcarefulrecoveryinQ3and

Q42020dependingonthedurationofthefinancialimpactofthenewcoronavirus”,

feelingsharedbyhisfellowRomainLavault,GeneralPartneratPartech,whostates

that “most startups should expect a “new normal” with fewer rounds, more

syndicateddealsandprobablymorecautiononvaluations”.Inthisregard,asurvey

0% 1% 2% 3% 4% 5% 6% 7% 8%

FintechLifesciencesandhealthcare

ArtificialIntelligenceGamingAdtechEdtech

CleantechBlockchain

AdvancedmanufacturingandroboticsCybersecurity

Agtech

Worldwide distribution ofstartups byindustry(2017)

14

amongventurecapitalpractitionersandprofessionalinvestorscarriedoutbythe

Spanish financialnewspaperExpansión,estimates thedrop invaluationbetween

20%and60%,dependingontheindustryandstageofthestartup.

In addition, according tomany other venture capitalists interviewed by EU-

startupsmagazine,thereisaconsensusinwhichearlystagestartups,especiallypre-

seed and seed –explained later in Section 2.3–, are the ones which will clearly

strugglethemostforraisingfundsandtosetpropervaluations.Theprogressunder

thissituationwillbeslowanditwilllastatleastforthenextsixmonths,butitwill

notbesolveduntiltheconfidencereturnstostockmarkets,andtheyarealmostfully

recovered.Obviously,thisisbecauseoftheadditionofahighuncertaintyfactorto

thealreadyveryuncertainbusinessmodelsoftheseearlystagecompanies.

However,thatsaid,asOliverRichards,PartneratMMCVentures,states,“great

entrepreneurs building great businesses will continue to raise capital to grow

throughoutthepandemicandafterit”.Then,eventhoughthetroublesomesituation

for the startupecosystems that theCoronavirus implies, itmight alsobe a great

opportunity to invest against fewer competitors in best-in-class companies, at a

lowervaluationthanbefore,withthehopetoenterinanormalizedsituationatthe

endoftheinvestmenthorizon.

All in all, although the appearance of startups can happen in almost every

sector,thevastmajorityofnewstartupsisconcentratedintechnologicalindustries,

which,atthesametime,happentobelowcostsectorsattheearlystages,enhancing

theattractionoftalentedentrepreneurswithouttheneedoflargeamountsofcapital

to set up the business. Regarding the difficult situation in which we are

unfortunately immerse due to the Coronavirus, despite the fact that the startup

ecosystemwill clearly suffer in forms of fewer financing rounds closed at lower

valuations,asWarrenBuffetoftensays,tomakemoneyyouneedtobuycheapand

sellexpensive,andthismightbeagoodtimetobuycheapifyouhavetherequired

capitaltoinvest.

15

2.3. MaturityStages

AswepreviouslysaidinSection2.1,startupssharecommoncriteriawhichlet

us identify and classify them.However, not all startups are in the same state of

maturity,andeveryoneofthesematuritystageshasitsownverydifferentneeds,

objectives,andparticularities.

Although there is no absolute agreement on startupsmaturity stages, there

seems to be an accord between practitioners and academics where we can

differentiate six states of maturity, which are shown in Figure 3 and explained

afterwards.

Figure3:Startupmaturitystages

Source:HECParis,StartupValuationcourse

2.3.1. Pre-SeedStage

ThePre-Seedstageisthestageofthebusinessideaorigination.Atthisstage,

thecompanystillhasnotdevelopedanyminimumviableproductnoravalidated

business model. At this time founding and management team is formed, the

PartnershipAgreementissigned,andtheroadmaptotransformthenon-developed

ideaintoarealityisconceived.

16

Inshort,thecompanyhasarawideawithoutdevelopment,andseeksforthe

validationofitsideafromitspotentialfuturecustomers.Theinvestorsatthisstage

usetocomefromtheentrepreneursthroughownfundsandfromtheirrelativeslike

familyandfriends.

2.3.2. SeedStage

TheSeedstageiscrucialforthesuccessforthestartupsinceitisconceivedas

thepointinwhichtheideacomestrue.Atthispoint,themainobjectiveistoexpand

theideainanadequatemannerandtovalidatethebusinessmodel,developinga

minimumviableproductwhichwillallowthecompanytotesttheproduct inthe

marketwithrealcustomers.

Hence,weincludeinthisstagestartupsthathavealreadycarriedoutanMVP

and keep looking for validating both their businessmodel and productwith the

market.Seedinvestmentsmaycontinuetocomefromfriendsandfamily,however

businessangelsandseedstageventurecapitalfundstendtobethemostrelevant.

2.3.3. EarlyStage

TheEarlystagerepresentsthephaseinwhichtheproductisimproved.Atthis

stage, thecompanyisabletocollect feedbackfromitscustomersandtoproduce

somemetricswhichwillreflect itsperformance.Usingthemthroughan iterative

process, the startup must be able to correct the failures of the product and to

transform the minimum viable product from the previous stage into a tangible

productthatisapprovedbythemarketandeasilyscalable.Inaddition,thecompany

mustestablishitsfirstcommercialagreementsanddefinethegrowthstrategythat

itwillfollowduringthenextstages.

Tosumup,Earlystagestartupsownanalreadydevelopedproductandarenow

lookingforboostingtheirgrowthandestablishingcommercialpartners.Thetypical

investorsarebusinessangelsandespeciallyventurecapitalfunds.

17

2.3.4. GrowthStage

IntheGrowthstagethecompanymustfocusonitsgrowthandimprovingits

profitability and customer base. At this stage, the startup must already have

developedamarket-validatedproduct,recurrentclientsandpositivemetrics,and

thegrowthstrategymustbewelldefined.Withoutanydoubt,cashflowsturntobe

thecrucialparameteratthisstage–intermsofbothsizeandstability–inorderto

ensuretheexternalfinancing.

So, startups included in theGrowth stage have validated their productwith

theircustomersyet,theyaremassivelygrowingandfuellingthisgrowthwiththe

expansionoftheirteamandoperations.Atthisstage,theinvestmentisalreadyvery

relevant,soventurecapitalfundsarethemainplayers.

2.3.5. ExpansionStage

The Expansion stage is that in which the company seeks to go beyond its

consolidatedmarketandexpanditscustomerbase.Asimplewayofdoingsomay

be through partnerships or agreements with large companies which operate in

differentcountriesorsectors,howeverinthisstagetheuncertaintyandtheriskis

massive because a bad investment decision can be fatal. To support these

investments,externalfinancingremainscrucialtoallowthecompanytoexpandits

operationsandtofuelitsgrowthstrategy.

In short, the startups own a validated product and is now focusing in the

international expansion of their operations either organically or inorganically

through agreements or acquisitions. To do so, massive funding injections are

required,usuallyprovidedbyventurecapitalfunds.

2.3.6. ExitStage

The Exit stage is that inwhich the company is sold. Although some startup

foundersseektoremainastheowneroftheircompanyaimingtocreateahigh-value

and long-run company, usually the last step of successful startups is exiting the

company.

18

ThisexitmaybecarriedoutthroughBuy-outsorIPOs.Thefirstonerefersto

thedirectsaleofthestartuptoabigcompany,mayitbebecauseitoperatesinthe

samesectorandwantstoimproveitspositioninginthemarketorbecauseitsees

complementaritiesinthetwobusinesstobeexploited.Itisalsopossibleforservice

providerssuchasAIorcybersecuritystartupsthattheyareacquiredtobeimproved

internalprocessesofthebigplayer.InthecaseoftheIPO,thecompanysimplygoes

publicthroughitssaleatthestockmarket.

2.4. Financing

Aswehaveseensofar,oneofthekeydriversofsuccessforstartupsistheir

ability to raise funds to fuel their growth and accomplish their growth strategy

milestones.Thesecompaniescanrisefundsthroughdifferentprocesses.

2.4.1. Equity

As seen in the first section, these companies usually raise funds through equity

issuances,andwecanfinddifferentfundingroundsdependingonthematuritystage

ofthestartup.

2.4.1.1. Pre-Seed

Pre-Seed isusually the funding round for startupsvaluedbetween$1mand

$3m,andoftenitisthefirsttimeinwhichtheyraisecapital.

Sinceatthispointcompaniesdonothaveproperfinancialdataorperformance

metrics to support their project, investments aremainly driven by the founders

themselvesandtheirrawidea.

The initial funding from any startup usually comes from the founders

themselves.Regardingexternalinvestors,familyandfriendsaretheusualinvestors

inthisround,althoughbusinessangelsareofteninvolvedaswell.Theusualticket–

amountofcapitalinvestedbyeachoftheinvestors–rangesfrom$10kto$250k.

19

2.4.1.2. SeedRound

Seedroundisusuallythefundingroundforstartupsvaluedbetween$3mand

$6m, and it is the first round inwhich startups raise the needed funds to start

makingtheirideareal.Hence,capitalraisedtendtobeusedtodeveloptheproduct

andtestitsmarketfit,tocarryoutanalysisandresearch,andtoincreasetheteam.

The usual investors in this round are business angels, seed Venture Capital

fundsandincubators,andtheusualticketrangesfrom$250kto$2m.

2.4.1.3. SeriesA

SeriesAareusuallythefundingroundforstartupsvaluedbetween$10mand

$15m,andtheyaretheroundsinwhichcapitalraisedisinvestedinoptimizingand

bringingtothenextlevelwhathasbeendonesofarandmakingbothproductand

businessmodelmorescalable.

Atthispoint,investorstendtofocusonkeyperformanceandoperatingmetrics

thatreflectthepotentialgrowthandsuccessprobabilityoftheidearatherthanvery

precisefinancialdata.

TheusualinvestorsintheseroundsareVentureCapitalfundsbusinessangels

–sometimescalled“superangels”–,andtheusualticketrangesfrom$2mto$10m.

2.4.1.4. SeriesB

SeriesBareusuallythefundingroundforstartupsvaluedbetween$30mand

$60m,and theyare the rounds inwhichcapital raised is invested in fuelling the

expansionstrategyofthecompany–intermsofcustomerbase,markets,team,etc.–

and,moregenerally,scalingitsbusiness.

At thispoint, the firmtendsnot tobeprofitableor, if it is,profits tendtobe

scarce.However,investorslookatthetractionofthestartupandtrytomakesure

thatthebusinessmodelactuallyworks.

Theusualinvestorsintheseroundsarelate-stageVentureCapitalfunds,and

the usual ticket ranges from $5m to $20m. Since tickets are of very significant

20

amountsintheseserieswhichtranslatesintolargeownerships–33%inaverage–,

investorsneedtobechosencarefullyfromacorporategovernancepointofview.

2.4.1.5. SeriesCandMore

Series C or more are usually the funding round for startups valued above

$100m, and they are the rounds in which capital raised is invested in boosting

customerbaseandmarketshare,obtainingbest-in-classtalentand,dependingon

thepositioningofthefirm,acquiringcompetitorstogrowaswellinorganically.

At this point, the startuphasproven that its businessmodelworks andhas

proper financial date to support their decrease in risk profile. Nevertheless,

investorstendtobeextremelydemandingatthisstage–mainlybecauseofthelarge

investmentstheyareconsidering–,carryingoutintensiveduediligenceprocesses.

Theusualinvestorsintheseroundsarelate-stageventurecapitalfunds,private

equityfirms,hedgefundsandinvestmentbanks,andtheusualticketrangesfrom

$20mto$250m.Aftertheserounds,itisusualthatstartupsgopublicthroughIPOs

orgetacquiredbylargerplayersinthesector.

2.4.2. Debt

Althoughthemostimportantandhabitualwayoffundingforstartupsisissuing

equity,someofthemalsoraisecapitalthroughdebtinstruments.

Traditionaldebtholderstrytoensuretherecoveryoftheirlendingandadjust

theinterestschargedtotheriskoftheinvestment.Hence,thehighriskthatstartups

entailintheirearlystagesmakesthemimpossibletoaskforatraditionalloanorto

bechargedwithunbearableinterestpayments,at leastuntiltheyreachamature

stage. That makes debt a more unusual financing option. Nevertheless, debt

financing typically presents some advantages over equity financing, such as the

lowercostandtheavoidanceofdilution.

Despitedebtisbyfarnotasrelevantfortheecosystemasequityfoundingbut

itstillplaysaroleinthegame,wewillbrieflymentionsomeofthemosttypicaldebt

instrumentsthatstartupsmayuseduringtheirearlystages.

21

2.4.2.1. VentureDebt

Venturedebtorventurelendingisafinancingoptiononlyavailabletostartups

backedbyventurecapitalfunds.Creditorsevaluatethefirm’sgrowthrate,business

planandinvestors’trackrecord,andtendtostructureitslendingasa3to4-year

termloan,collateralizedwithcompanyshares.

2.4.2.2. WorkingCapitalLineofCredit

Workingcapitallinesofcreditarerevolvingcreditlinesusedtocoverbusiness’

operatingcosts,suchaspayroll,inventory,orrent.Startupscanwithdrawasmuch

astheywantuptoapredefinethreshold,withthecommitmentofrepayingitina

specifictimeframeandwithapredefinedinterestrate,sometimesincreasinginline

withtheborrowedamount.Oncetheborrowerreturnsthewithdrawnamount it

canbenefitagainfromtheinitialcreditedamount.

22

3. StartupValuation

Valuationiscrucialtoestimatethefaireconomicvalueofanowner’sinterestin

acompanyorbusiness.Thisvaluationshouldconsidertheactualmarketvalueof

the assets that the company possess, but it should also comprise the future

performancethatitwilldelivertoitsequityholders.

In this sense, themost commonmethods thatpractitioners in the corporate

financeindustryhaveusedtovaluecompaniesarefocusedoncashflowgeneration,

earningsgrowth,capitalstructureandotherfinancialmetricsthatcanbeforecasted

forareasonabletimeperiodincaseofmaturecompanies.

However, ifwe think of startups, especially in early stage companies,which

havelittleordirectlynopastfinancialstobeusedtopredictitsprospects,whichare

operatinginabinarybusinessmodelwithmassivefailurerates,andwhichcurrent

situation–intermsofgrowth,margins,capitalstructure,etc.–mayextremelydiffer

fromthatofwhattheywillhaveintheiroptimalmaturestage,itseemsclearthat

alternativevaluationmethodsmustbeused.

Asaresult,wehavedecidedtosplitouranalysisintotwocategories:traditional

methods,thatmaybeusedwhenvaluingstartupsintheir lateststages;andnon-

traditional methods, that may be useful for early stages. In the first group we

include: (i) Discounted Cash Flow; (ii) Precedent Transactions; (iii) Comparable

Companies;(iv)RealOptions;(v)BookValue;and(vi)LiquidationValue.Inthelast

groupweinclude:(i)VentureCapital;(ii)FirstChicago;(iii)Berkus;(iv)Scorecard;

(v)RiskFactorSummation;and(vi)Cost-to-Duplicate.Figure4showswhentouse

eachtypeofmethoddependingonthestageofthestartup,andFigure5showsa

comparison in terms of traditionality, frequency of use and complexity between

them.

23

Figure4:Typeofvaluationmethodsusuallyusedregardingstartupmaturitystage

Note:MultiplesreferstoComparableCompaniesandPrecedentTransactions

Source:RocaSalvatella;“ModelosdeValoracióndeStartups”

Figure5:Startupvaluationmethodscomparison

Source:Ownelaboration

24

3.1. TraditionalValuationMethods

Aswepreviouslydiscussed,wewillstartbyanalysingthetraditionalvaluation

methodsthatcanbeusedforstartupsinlateormaturestages.

3.1.1. DiscountedCashFlow

The Discounted Cash Flow –hereafter DCF– is a common valuationmethod

widelyusedtoestimatethevalueofcompanybasedonitsfuturecashflows.This

method is specially used to value mature companies with stable cash flow

generationandpredictableprospects.Likewise,theDCFmethodcanbealsoused

forthevaluationoflatestagestartupsthathavegeneratedrevenues,withpositive

freecash flows,andwhoseprospectsparametersareacceptablypredictable.For

earlystagestartups,ontheotherhand,asthesecompaniesdonotpresenthistoric

cashflowdataandtheirprospectsarebasedonahighlevelofuncertainty,theDCF

isnotused.

RegardingtheDiscountedCashFlowmethoditself,itstatesthatthecompany

orenterprisevalueiscalculatedthroughthepresentvalueofthefuturefreecash

flowsthatthecompanywillgenerateinthefuture.Thesefuturefreecashflowsare

discountedtopresentvalueusingadiscountrate,toaccountforthetimevalueof

money,whichreflectstherisksandthefinancingcostsofthecompany.

AstheDCFmethodwillresultintheenterprisevalue,thediscountratemust

reflect all the creditors of the business, considering then equity holders,

debtholders,andpreferredshareholders.Hence,thediscountrateshouldaccount

forthereturnthatcreditorswillaskfortheriskthattheyassumebyinvestinginthe

company.

Freecashflowestimation

In order to estimate the future free cashflows of a business, we will first

determine a forecast period, which will vary depending on the nature of the

business,thematurityofthecompany,howstablethecompanyis,andhoweasyis

topredict itsprospects.Inthissense,theforecastperiodforamatureandstable

25

companywithstablepredictedprospectswouldrangefrom5to10years–oreven

moredependingonthenatureofthebusiness–.Forastartup,withhighlevelsof

forecastedgrowthandwithanuncertaintyonitsfarprojections,thehorizonofthe

futurefreecashflowsprojectionwillrangefrom3to5years.

Asthecompanywillnotstopitsactivityaftertheprojectedperiod,theterminal

valuewillthenbecalculatedinordertoaccountforthevalueofthefuturefreecash

flowsgeneratedfromtheyearaftertheprojectionperiodtothelongfuture.This

processwillbeexplainedlatelyinthesubsectionTerminalValue.

Oncetheprojectionperiodisknown,itistimetoestimatetheFutureFreeCash

Flows,which are the after-tax cash flows the company generates on a recurring

basis,aftertakingintoaccountnon-cashcharges,changesinOperatingAssetsand

LiabilitiesandrequiredCapitalExpenditures.FreeCashFlowscloselycorrespond

to theactualcash flowthat investorswouldreceiveeachyear if theybought the

entirecompany.

𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 · (1 − 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑡𝑎𝑥𝑟𝑎𝑡𝑒) + 𝐷&𝐴 − ∆𝑁𝑊𝐶 − 𝐶𝐴𝑃𝐸𝑋

ThenFreeCashFlowswillbeestimatedforeachoftheyearsoftheprojection

period.Forstartups,theevaluationofoperatingmarginscanbedifficulttoestimate

duetothelackofpastfinancialdataandthehistoricallossesthatthecompanyfaced

in the beginning of its operations. A possible solution tominimize this problem

wouldbetofocusonsimilarsuccessfulstartupsinthemarketandsettheexpected

profitability. Moreover, considering the required Capital Expenditures, for long

stage startups, these reinvestments will be growth-oriented and estimated to

deliverpotentialgrowthtothecompany.

DiscountRate

In order to account for the time value ofmoney, the future free cash flows

calculatedforeachoftheyearswithintheprojectionperiodneedtobediscounted

byadiscountratetoobtainthePresentValueofthoseFreeCashFlows.

Thediscountratenotonlyreflectsthetimevalueofmoney,butalsothereturn

thatinvestors–suchasdebtholdersandequityholders–requirebeforetheyinvest

26

inthecompany.Italsoreflectstheriskofthecompanysincehigherpotentialreturns

correspond to higher risk. Thus, the discount ratemust reflect, as accurately as

possible,thecostofcapitalemployedbythecompany.

Allelsebeingequal, smallercompaniessuchasstartups tendtohavehigher

Discount Rates than mature companies, since for startup companies, investors

expectthattheywillgrowmoreanddeliverhigherreturnsinthefuture.Atthesame

time,startupsarealsoriskierthanstableandmaturecompanies.

ThemostwidelyusedDiscountRate istheWeightedAverageCostofCapital

(WACC),inwhicheachcapitalcomponentismultipliedbyitsproportionalweight

withinthecapitalstructure.

𝑊𝐴𝐶𝐶 = 𝐸

𝐸 + 𝐷 + 𝑃 · 𝑘! +𝐷

𝐸 + 𝐷 + 𝑃 · 𝑘" ·(1 − 𝑇𝑎𝑥𝑟𝑎𝑡𝑒) +

𝑃𝐸 + 𝐷 + 𝑃 · 𝑘#

Where:

E:Marketvalueofequityshares

D:Marketvalueofnetdebt

P:Marketvalueofpreferredshares

kE:Costofequity

kD:Costofdebt

kP:CostofPreferredStock

Knowingthatmostof thestartupsarecompletely financedbyequity, inthat

casetheWACCwouldequalthecostofequity.Hence,consideringthatthecostof

equity is very relevant regarding the valuation of a startup using the DCF, it is

importanttounderstandtheprocesstogetit.

Themost commonway to calculate the costof equity is through theCapital

Asset Pricing Model (CAPM), which proposes that, in equilibrium, the expected

returnonanyriskyassetanditssystematicriskarelinearlycorrelatedthroughthe

betacoefficient,asitisshownbelowintheCAPMequation:

27

𝐸(𝑅$) = 𝑅% + 𝛽$ · C𝐸(𝑅&) − 𝑅%D

Where:

E(Ri):Expectedreturnonthecapitalforasseti(orcostofequity)

Rf:Risk-freerate(takenfromtheyieldofhigh-qualitybonds)

E(Rm):Expectedreturnofthemarket

[E(Rm)-Rf]:Expectedmarketriskpremium

βi:Betacoefficientforasseti

𝛽$ =𝑐𝑜𝑣(𝑅$ , 𝑅&)𝜎'(𝑅&)

Where:

cov(Ri,Rm):Covariancebetweenmarket’sreturnandasset’sreturn

σ2(Rm):Varianceofthereturnofthemarket

Knowingthatbetaisthesensitivityoftheexpectedexcessreturnsfromasseti

totheexpectedexcessmarketreturns,therearedifferentprocessesthatcompanies

usetoestimatethebetainamorestraightmanner:throughpasthistoricalbetaof

thecompany,orthroughtheestimationofthecompany’sownbetafrombetasof

publiccomparablecompanies.

Historicalbetasuggestsusingthebetaasthecorrelationbetweenthereturnof

the asset i and the market return during the last years. The drawback of this

approach for an early stage company, suchas a startup, is thathistoricaldata is

neededtocomputethebeta.Hence,asstartups lackofpastdata, thiscalculation

approachmightnotbeuseful.

Regarding the estimation of the beta through the betas of comparable

companies, this approachassumes that the “true”betaof a company isdifferent

fromwhathistoricaldatasuggestssincethe“true”riskinessofthecompanyismore

in-linewithhowriskysimilarcompaniesinthemarketarethantoitsownhistorical

trackrecord.

Inthismethod,usingasetofformulas,anun-leveringandre-leveringprocess

ofthecomparablecompaniesbetasisneededinordertoremovetheadditionalrisk

28

comingfromeachofthecapitalstructuresofthesecompanies,andadaptthebetas

withthecapitalstructureofthecompanythatwearevaluing.

Again,thereisanimportantpointtoconsiderforstartupvaluationregarding

theestimationofthebetathroughthePublicCompanyComparables.Startupsuse

tobeyoungandinnovativecompanieswithveryfewsimilarpeersinthemarket,

andwithanevensmallernumberofcomparablecompaniestradinginthepublic

market, making it very challenging to find similar companies to base the beta

estimation.Thus,especiallyforearlystagestartups,itmightbechallengingtofins

comparablepeers.

Consideringthesedrawbacksinthebetaestimation,areducednumberofVCs

usetheCAPMmethodtodeterminethediscountrate.Instead,theyusededuction

valuesaccordingtointernalreturnexpectationsthatthecompanymightdeliver,as

wellastheperceivedriskofthecompanyitselfandthemarketingeneral.

TherearedifferentadjustmentsthatcanbeintroducedintheCAPMmodelin

ordertocalculatethebetaofastartupconsideringthespecificriskofthecompany,

suchastheintroductionofasizepremiumandvaluepremium,whichareincluded

toaddresstherisksrelatedtothesizeandthevalueofthecompany.Moreover,these

adjustments could then be based on different categories within the company’s

structure,suchasorganizational,financialandtechnological,amongothers,leading

toapositiveornegativeimpactonthebetacoefficient,dependingontheirinfluence

on the company risk. In this sense, Gunter W. Festel, Martin Würmseher and

Giacomo Cattaneo propose in their "Valuation of Early Stage High-Tech Startup

Companies"papersomeadjustmentsthatarepresentedinFigure6.

29

Figure6:BetaadjustmentschemeforTechstartups

Source:Festel,Würmseher,Cattaneo;"ValuationofEarlyStageHigh-TechStart-UpCompanies";

InternationalJournalofBusiness

TerminalValueEstimation

The Terminal Value (TV), which represents the company’s far in the future

value,isanimportantelementoftheDCFmethodology,sinceitaccountsforalarge

30

proportionoftheoverallenterprisevalue,havinganevenbiggerimpactonthefirm

valueofyoungcompanies.

AlthoughthereexistdifferentmethodologiestocalculatetheTerminalValue,

practitioners use 2mainmethods: (i)Multiplesmethod and (ii) GordonGrowth

method.

ThefirstmethodstatesthattheTVcanbecomputedbyapplyingaforecasted

EVmultiple,takenfromtheanalysisofcomparablepeers,toaforecastedEBITDA,

EBIToranyothermarginofthecompanythatwearevaluating.Astheexactmultiple

ishardtoestimateyearsinadvance,differentmultiplesareusedandshownina

sensitivitytable.

On theotherhand, theGordonGrowthmethod assumes that the company’s

futureFreeCashFlowskeepgrowingfarintothefutureandthatthecompanykeeps

operatingforever.However,thepresentvalueoftheFreeCashFloweachyearkeeps

shrinkingsincetheDiscountRateishigherthanthegrowthrateofthoseFreeCash

Flows,whichisassumedtobesimilartothecountry’sinflationorGDPgrowth.

𝑇𝑉( = 𝐹𝐶𝐹( ·1 + 𝑔

𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑟𝑎𝑡𝑒 − 𝑔

Where:

TVT:Terminalvalueatthelastforecastedyear(t=T)

FCFT:Freecashflowofthelastforecastedyear(t=T)

Discountrate:UsuallytheWACC

g:Terminalgrowthrate(similartothecountry’sinflationorGDPgrowth)

Either ifwecalculate theTerminalValueusing theMultiplesmethod,or the

GordonGrowthMethod,oranyothermethodnotcommented in thispaper,as it

representsthevalueofthecompanyinthelastforecastedyear,thisTVneedstobe

discountedtothepresentvalueusingthediscountratecomputedasstatedbefore.

31

Finalresult

Finally,oncetheFreeCashFlowshavebeencalculatedfortheprojectionperiod

and the Terminal Value has been computed using the methodologies proposed

above, it is time to discount them to the Present Value, using the discount rate

calculated before, adding afterwards the two together to finally obtain the

EnterpriseValue.

𝐸𝑉#)*+*,- =M𝐹𝐶𝐹-

(1 +𝑊𝐴𝐶𝐶)-

(

-./

+𝑇𝑉(

(1 +𝑊𝐴𝐶𝐶)(

3.1.2. ComparableCompanies

Comparable Companies is a traditional methodology based on the relative

valuation, since it values a company through the comparison to what similar

companiesareworth,usingmultiples.Themain ideaof thismethodology is that

companieswithsimilarcharacteristicsshouldtradeatsimilarmultiples.

This valuation method is mostly used to value mature companies with an

importantsetofcomparablepeerswithaccessibledata.Startupslocatedinagrowth

orexpansionstagecanalsobevaluedthroughthismethodology.

To carry out this method, it is important to correctly gather the data from

comparable companies, which is relatively easy to find, especially for listed

companies.Thesecompaniesarechosenaccordingtothefollowingcriteria:

1. Geography–Betterchosecompaniesinsimilargeographiesandmarkets

2. Industry–Companiesoperatinginthesameindustrygroup

3. Financials–Similarrevenues,marginsandexpectedgrowth,ifpossible

Oncethepeersareselected,differentmultiplesarecomputedforeachofthese

comparablecompanies,suchasRevenue,EBITDAorEBITmultiples(althoughother

multiplescanbeincludeddependingontheindustry),andwefinallygetarangeof

multiples.We then compute theaverageandmedian for eachof the ranges, and

multiplytheoutcomebythemarginorrevenueofthecompanythatwearevaluating

32

–i.e.multiplyEBITDAtoEV/EBITDAratio–tofinallygettheEnterpriseValue(EV)

ofthecompanywhichwillbeexpressedinarangeofvalues.

Therearespecialsituations,withstartups,forinstance,thatwedonotcompute

the average and median for each of the ranges. Instead, if we believe that the

companywillexperienceanastonishinggrowthinthenearfuturecomparedtothe

peers, and that will be able to increase themargins compared to the ones that

currentlypresents,wecouldusethe75thpercentileoftherange,forinstance,to

computethefinalEVrange.

Toconclude,sincethismethodusesthesecuritiesofothercompanies,which

arefairlypricedassumingthatthemarketsareefficient,itshouldprovidearealistic

range of the firm value,while othermethodologies such as theDiscountedCash

Flows are subject to far-in-the-future assumptions. For this reason, Comparable

Companiesisoneofthemostusedmethodsforpractitioners.

3.1.3. PrecedentTransactions

PrecedentTransactionsmethodologyisalsoatraditional,widelyusedrelative

valuationmethod based on the price paid on recent acquisitions of comparable

companies. The approach is very similar to Comparable Companies valuation,

althoughinthiscaseweincludeanadditionalcriteriontochoosethecomparable

PrecedentTransactions:

4. Time – Transactions occurred close to the current period, since the

marketschangeovertime

Also, it is importanttoconsidertherationalebehindthetransaction–M&Adeal,

LBO deal, etc.–, since synergies play an important role on the premium that

acquirerswillbewillingtopay.

Once the transactions are chosen according to the specified criteria,weproceed

withthesamemethodologyaspertheComparableCompanies.Wecomputearange

ofdifferentmultiplessuchasEV/EBITDAandEV/EBIT,forinstance,wheretheEV

33

representsthetransactionvalue,andwethencomputetheEVofourcompanyusing

themarginsanddataofthecompanythatwearevaluating.

Bearinmindthattheenterprisevalueobtainedthroughthisvaluationmethodmay

be higher than the values obtained through Comparable Companies or other

methods.Thereasonisthatthetransactionvalueusuallyconsidersthepremium

paid to control or acquire the underlying company, increasing then the actual

marketvalueofthecompany.

As per the startup universe, as this methodology requires public data from

comparabletransactions,itmightbechallengingtoimplementsincethenumberof

precedenttransactionsofcomparablecompaniesmightbelimited.

3.1.4. RealOptions

Differentvaluationapproachesusedbyacademicsandpractitionerstypically

assume that companieswill hold the assets passively,whereas theReal Options

method considers the right, but not the obligation, to modify the project by

expanding,contracting,deferringorabandoningit,forapredeterminedperiodof

timeandwithanimpliedcost.

So,wedefinearealoptionasachoiceavailabletothemanagersofa firmto

assessthedifferentinvestmentopportunitiesthatabusinessmayormaynottake

advantageofrealizing.Thisrealoptionispresentinaninvestmentwhenthereexists

apossibilityoffutureactionwhentheoutcomeofanycurrentuncertaintyisknown.

Inthissense,thismethodconsidersthatthebusinessdecisionscanbemodified,

impactingtheoutcomeoftheprojectdifferentlydependingonthedecisionchosen.

Themoreuncertainoruncleartheoutlookis,themorevaluableisthisflexibility.

Thisflexibilityisparticularlyvaluabletoaccountfortheintrinsicuncertaintyofthe

startup ecosystem, allowing us to consider different outcomes throughout the

lifetime of the company and introducing different scenarioswith the purpose of

understandingitsfairvaluation.

34

The main idea is to split the business that we want to value into different

mutuallyexclusiveprojectsormilestonesandtoidentifywhatarethemainsources

ofuncertaintyandtherespectiveimpactforthem,andhowtheycorrelatebetween

eachother.Then,wereflectthisinformationinadecisiontreeintroductionoption

exerciseconditions,i.e.simpleeffectiverulesforoptimaldecisions.Anexampleof

decisiontreeispresentedinFigure7.

Figure7:RealOptionsdecisiontreeexample

Source:TeresaClavería;“Elmétododevaloraciónporopcionesreales”;RepositorioComillas

Oncewehavebuiltourstartupdecisiontree,wecomputetherealoptionvalue.

The calculation of the real option value can be carried out mainly through two

approaches:(i)Binomialmodel;(ii)Black-Scholesmodel.

35

BinomialModel

The Binomial model follows an iterative approach in which there are two

possibleoutcomesforeachiteration,anupwardmoveoradownwardmoveinthe

decisiontree.

Followingthisidea,thismodelfirstlyreplicatesthecashflowsoftheoption–in

ourcaseacalloption–withcashflowsfromcommonstockanddebtasitisshown

inFigure8,inordertoendupfindingthecurrentvalueofouroption.

Bond Stock CallOption

Figure8:Binomialrepresentationforbonds,stocksandcalloptions

Source:HECParis,CorporateValuationcourse

Where:

p:Probabilityofup-statehappening

Rf:Risk-freerateofreturn

S0,C0:Currentstockandcalloptionvalue,respectively

S1U,C1U:Futurestockandcalloptionvalueintheup-state,respectively

S1D,C1D:Futurestockandcalloptionvalueinthedown-state,respectively

Inthecaseofthebond,theoutcomeofeithertheupordownstateisobviously

thesameandweassumethatitdeliverstherisk-freerate.However,inthecaseof

bothstockandcalloptionlogicallytheiroutcomeswillvary.

Forthestock,wedefineitsvalueinthenextperiodas:

𝑆/0 = 𝑢 · 𝑆1

𝑆/" = 𝑑 · 𝑆1

Where:

1p

Rf1-p

RfS0

p

1-p S1D

S1UC0

p

1-p C1D

C1U

36

u:Factorbywhichthevalueofthestockincreasesintheup-state

d:Factorbywhichthevalueofthestockdecreasesinthedown-state

Forthecalloption,wedefineitsvalueinthenextperiodas:

𝐶/0 = 𝑚𝑎𝑥{𝑢 · 𝑆1 − 𝐾, 0}

𝐶/" = 𝑚𝑎𝑥{𝑑 · 𝑆1 − 𝐾, 0}

Where:

K:Calloptionstrikeprice

Now,wecanreplicatethepayoffsofthecalloptionbybuildingupaportfolio

madeofbondsandstocks.Hence,byequalingthesetwopayoffsweobtain:

𝐶/0 = 𝑎 · 𝑆/0 + 𝑏 · 𝑅% = 𝑎 · [𝑢 · 𝑆1] + 𝑏 · 𝑅%

𝐶/" = 𝑎 · 𝑆/" + 𝑏 · 𝑅% = 𝑎 · [𝑑 · 𝑆1] + 𝑏 · 𝑅%

Where:

a:Stockportfolioallocation

b:Bondportfolioallocation

Sinceallthedataisknownexceptfortheallocationsineachasset,wecompute

theportfoliocompositionas:

𝑎 =𝐶/0 − 𝐶/"

(𝑢 − 𝑑) · 𝑆1

𝑏 =𝑢 · 𝐶/0 − 𝑑 · 𝐶/"

(𝑢 − 𝑑) · 𝑅%

Finally,wefindthecurrentvalueofouroptionas:

𝐶1 = 𝑎 · 𝑆1 + 𝑏 =𝑅% − 𝑑𝑢 − 𝑑 · 𝐶/0 +

𝑢 − 𝑅%𝑢 − 𝑑𝑅%

· 𝐶/"

37

Black-ScholesModel

The Black-Scholes model is the most well-known mathematical model for

valuingoptionsandassumesgeometricBrownianmotioninpriceswithconstant

drift and volatility. The development of this formula gave the Nobel Prize in

EconomicstoMyronScholesandRobertMerton–FischerBlack,thethirddeveloper

passedawaytwoyearsbefore–in1997aftertheirpublishingin1973.

TheBlack-Scholesmodelmakesthefollowingassumptions:

§ TheoptionisEuropeanandcanonlybeexercisedatexpiration;

§ Nodividendsarepaidoutduringthelifeoftheoption;

§ Marketsareefficient(i.e.,marketmovementscannotbepredicted);

§ Therearenotransactioncostsinbuyingtheoption;

§ The risk-free rate and volatility of the underlying are known and

constant;

§ Thereturnsontheunderlyingarenormallydistributed.

Inordertovaluetheoption,wejustneedtoinputtherequireddataintothe

Black-Scholesformula:

𝐶 = 𝑆 · 𝑁(𝑑/) − 𝐾 · 𝑒2)- · 𝑁(𝑑')

Where:

𝑑/ =ln 𝑆𝐾 + Z𝑟 +

𝜎'2 \ · 𝑡

𝜎 · √𝑡

𝑑' = 𝑑/ − 𝜎 · √𝑡

Where:

C:Calloptionprice

S:Stockprice

K:Exerciseprice:Costsassociatedwithundertakingtheproject

r:Timevalueofmoney:Risk-freerateofreturn

38

t:Timetomaturity:Maxtimetheinvestmentdecisioncanbedeferred

σ:Std.dev.ofstockreturns:Riskinessoftheunderlyingasset

N:Normaldistribution

RegardingtheRealOptionsmethod,themostvaluableadvantagethatwefind

istheflexibilitythatprovidestheinvestorwithwhenvaluingastartup.However,it

entailsahigh levelofcomplexityandknowhowwhichmightnotbeavailable for

everyone.

Regardingthetwomodelsthatwehaveseen,theBinomialmodelpresentsthe

clearadvantageofbeingextremelymathematicallysimple.Nevertheless,thismodel

canbeascomplexasthedesignerofthedecisiontreewants,sinceincludingextra

nodesinmulti-periodmodelsincreasessignificantlyitscomplexity.Inthecaseof

theBlack-Scholesmodel,themainissuecomesnotonlyfromthehighquantitative

complexitybutalsofromthehighdependencyonchoseninputs,whichatthesame

timemightbedifficulttodefine.

3.1.5. BookValue

Book Value method is a good way to assess valuations of companies that

accountsignificantassets,suchasinventory,receivables,amongothers,ortovalue

companieswithlowprofits.

Itisanasset-basedapproachinwhichBookValuerepresentstotalassetsminus

totalliabilitiesandiscommonlyknownasnetworth.Itrepresentstheamountthe

company is worth after selling all the assets and paying back all the liabilities,

consideringbothtangibleandintangibleassetsinthecalculation.

𝐵𝑜𝑜𝑘𝑉𝑎𝑙𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Book Value method is commonly used to cross-test other more common

methods, suchas theDCF,ComparableCompanies,etc.However, therearesome

specialsituationswherethisvaluationmethodcanbeusedasaprimaryvaluation

methodology:

39

• Companieswithlowornegativeprofits–Inthiscase,commonvaluation

methodscannotbeused.

• Small companies with powerful customer/supplier relations –

Successfulsmallcompanieswithstrongrelationswithitscustomersand

suppliers,whichareusuallynoncontractual andnon-transferable, are

usuallyvaluedattheirbookvalueplusamodestpremium.

TherearesomeadjustmentstobemadeintheBookValuemethodology.Some

sellerswillprobablywanttoconsiderthefactthatsomeassetsmayhaveagreater

market value than the value accounted in the balance sheet, such asmachinery,

equipment,buildings,etc.Ontheotherhand,buyersmightrequestanassessment

oftheassetsthatareearningmoneyforthebusiness,askingforanadjustmentin

the purchase price in case that some assets do not generate anymoney for the

company.

Regarding the use of this methodology for a startup valuation, since some

startups,speciallyearlystagefirms,aremorefocusedonintangibleassetssuchas

R&D, customer base, product development, among others, and the Book Value

methodismorefocusedonthetangibleaspectsofthecompany,thismethodfailsto

consider the intrinsic potential success of the businessmodel, being not always

helpfulinstartupvaluation.

3.1.6. LiquidationValuation

Similar to the Book Value, the Liquidation Valuation is a method in which

company’sassetsareassumedtobesoldtorepaycompany’sliabilities.Whatever

remainsrepresentstheEquityValueofthefirm.

The main difference with Book Value is that Liquidation Valuation only

considers the tangible assets of the company, since this valuation method

represents the total worth of a company’s assets if the firm were to go out of

businessanditsassetssold.

𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

40

Intangible assets such as goodwill, brand recognition and intellectual

propertiesareexcludedfromthiscalculationsincetheycannotbesoldseparately

fromthebusiness.

Since this methodology is commonly used in bankruptcy or liquidation

scenarios,sometimesthevalueoftheassetstobesoldareatdiscountorbelowits

bookvalue,duetotheadverseconditionsofthesaleandtheneedtocollectmoney

torepaydebtholdersfirstandequityholderslately.

All-in-all, most of the time Liquidation Valuation produces lower values

comparedtoothervaluationmethodologies,sinceitexcludesintangibleassetsand

usuallythetangibleassetsconsideredinthecalculationareaccountedatdiscount.

However,companieswithlowearningsbutwithsubstantialhardassetscouldfind

attractivetousethisvaluationmethodsinceitwouldproducehighervaluesthan

theonesobtainedthroughothercommonvaluationmethodssuchasComparable

CompaniesorDCF.

3.2. Non-traditionalValuationMethods

Afteranalyzingtheoptionsforlatestagestartups,wewillnowreviewwhatare

thenon-traditionalalternativevaluationmethodsthatmaybeusedforearlystage

startups.

3.2.1. VentureCapital

The Venture Capital method was developed by Harvard Business School

ProfessorBillSahlmanin1987andhasbeenimprovedbyhimselfseveraltimesuntil

now.Thismethodsetsavaluationbyconsideringtheexpectedrateofreturnofthe

investmentinthetargetstartuponceitisexited.Inshort, itstartsbydefiningits

expectedsellingpriceaftertheholdingperiod–usuallywithin3and7years–.From

there,onecalculatesbacktothecurrentpost-moneyvaluation.Althoughitcanbe

used in post-revenue companies, the Venture Capital method is often used in

valuationsof pre-revenue startupswhere it is easier to estimate a potential exit

valueoncecertainmilestonesarereached.

41

Aswesaid,thefirststepistodeterminetheexpectedvalueofthestartuponce

theinvestorexitsthecompanyafteritsholdingperiod.Todoso,weneedtocome

upwithanestimationof futuremetrics thatwilldrivetheexitvaluebyapplying

multiples from comparable companies and similar precedent transactions from

relatedbusinesses.Theoretically,anykindof trustworthymetricrelevant for the

businessinwhichthestartupoperatescanbeusedtoforecasttheterminalvalueof

thecompany,howeverthemosttypicalonesareforecastedrevenuesandearnings

–EV/revenuemultipleandearningsratiorespectively–.

Oncewehavetheterminalvalueofthestartupatthetimeoftheexit,weneed

todiscounttheexitvaluebacktothepresent.Bydoingsowefindthepost-money

valuation.Atthispoint,animportremarkiscrucial:thismethodvaluesthestartup

from the investor’s point of view, not the company’s one. In this sense, the

discounting rate tobe takenmustnotbe the company’sWACCbut the expected

returnontheinvestment(ROI)thattheinvestorislookingfor.

𝑃𝑜𝑠𝑡–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑃𝑉(𝐸𝑥𝑖𝑡𝑉𝑎𝑙𝑢𝑒) =𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙𝑉𝑎𝑙𝑢𝑒

𝑅𝑂𝐼

Once we have the post-money valuation, we convert it into the pre-money

valuationby simply subtracting the amount ofmoneydeployed in the company,

eitherattheentrytimeorinlaterinvestments.

𝑃𝑟𝑒–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑃𝑜𝑠𝑡–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Oneof themain limitationsof theVentureCapitalmethod is the fact that it

implicitlyassumesthattherewillbenoequityissuancesinthestartupinthefuture,

makingtheownershipoftheinvestortobethesameatthebeginningandattheend

oftheinvestmentperiod.Thisconsiderationdoesnotseemreasonablesince,aswe

discussed in Section 2.4, themainway of fundraising to fuel startups growth is

issuingnewequity.Nevertheless,thereareafewtechniquestotrytoaccountfor

this effect such as estimating the dilution level that can be producedwithin the

investor’sinvestmentperiod.

Similarly, the Venture Capital method does not take into account possible

payments made from the startup to the investor within the investment period,

42

whicharecommon,especiallywhentheinvestorisaventurecapitalfund–aiming

tominimizeitsinvestmentrisk–.

Another limitationcomes fromtheuseofmultiples tocompute the terminal

value of the startup. As we already discussed in Section 3.1.2 and Section 3.1.3,

multiplesalwaysentailacertainlevelofuncertainty,andevenmoreinthestartup

ecosystemifwethinkofthehighrateoffailureduetothebinarybusinessmodel,

the uniqueness of some disruptive businesses, and the fluctuations in industry

multiplesdrivenby“hot”periodsinwhichthoseriseartificiallybecauseofirrational

expectationsorhighconcurrencybetweeninvestors.

Despite theabove-mentioneddrawbacks, theVentureCapitalmethod iswell

reasonablybalancedintermsofquantitativeanalysisandsimplicityandseemsto

beusefulforsystematicplanningoffutureroundsofinvestment.

3.2.2. Berkus

TheBerkusmethodwas developed byDaveBerkus during the nineties and

updatedbyhimself20yearsafter.Fromhisperspectiveasa renownedbusiness

angelandventurecapitalist,herealizedthatwhiletherearemanywaystoproject

thevalueofacompanyforpurposesofpricinganinvestment,forecastedrevenues

aremetorachievedbyfewerthanoneinathousandstartups.Then,Berkuscame

upwithavaluationmethodthatdoesnotrelyon financialmetricsbutratheron

operatingrisk.

Followingthis idea,Berkusidentified5operatingrisksasthecrucialonesin

order to determine whether or not a startup will succeed: (i) Sound idea; (ii)

Prototype; (iii) Quality management team; (iv) Strategic relationships; and (v)

Productrolloutorsales.

The first risk ishavingaSound idea andaims to reduce thebasic valueand

product risk. To analyze it, we have to determine whether there exist similar

products in the market. If there are no similar products, the investor should

establish subjectively its own risk valuation. However, if there are products

43

reasonably alike the investorwill rate the riskby analyzing theirmarket fit and

marketpenetrationinwhichtheyarecurrentlyoperating.

ThesecondriskisPrototypeandaimstoreducethetechnologyrisk.Tovalue

thisriskitisneededtoanalyzeboththeprototypeofthestartupinwhichweare

considering to invest and most importantly the market reaction and customer

opinionaboutit.

Thethirdrisk isQualitymanagementteamandaimstoreducetheexecution

risk.Regardingthisrisk,itisimportanttounderstandwhetherthekeypeopleinthe

startupworkcollectivelyasacohesiveteamwithalignedobjectives.Itisalsovital

thatthisteamismultidisciplinaryanddiverselycomposed,andthateachindividual

hasadifferentiatedrolethatmatcheshisexpertisefield.

ThefourthriskisStrategicrelationshipsandaimstoreducethemarketriskand

competitiverisk.Thisriskrefers,ontheonehand,totheadvisorteamthestartupis

surroundedbyas an indicatorofhow trustworthy the company is.On theother

hand, it is also relevant toknowwhat investorshavealready investedandwhat

financingwaysthestartuphaschosenuptothispoint.

Finally,thefifthandlastriskisProductrolloutorsalesandaimstoreducethe

financialandproductionrisk.Totacklethisrisk,weneedtoanalyzethetractionof

theproductonceithasbeenlaunchedandthecustomerresponsetoit.

Once these five riskshavebeenconsidered,according to theoutcomeof the

analysis,Berkusassignupto$500ktoeachfactor–thesevaluesarethoughtforthe

Americanecosystemandhavetobeadaptedtotheappropriateindustrypricelevel

whenconsideringinvestinginothergeographies–,whichamounttoamaximumof

$2,5m startup valuation. However, Berkus states that there is no question that

startupvaluationsmustbekeptatalowenoughamounttoallowfortheextreme

risktakenbytheinvestorandtoprovidesomeopportunityfortheinvestmentto

achieveatentimesincreaseinvalueoveritslife.

44

AfirstlimitationtotheBerkusvaluationmethodisthatitcanonlybeusedfor

startups in which the investor believes in its potential to reach over $20m in

revenuesbythefifthyearofbusiness.

Anotherlimitationistherigidityofthemethodtoestablishwhatarethemain

risksforaspecificcompany.Itmaybearguedthatamarketplacedoesnotsharethe

samecrucialoperatingrisksasabiotechcompany,at leastnotcompletely.Then,

Berkushasrecentlystatedthatnowadayshismethodshouldbeusedasasuggestion

ratherthanarestrictiveform,adaptingittotheparticularitiesthatwecanfindin

eachbusiness.

Finally,wecanalsoarguethatthismethodistoosubjectivesince,intheend,

the risk rating has to be done by the investor without a particular scale or

methodologytogradeit.However,thissimplicityisalsooneofthemainadvantages

of the Berkus method, alongside with the independency of the valuation from

financialprojectionsthatveryrarelyaremet.

3.2.3. Scorecard

TheScorecardmethodwasdevelopedbythefamousbusinessangelBillPayne

in2010.Themainideaofthisvaluationmethodistocomparethecompanyinwhich

we are considering investing to other funded startups. Adjusting the average

valuation based on different factors such as industry or geography is possible

althoughthemostidealscenarioisthatinwhichallcomparablestartupssharethe

samefactors.Eventhoughitisalsopossibletoadjustbasedonstage,thismethodis

normallyusedforpre-revenuestartups.

The first step that Payne proposes consists on computing the average pre-

money valuation of similar startups. Since startups use not to be public and

financingroundsinformationusenottobedisclosed,gatheringthesedatacanbea

difficult task. In this sense, the author of the method published his Scorecard

MethodologyWorksheetbasedontheresultsofasurveytobusinessangelswhere

itwasshownthatNorth-Americanpre-revenuestartupswerevaluedbetween$1m

and$2m,witha$1.5massumedaverage.

45

Inthesecondstep,Paynedefinesthesevenmostrelevantfactorsforastartup

to be successful, assigning a relative weight to each of them which allows the

investortovarythepreviouslymentionedweightwithinacertainrange.Thefactors

andtheirrangesareshowninFigure9.Bydoingso,wecanadjusttheaveragepre-

moneyvaluationoftheindustrywiththeparticularitiesofourtargetstartup.

ComparisonFactor Range

StrengthofEntrepreneurandTeam 0%–30%

SizeoftheOpportunity 0%–25%

Product/Technology 0%–15%CompetitiveEnvironment 0%–10%

Marketing/Sales/Partnerships 0%–10%NeedforAdditionalInvestment 0%–5%

Otherfactors 0%–5%

Figure9:Scorecardcomparisonfactorsandrespectiverange

Source:BillPayneandAssociates

Finally,inthethirdstepweassigncomparisonfactorstotherelativeweights.

To sodo,wemust conduct an intensivemarket analysis tounderstandhowour

targetcompanystandswithrespecttoitscompetitors.Forinstance,iftheSizeofthe

opportunity for the startup is in line with its peers, we will assign a 100%

comparisonfactor.However,itwillbeabove100%if it ishigher,orbelowif it is

lower.Then,wewillcomputethefinal factorasthesummationoftheproductof

each comparison factor (CF) times its respective relative weight (RW), and we

multiplythisfinalfactorbythepreviouslycomputedindustryaveragepre-money

valuation.

𝑃𝑟𝑒–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝑃𝑟𝑒–𝑚𝑜𝑛𝑒𝑦𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 ·M𝑅𝑊$ · 𝐶𝐹$

3

$./

Similarlytoothernon-traditionalvaluationmethods,themainlimitationsofthe

Scorecardvaluationmethodisthenecessityofgatheringpre-moneyvaluationsof

similar companies and the subjectivity of establishing relative weights and

comparative factors. Themain advantage is the simplicity and the high level of

personalizationofthemethod,whichcanbeveryusefulforexperiencedinvestors.

46

3.2.4. FirstChicago

TheFirstChicagomethodwasdevelopedbytheventurecapitaldivisionofFirst

ChicagoBankin1970,aimingtovaluesituation-specificbusinessesbycombining

market-orientedandfundamentalanalyticalmethods.Themainideaistoestablish

differentscenariosandtovalueeachofthemindependentlyand,intheend,tocome

upwithafinalvaluationconsideringtherespectiveprobabilityofeachscenario.

Hence,firstlyweneedtodefinedifferentfuturescenariosforthestartupthat

we are valuing. Theoretically, any number of scenarios is possible, however in

practiceusuallythreedifferentscenariosareconsidered:(i)Best-casescenario;(ii)

Mid-casescenario;and(iii)Worst-casescenario.Eachscenariowillbeindependent

from the others and will have each own financial projections, with different

revenues,costs,earnings,cashflowsandeveninvestmenthorizonsortimetoexit.

Usually,themid-casescenarioisthemostfeasibleandrealisticone,whichis

basedonanalystexpectationsor intensiveduediligenceprocesses.On theother

hand, the best-case scenario is an optimistic one, in which the hopes of the

management team are reflected and drives to the best financial outcomes.

Dependingonthebusinessinwhichthecompanyoperates, it ispossiblethatthe

marketdeterminesanaturalmaximumcapofthefinancialoutcome.Similarly,the

worst-casescenarioisthemostpessimisticone,inwhichthefearsoftheinvestor

arereflecteddrivingthevaluationtoitslowestpoint.Becauseofthebinarymodel

ofstartupsthatwehavealreadytalkedaboutindifferentoccasions,theworst-case

scenariooftenentailsthepossibilityoffailure,situationinwhichtheinvestormay

loseallhisinvestedcapital.

Inasecondstep,weneedtocomeupwithanestimationofthedivestmentprice

foreachscenario.Todoso,weneedtofindtheterminalvaluethatthestartupthat

wearevaluingwillhaveoncewedecidetoexitit.Thisterminalvalue,likewise,in

otherpreviouslyanalyzedmethods,iscomputedapplyingmultiples,followingthe

approachtoestimatevaluationbytakingasareferenceagroupofpeerssimilarto

ourtargetcompanyintermsofindustry,geographyandstage.

47

Oncewehave a terminal value for each scenario,weneed todetermine the

requiredrateofreturninordertobeabletoconductthevaluationsofeachscenario.

Althoughmanyprofessionalinvestorsdeterminetherateofreturninternally,the

CAPM–explainedindetailinSection3.1.1–canalsobeused.Nevertheless,therate

of return produced by the CAPM is usually adjusted in order to account for the

characteristic illiquidity of the startup ecosystem. In fact, since one criteria that

definesastartupistheequityfinancingandthe–almost–totalabsenceofdebt,the

rateofreturnthatwewillusetovalueeachscenariocorrespondstotheoutcomeof

ouradjustedCAPMformula.

𝑟 = 𝑅% + 𝛽$ · C𝐸(𝑅&) − 𝑅%D + 𝑙4

Where:

r:Requiredrateofreturn

Rf:Risk-freerate(takenfromtheyieldofhigh-qualitybonds)

E(Rm):Expectedreturnofthemarket

[E(Rm)-Rf]:Expectedmarketriskpremium

βi:Betacoefficientforasseti

lp:Liquiditypremium

Atthispointwecanalreadycomputethevaluationofeachscenario,whichwill

result from the summation of cash flows projected in the respective scenario

discountedwiththepreviouslyfoundrateofreturn,addedtotheterminalvaluethat

thestartupwillhaveatthetimeofexitdiscountedaswell.

𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛5 =M𝐶𝐹-5

(1 + 𝑟)-

6

-./

+𝑇𝑉5

(1 + 𝑟)6

Where:

ValuationS:ValuationunderscenarioS

h:Investmenthorizon

𝐶𝐹-5:CashflowatperiodtandunderscenarioS

r:Requiredrateofreturn

48

TVS:TerminalvalueunderscenarioS

Oncewehaveavaluationforeachscenario,wehavetoallocateprobabilitiesto

eachofthem.Naturally,theseprobabilitiesdependonourscenariodefinitionsand

thenumberofthem,hencetheymayvaryalotbetweendifferentstartupvaluations

and significantly rely on the skills and experience of the investor. Nevertheless,

WilliamSahlmanandDaniel Scherlisdefine the typical scenarioprobabilities for

venturecapitalinvestors,showninFigure10.

Scenario Probability

Best-casescenario 25%

Mid-casescenario 50%Worst-casescenario 25%

Figure10:Sahlman,ScherlisFirstChicagomethodscenarioprobabilities

Source:WilliamSahlmanandDanielScherlis;“TheVentureCapitalMethod”;HBS

Nowthatwehaveaproperandindependentvaluationforeachscenario,the

laststepistocarryouttheweightedsumofthesevaluations,resultinginthefinal

valuationofourtargetstartup.

𝑆𝑡𝑎𝑟𝑡𝑢𝑝𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 =M𝑝5 · 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛5

7

5./

Where:

N:Numberofscenarios

pS:ProbabilityofscenarioS

ValuationS:ValuationunderscenarioS

The First Chicago method provides the investor with a very high level of

freedomandflexibilityinordertoaccountforthemanydifferentsituationsthatthe

startupmayencounter–actuallyasmanyashewants–.However,thisisadouble-

edgedsword:thehigherthenumberofscenariosthehigherthecomplexityofthe

method. Another advantage is the possibility of taking into account possible

paymentsfromthetargetcompanytotheinvestorwithinitsholdingperiod,even

though makes the model more complex again. Finally, the use of multiples

49

introducesthepreviouslymentioneduncertaintyandissuesoffindingthenecessary

appropriatedata.

3.2.5. RiskFactorSummation

TheRiskFactorSummationmethodwasdevelopedbytheOhioTechAngels,a

group of early stage investors of Ohio. Thismethod, likewise, as the previously

explainedvaluationmethodssuchastheScorecardmethodortheBerkusmethod,

aims to come up with a pre-money valuation for pre-revenue companies but

consideringabroadersetoffactorsthatwillbeanalyzed.

As in the Scorecard method, first we have to find the average pre-money

valuationofcomparablecompaniesforourtargetstartup.Then,weadjustthisvalue

with twelverisk factors that theOhioTechAngelspropose.Concretely, the listof

risksthattheRiskFactorSummationmethodsuggestsconsideringisthefollowing:

i. Management

ii. Stageofthebusiness

iii. Legislation/Politicalrisk

iv. Manufacturingrisk

v. Salesandmarketingrisk

vi. Funding/capitalraisingrisk

vii. Competitionrisk

viii. Technologyrisk

ix. Litigationrisk

x. Internationalrisk

xi. Reputationrisk

xii. Potentiallucrativeexit

Foreachriskfactor,theinvestorhastoassignagradeinlinewiththefollowing:

§ +2 Verypositiveforthecompanygrowthandfutureexit

§ +1 Positiveforthecompanygrowthandfutureexit

§ 0 Neutralforthecompanygrowthandfutureexit

§ -1 Negativeforthecompanygrowthandfutureexit

50

§ -2 Verynegativeforthecompanygrowthandfutureexit

Apositivegrade(+1or+2)reflectsalowerthanaverageriskforthestartupthat

wearevaluing,aneutralgrade(0)reflectsthattherespectiveriskisinlinewithits

peers,andanegativegrade(-1or-2)reflectsthatthecompanyismoreexposedthan

itspeerstothisspecificrisk.

Hence,theaveragepre-moneyvaluationofthecomparablestartupsisfinally

positivelyadjustedforriskswithpositivegradesincreasingthevaluationby$250k

forevery+1and$500kfora+2.Ontheotherhand,theaveragevalueisnegatively

adjustedforriskswithnegativegradesdecreasingthevaluationofthetargetstartup

by$250kforevery-1and$500kfora-2.

The main advantage of Risk Factor Summation is that this method forces

investors to consider important exogenous factorsof risks thathemaynothave

considered otherwise. The downside is that this also implies an increase in the

subjectivityandthecomplexityofthemethod.

3.2.6. Cost-to-Duplicate

The Cost-to-Duplicate method, also known by the Cost-to-Recreatemethod,

valuesthestartupbyanalyzinghowmuchwouldcosttosetupanidenticalcompany

fromscratchaccordingtothefairmarketvalueofitsassets.However,thismethod

doesnottakeintoaccountfuturepotentialandintangibleassetssuchasbrandvalue

ormanagementstrength.

Inadditiontothephysicalassetsofthestartup,theCost-to-Duplicatemethod

accountsaswellforcoststhathavealreadybeenincurredsuchasdevelopingtheir

prototype,patentprotection,orresearchanddevelopment.

For the above mentioned limitations, this method is used as a Go/No-Go

decisionmakerortoseta floor inthevaluationrangeratherthantoassesa fair

valuationofthecompanyinwhichaninvestorisconsideringtoenter.Inthissense,

hewouldneverinvestinthestartupmorethanitwouldcosthimtoreplicatethe

business.

51

4. CaseStudy:HelloFresh4.1. Maingoalsofthecasestudy

Theobjectiveofconductingacasestudyistoapplywhatwehavestudieduntil

thispointinarealscenario.Bydoingso,wewanttoprovehowdifficultisthejobof

a professional startup investor, who has to face the uncertainty inherent in the

ecosystemduetothebinarymodelandhighrisksassociated,whicharereflectedin

volatilevaluationsdependingonthemethodusedandthefactorsconsidered.

Moreover,wewanttounderstandbyourownexperiencewhichmethodsseem

to be more appropriate for this purpose and what are the main upsides and

downsides of each of them. In addition, we want to see how different are the

valuationsprovidedbyeachmethodandwhethertheyfinallyconvergeinacertain

reasonablevalue,meaningthattheuseofsomeofthemisthemostappropriateway

offindingafairfinalaveragevaluation.

With the above-mentioned objectives in mind, we will work in a real case,

valuingthestartupHelloFreshjustafteritsIPOonNovember2nd2017,withdata

gathered fromcompanyreports,brokerreports,equityanalystreports, initiating

coverage reports and other public data available. Hence, all the information

providedinthisreportwillbeasofDecember2017,toconsiderthesamedataand

information and company characteristics that was used to carry out the IPO

valuation.

4.2. Companyintroduction

4.2.1. Generalinformation

HelloFresh is an online company which delivers fresh, pre-portioned

ingredientsandrecipesonaweeklybasisviaasubscriptionmodel.Thecompany

was founded in Berlin in 2012 by Dominik Rickter, Thomas Griesel, and Jessica

Nilsson.

52

HelloFresh’scorebusiness is focused insending fresh,healthy,personalized,

andnutritiousstep-by-steprecipes,withtheexactfreshingredientsneededtocook

them,totheircustomer’shomeseveryweek.Thesemeal-kitsaredelivereddirectly

totheircustomersdoorataconvenienttimeandcontainsustainable,healthy,and

locally sourced ingredients to prepare the recipes above-mentioned.Most of the

recipesaredesignedtobepreparedin30to40minutes.

The company operates in 10 markets and finished the year 2017 with

approximately1.5millionactivecustomers,whoconsumedaround137.4million

meals,establishingthemasthegloballeadersintheircategory.

Figure11:HelloFreshlocations

Source:HelloFreshSEAnnualReport2017

JustafterthestartoftheiroperationsinBerlin,thecompanydecidedtooffer

nationwidecoverageinGermany,expandingthebusinessalsointheNetherlands

andUK.Lately,HelloFreshenteredthemarketsofAustria,Australia,UnitedStates,

Belgium,Canada,Switzerland,andLuxembourg.

To manage the business, HelloFresh does not divide their business into

operating segments based on the type of the business. Instead, the company is

organizedonthebasisoftwogeographicalregionswhichformtheiroperatingand

53

reporting segments, and divided by theUSA region, comprisingUnited States of

America,andtheInternationalregion,comprisingtherestofthecountrieswhere

thecompanyoperates.

4.2.2. BusinessActivities

HelloFresh established an innovative businessmodel, being one of the first

companiesinthemarkettooffermeal-kitsolutions.Theirmainideaistotransform

traditional food supply chain model into a sustainable business, eliminating

intermediariessuchasdistributorsandwholesalersandreducingsubstantiallythe

foodwastefromtheirsupplychain.

Inorder tomake thishappen,asof2017,HelloFreshworkedwith600 local

suppliers which let them operate in a just-in-time basis, ordering from their

suppliersonlytheingredientsandquantitiesthatwereconfirmedtobedelivered

totheircustomers,reducingthenthefoodwaste.Hence,thecompanyestablisheda

nearzero-inventorybusinessmodelforalltheperishableproducts,whicharethen

packedintheirrefrigeratedfulfilmentcentersanddeliveredtothecustomersusing

insulated packing or refrigerated vehicles. The food boxes are handed to the

customersthroughoutthecompany’slogisticpartnersfordeliveryordeliveredby

theirowndeliveryservice.Inthisaspect,customersreceiveaboxeveryweekatthe

time slot of their choice with perfectly portioned ingredients and the required

recipestotransformthemintomeals.Asof2017,mostofthedeliveryservicesthat

thecompanyofferswerefreeofchargetotheircustomers.

With theirmeal-kit plan, the company’s valueproposition is to approach an

enjoyable, customized, and personalized cooking experience using healthy and

nutritiousingredients,providinghighvalueformoneyandasuperiorproductand

serviceoffering.

54

Figure12:HelloFreshproduct

Source:HelloFreshSENon-FinancialReport2017

Regardingtheoffering,customerscanpickameal-kitplanaccordingtotheir

dietarypreferences,theirschedule,andthesizeofthehousehold.Althoughitcan

varydependingonthegeography,mostof thecustomerscanchoose from3to5

mealfoodboxes–oreven2to5insomelocations–perweekfor2to4people,from

differentdietaryplansrangingfromclassictoveggie,family,andothermorespecific

such as pork-free, no-fish, express, etc., which are personalized meal

recommendations based on their customer’s indications. Within each plan the

customerscanselectupto14differentrecipes,whichtypicallytakearoundthirty

minutestoprepareandthatchangeinaweeklybasis.

Thebusinessoperatesthroughaflexibleorderingmodelwherecustomerssign

uptoaplan,whichcanbecustomizedaccordingtoparameterssuchashousehold

size,deliverywindowanddietarypreferences.Oncethecustomersaresubscribed,

they have then to select their recipes in advance from a list ofweekly changing

recipes and pay only for those deliveries that they order, since the customer’s

paymentisdrawnonthedayofdelivery.Theprocessneedstobetriggeredonce

only –online– and then turns into a fully automated process thereafter. This

operatingmodelletcustomerpauseorcanceltheplanatanytime–typically5days

inadvance–withoutlosinganymoney.

55

4.2.3. Company’sFactsandFigures

In order to fully understand HelloFresh and its pre-IPO situation, we will

analyzethemostimportantfactsandfiguresthatthecompanypresents.

Firstly, we can see in Figure 13 that HelloFresh revenue stream has grown

massivelyup to2017and it isexpected tocontinuesignificantly increasinguntil

2021,althoughlogicallyatalowerpath.Moreover,inlinewithwhatwasexplained

inprevioussections,USrevenuecurrentlyrepresentagreatportionofthetotal–

c.60%in2017–anditisexpectedtokeepthislevelupto2021accordingtoBarclays

projections.

Figure13:HelloFreshrevenueevolution(2014-2021)

Source:CompanyreportsandBarclaysresearch

RegardingHelloFreshmargins,Figure14showshoweitherGrossmargin,and

EBITDAandEBITmarginshaveimprovedconsiderablysince2014,recoveringfrom

theirlowestpointin2015,andareexpectedtokeepgoingupforthefollowingyears,

breakingevenin2020fortheEBITDAandEBITmargins.Itisworthtomentionthat

inthiscase,theEBITDAandEBITtakenintoaccounttoperformtheanalysisarethe

onesadjustedbyBarclays,whicharemoreconservativethanthereportedones.

0%

100%

200%

300%

400%

500%

0

500

1.000

1.500

2.000

2.500

2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E

%YoY€m

RevenueUSA RevenueInternational Growth(%)

56

Figure14:HelloFreshmarginsevolution(2014-2021)

Source:CompanyreportsandBarclaysresearch

ConsideringthecurrentcoststructureofHelloFreshin2017whichisdisplayed

inFigure15,clearlyCOGSrepresentsthemaincost,amountingformorethanone

thirdofthetotal,followedcloselybyFulfillmentcosts.Thisisnotasurpriseifwe

thinkofHelloFreshbusinessmodel,inwhichtheybuyfoodfromitssuppliers,pack

it,andthendistributeittoitscustomers.Marketingisanotherrelevantexpense–

althoughlessthanitwastwoyearsagoaspresentedinFigure16,whenthecompany

waslessknownandneededmassivemarketingeffortstopromoteitself–,whichis

also in linewithwhatwe should expect from a startup. Finally, SG&A is a little

portionofthecoststructure,alsoconsistentwiththestartupecosystemandwith

operatingthoughtheInternet,whichrequireslittlelaborintensity.

-40%

-30%

-20%

-10%

0%

10%

45%

49%

53%

57%

61%

65%

2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E

EBIT(DA)MarginGrossMargin

GrossMargin Adj.EBITDAMargin Adj.EBITMargin

COGS37%

Fulfillment33%

Marketing24%

SG&A6%

57

Figure15:HelloFreshcostsbreakdown(2017)

Source:CompanyreportsandBarclaysresearch

Figure16:HelloFreshcostsasapercentageofsalesevolution(2015-2021)

Source:CompanyreportsandBarclaysresearch

Oncewehaveanalyzedrevenuesandcosts,wewillfocusontheglobalsituation

ofthecompany.Todoso,wehavebuilttheEconomicBalanceSheetofHelloFresh,

which is shown in Figure 17.We can see how non-current or fixed assets have

increased and are expected to continue doing so, as it is natural in a growing

companywhichisinprocessofexpansion.Inaddition,currentassetsarelowerthan

itscurrentliabilitiesand,asaresult,HelloFreshworkingcapitalrequirementsare

negative.Thisismainlyduetothefactthatthecompanycollectsthemoneyfromits

sales almost immediately while it takes between two to four weeks to pay its

suppliers.WecanalsonotethatHelloFreshtotalequityhasincreased–wewilllook

atitmoreindetailafterwards–,asithasdonethenetcashpositionthatthestartups

holds.Finally,itsdebtpositionisirrelevantcomparedtoitsequity,whichmatches

ourstartupcriteriadefinitionoftheSection2.1.

0%

10%

20%

30%

40%

50%

2015A 2016A 2017A 2018E 2019E 2020E 2021E

COGS(%Sales) Fulfillment(%Sales) Marketing(%Sales) SG&A(%Sales)

58

Figure17:HelloFreshEconomicBalanceSheet(2015-2021)

Source:CompanyreportsandJPMorgan,MorganStanley,Barclaysresearch

GoingnowdeeperintotheHelloFreshequity,thestartuphasbeenissuingnew

equitysinceitsfoundation2012tofuelitsgrowthstrategyasitshowsFigure18.In

thisregard,thefirstfinancingroundtookplacein2014,whereHelloFreshraised

€39m at €0.1bn pre-money valuation. The most recent at the IPO time equity

issuancewascarriedoutin2016,raising€85matapre-moneyvaluationof€2bn.

Figure18:HelloFreshcapitalraising(2012-2016)

Source:CompanyreportsandMorganStanleyresearch

EconomicBalanceSheet–EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021ENon-CurrentAssets 21 60 66 101 125 132 144

CurrentAssets 28 34 49 63 73 83 91CurrentLiabilities 61 66 106 123 146 166 186WorkingCapitalRequirements -33 -33 -58 -61 -73 -83 -95

CapitalEmployed -12 27 9 40 52 49 49

TotalEquity 88 20 294 226 222 295 434

Debt 10 64 45 36 36 36 36Cash&CashEquivalents 109 58 331 222 205 282 420NetFinancialDebt -99 6 -286 -186 -170 -247 -385

CapitalInvested -11 27 8 39 52 49 49

59

After the several capital increases shown before, the pre-IPO non-diluted

shareholder structure remained as Figure 19 presents, dominated by Rocket

Internetwitha48%ownershipasaclearmajorbutnon-controllingshareholder.

Additionally, in-the-money employee options outstand of more than 10% of

ownership.

Figure19:HelloFreshpre-IPOnon-dilutedshareholderstructure(2017)

Source:CompanyreportsandMorganStanleyresearch

4.2.4. Companyrisks

When analyzing a company, specially a startup, it is important to make an

assessmentabouttherisksthatcanchallengethecompanyinthepresentornear

future.Havingaclearimageabouttherisksthatthecompanywillfacewillhelpto

understandthecurrentmarketpositionofthefirmandassessthefuturesuccessof

thebusiness.

Analyzingthecompanybothinternally–operationsandbusinessmodel–and

externally –market and competition– we have classified the company risks as

follows:

1. HelloFreshpresentsa limited track recordasa company since itwas

founded in2012.Thebusinessmodel isbasedonhigh-growth, asset-

lightmodelwhichreliesonnegativeWorkingCapital,sincethecompany

48%

15%

7%

4%3%4%0,1%

18,9% RocketInternet

HoringJeff

PhenomenVenturesLP

Vorwerk&Co.

QatarInvestmentAuthority

OtherShareholders

TreasuryShares

Other

60

does not pay suppliers until 2-4 weeks after delivery and takes

customer’spaymentonthedayofdelivery.

2. Low customer retention, considering that among the4.4mhousehold

thattriedtheproductuntilthesecondquarterofFY2017,only1.3mof

themwereactivecustomers.

3. Complexity tomaintain the zero-inventoryapproachwhen scalingup

thebusiness,whichcangeneratelogisticproblems.

4. Since the company is still unprofitable as of December 2017, if the

companyisunabletoscaleupthebusinesstoreachprofitability,then

lossesandcashburncouldcontinue.

5. Low barriers to entry which can directly affect HelloFresh’s market

position.Thereisanimportantthreatcomingfromsupermarketchains,

sincetheycancopyHelloFresh’stechnology,whichcombinedwiththeir

current logistics and network of local presence, can become an

importantcompetitor.LogisticcompaniessuchasAmazoncanalsooffer

animportantthreat.

6. Thecompanywillfaceimportantmarketingcoststoincreaseboththe

customerbaseandtheretentionrate.

7. Strictqualitycontrolstoberealizedregularly.SinceHelloFreshdelivers

freshfoodtoitscustomers,thereisariskassociatedwithfoodsafety.

Any problem regarding the food conditions can negatively affect the

brandimageandcustomerperceptionofthefirm.

4.3. IndustryOverview

4.3.1. Industry’sFactsandFigures

The meal-kit industry where HelloFresh operates represents a fragmented

sector, following the typical characteristicspresent in industrieswithoperations

related to the production ormanufacture of foods. Since food is a differentiated

product,differentcompanieswill likelycoexist,offeringawiderangeofproducts

adjustedtodifferenttastes.

61

According to data extracted from Euromonitor as of 2016, the global food

industry represented an aggregated value of €7.5tn, with an online penetration

accountingthe2%ofthismarket.ConsideringonlythecountrieswhereHelloFresh

operates, the food industry accounts for€2.5tn, being€800bn generated by the

restaurantindustry,whoseonlinepenetrationisaround3%–quitesmallcompared

toother industries–and€1.7trilliongeneratedbythegrocery industry–withan

online penetration of 1%–. Regarding the meal-kit industry, it is more likely to

disruptthegroceryindustryratherthantherestaurantindustryduetothebusiness

natureofHelloFresh.

Focusing now on the meal kit-industry itself, data from Euromonitor and

Morningstarstatesthatthisindustryrepresentsasmallpartoftheoverallmarket

food, with a current estimated value of €1.9bn in the US andwith an expected

growth to €8.1bn by 2021. As commented, meal-kit market represents a small

portionof theglobal food industry,which is currentlyworth€7.5tnandwithan

expectedgrowthto€9.0tnby2021.

Figure20:Foodandmeal-kitindustryvolumes[2016and2021]

Source:EuromonitorandMorningstar

The growth forecasted both for the global food industry and the meal-kit

market, will be driven by three main trends, which will be aggregated to the

increasingpenetrationthatonlineservicesisofferinginthefoodindustry.

1. Increase on the healthy food demand. According to Technomic,

around68%ofconsumersindevelopedcountrieseithereatortrytoeat

2016– GlobalFoodMarket:€7.5tn 2021– GlobalFoodMarket:€9.0tn

2016 2021

USMeal-Kit:€1.9bn USMeal-Kit:€8.1bn

62

healthyfoodtofollowahealthylifestyle.Consumersaremorelikelyto

eathealthyingredientsandmealsathomethanawayfromhome.

2. Stressfulandbusylifestyleleadpeoplefocusonconvenienteating.

Customersareincreasingthetimespendonshoppingonlinetohavea

less stressful experience and save time. As a result, the popularity of

proportionedfoodsisincreasingquickly.

3. Increaseontheinteresttowardshighqualityproducts.Peopleare

willingtopaymoreforfoodoptionsfororganicandqualityfood.

4.3.2. CompetitiveLandscape

As seen in the recent past years, the onlinemarket has been increasing its

presence in developed countries to account for high penetration numbers in

industries such as fashion and accommodation.However,within the global food

industry,thepenetrationseenasof2016isquitelow–3%forrestaurantsand1%

forthegroceryindustry–which,aggregatedtothelowbarrierstoentry,attracteda

significantnumberofcompetitors.Thesecompetitorsoperateinawidevarietyof

businessmodelsacrossseveralverticalswithinthefoodindustry.

Themostimportantthreattocompaniesoperatinginthemeal-kitindustryare

thegroceryretailers.Regardingtheonlinetakeawayplatforms,althoughtheywould

beable to takeadvantageof their technological capabilities,as theyoperateasa

marketplace connecting customers with restaurants, they do not seem to be

threateningcompetitorsinthefuturewithinthemeal-kitmarket.Otherimportant

playerssuchasonlineretailersmightentertothemeal-kitindustry.

All in all, themeal-kit sectoroffers importantopportunities to explore,with

manyplayerstryingtogetintothem.However,itisimportanttonotethatbarriers

toachievescaleareconsiderableanditmaybechallengingtosustainablyoperate

in this competitive ecosystem. Players with the ability to adapt their inventory

challengestotheirbusinessscalabilitywillsucceed.

63

4.3.2.1. Meal-kitproviders

Asof2016,HelloFreshisthelargestandonlyglobalplayerwithinthemeal-kit

deliverymarket.However,accordingtoastudyrealizedbyPackagedFacts,there

are c. 150 meal-kit delivery services in the market, which have been trying to

differentiatefromtherestbyofferingdifferentmeal-kitexperiencessuchasvegan

mealkits,orplansfocusedonprofessionalathletes,forinstance.Withintheseother

players,themoremeaningfulcompetitorsinthissegmentare:

• LinasMatkasse–Swedishfresh-foodsubscriptionservicelaunchedin2008

withoperationsinScandinaviaandtheNetherlands.Profitablesince2013,

thecompanygeneratedrevenuesof€116min2016.LinasMatkassedelivers

2.5mmealspermonth.

• BlueApron–Launchedin2012intheUnitedStates,thecompanyoperates

in the meal-kit industry, offering similar services to the ones offered by

HelloFresh.Thecompanywentpublic in June2017,afterexperiencingan

outstandingrevenuegrowthof113%,from$340mofrevenuein2015,to

$795min2016.

• Otherimportantcompetitors–Playersoperatinginthemeal-kitsegment

with slightly different business models, ranging from “a la carte” to

subscription, are Gousto, Green Chef, Plated, Home Chef, FreshDirect,

SimplyCook, Quitoque, Handpick, Munchery, Hungryroot, Sun Basket,

Shuttlecook,SimplyCook,GobbleandPeachdish,amongothers.

4.3.2.2. SupermarketChains

Amongtheplayersoperatingwithinthefoodindustry,thelargestthreattoa

meal-kitprovidersuchasHelloFreshcomesfromtraditionalgroceryplayersthat

aimtobemoreactiveinthebusiness,offeringnewservicessuchasmeal-kitplans.

Nevertheless,meal-kitprovidersarespecialistsinofferingattractiverecipesbacked

bydata-drivenapproachtofood,operatinginamoreflexiblemanner,beingableto

vertically integrate thevaluechain to reduce thenumberofStockKeepingUnits

(SKUs) compared to a traditional grocery retailer, taking advantage of more

attractiveeconomics.

64

In an attempt to maintain their market share in the retail sector, many

supermarkets seem to be interested either in acquiring a meal-kit provider or

implementing themeal-kit servicewithin their product offering. As an example,

majorsupermarketchainslikeWaitrose,TescoandOcadohavemovedtothemeal-

kitdeliverymarketby launching theirownproductoffering.AsofMay2017,40

branches of Tesco have been stocking meal-kits to be sold. Moreover, many

supermarketsarepartneringwithmeal-kitproviders,suchasHelloFresh,whosells,

asof2017,theirdinnermeal-kitsinSainsbury’sinLondon.

4.3.2.3. Amazon

Duetoitsbusinessnatureanditsbrandpower,Amazonisanimportantthreat

to companies operating in the meal-kit delivery market. As of July 2017, the

companydecidedtoenterinthemeal-kitmarketbylaunchingtheirAmazonFresh

service,whichwasavailableinsomeUSstatesandonlyforAmazonPrimemembers.

ThebusinessmodeloftheAmazon’smeal-kitserviceisquitedifferentfromtheone

offeredbyHelloFreshorBlueApron, being“a lacarte”withoutanysubscription

required, and with delivery fees for those orders below $40. Although in 2017

AmazonFreshoperatedinasmallscale,offeringthisserviceinUSmetroareas, it

couldbecomeabiggerfocusareaaftertheacquisitionofWholeFoodsbyAmazon.

4.4. CompanyValuation

Theimportanceofacompanyvaluationistounderstandhowmuchthefirmis

worthatthemomentinordertocarryoutfinancingrounds,companysale,andalso

toanalyzethefairvalueofthetradablesharesoutstandinginthemarket.

Inthecaseofstartups,theprocessofunderstandingitsvalueisanimportant

point for the company. As startups usually are financed through equity, both

foundersandinvestorsareinterestedinknowingthefairvalueofthecompanyto

negotiate,notonlytheamountofmoneyraisedinthefinancinground,butalsothe

percentageofownershipthatinvestorswillreceive.

65

Inthisparticularcase,thegoalofthispaperistocomputeacompanyvaluation

analysis focusing on the startup above described. As seen in precedent sections,

HelloFreshcarriedoutseveralfinancingroundsbetween2014and2016,raisinga

total amount of €322m. The company became listed on the Frankfurt Stock

ExchangesinceitsIPOinNovember2017.Hence,thispaperwillanalyzethevalue

ofthecompanyasofDecember2017.Thedecisiontochoosethisdateismainlydue

totheavailabilityofinformationandrelyingdata,takingintoaccountthefactthat

the companywas still considered to be a startup since it was still unprofitable,

mainlyfinancedthroughequity,andwithanewanddisruptingbusinessmodel.

This paper has analyzed the value of the company using different valuation

methods,bothtraditionalandnon-traditional.Thetheoreticalexplanationofeach

ofthemethodsisdescribedintheSection3ofthispaper.

Fromapracticalpointofview,wegatheredourfinancialdatafromestimations

developedbydifferentinvestmentbanks–JPMorgan,MorganStanleyandBarclays–

andpublishedindifferentbrokerreports,aswellasfromotherpublicavailabledata

suchascompanyreports.JPMorgan’sforecaststurnouttobethemostoptimistic

onesabouttheprospectsofHelloFresh,whileBarclayswasthemostpessimistic.

Morgan Stanley’s expectations were in between. Given that each forecast was

different,wedecidedtocomputeanaveragescenario,whichwewillusetocompute

thevaluationofthecompany.

4.4.1. DiscountedCashFlows

As stated in the Section 3.1.1, the Discounted Cash Flows is a widely used

valuationmethod very useful to valuemature and stable companies, as well as

companiesthathavegeneratedrevenuesandpositivefreecashflows.Hence, the

DCF is a very valid and useful method to valuate late stage startups such as

HelloFresh.

AlthoughHelloFreshstartedgeneratingsignificantrevenuesin2014,in2017

the companywas still not profitable, forecasting net incomebreakeven in 2020.

However,theoutstandingrevenuegrowththatthecompanyhasbeenexperiencing

since its foundation, accounting for a 71%CAGRFY15 – FY17, combinedwith a

66

projectedCAGRFY17–FY21of23%,andapositivetrendofpercentageofGross

Margintorevenues,letbrokersbelievethatthecompanywillbeprofitableatthe

EBITDAandFCFlevelinFY19.

Figure21:HelloFreshweightedaveragescenarioincomestatement

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

FortheDCFanalysis,sinceitisbasedinprojectionsoffinancialperformance,it

isimportanttotackleandconsiderthemainfactorsthatcanaffectthecompany’s

performance, considering that the company will work in solving the following

challenges:

• Lowbarrierstoentry,whichincreasesthecompetition

• Increasethecustomerretentionratestoreducethemarketingcosts

• Scalabilityofthebusinesswithoutincreasingtheassetcostbase

• Asset-lightmodelreliantonnegativeworkingcapitalmightbesensible

totoplinemomentum

FreeCashFlowprojections

Consideringthatthestartuppresentsahighuncertaintyduetoitsimportant

growthprospectsanditsunprofitablesituation,theprojectedperiodfortheFree

CashFlowshasbeenrangedbetween2018and2021,obtainingthepresentvalueof

thefuturefreecashflowsasofyear-end2017.

WeightedAverageScenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021ERevenue 305 597 892 1.217 1.537 1.810 2.058EBITDA -94 -83 -77 -55 15 95 165D&A 0 -1 -1 -3 -8 -11 -12EBIT -114 -90 -93 -77 -12 70 138NetFinancialInterest -1 -4 -6 -1 -1 -1 -1EBT -106 -92 -96 -74 -9 72 140IncomeTax 0 0 2 -2 -3 -7 -13EffectiveTaxRate 0,0% 0,0% 2,1% -2,5% -9,2% 27,5% 13,3%

NetIncome -106 -92 -94 -76 -13 64 127EPS(EUR) n.a. -0,87 -0,62 -0,51 -0,09 0,40 0,81

67

Figure22:HelloFreshfreecashflowscalculation

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

Discountrate

TocomputethediscountratetobeappliedinthefutureFreeCashFlowsand

theTerminalValue,wehaveusedtheWACC,consideringthefollowingassumptions:

Figure23:HelloFreshdiscountratecalculation

Source:JPMorgan,MorganStanley,BarclaysandDeutscheBank

Itisimportanttomentionthatthediscountrate,orWACC,hasbeenassumed

witha100%equity.Althoughthecompanyhassomedebtliabilitiesshownonthe

balancesheet,theproportiondebt-over-equityisverysmall,sincethecompanyis

mainly financed by equity, with a debt-over-assets ratio being close to zero.

Moreover,inordertoaccountfortheriskanduncertaintyofthestartupecosystem,

wedecidedtoconsideronlythecostofequityasthediscountrate,obtainingthen

moreconservativevalues.

Regarding thevaluesof the risk-free rate, riskpremiumandbeta, theyhave

been assumed according to broker consensus from JP Morgan, Morgan Stanley,

BarclaysandDeutscheBank.

FreeCashFlow –EURm 2017A 2018E 2019E 2020E 2021EEBIT -93 -77 -12 70 138EffectiveTaxRate 2% -2% -9% 28% 13%NOPAT -91 -79 -13 51 120+D&A 1 3 8 11 12–ChangeinWorkingCapital -29 -3 -12 -11 -11–Capex 10 29 36 21 26FreeCashFlow -108 -51 20 73 146

WACCBeta 1Equityriskprimium 6%Riskfree 3%Discountrate 9%

68

TerminalValue

TocomputetheterminalvalueasofDecember2021,ithasbeendonewiththe

GordonGrowthMethod,consideringthefollowingassumptions.

Figure24:HelloFreshterminalvaluecalculation

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

Again, the perpetuity growth assumption has been taken from broker

consensus.RegardingtheDiscountRate,itrepresentsthecostofequityasexplained

intheprecedentsection,whereastheFCF–2021Ecomesfromthecalculationofthe

futureFreeCashFlowof2021E.

DiscountedCashFlowanalysis

Once the projection period has been settled, the FCF and Terminal Value

calculated,andthediscountratedetermined,thenextstepistodiscounttheFCF

and TV to 2017 year-end, sum them up and obtain the Enterprise Value of the

analyzedcompany.

Figure25:HelloFreshDCFvaluationmodel

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

TerminalValueDiscountrate 9%Perpetuitygrowth 3%FCF-2021E(EURm) 146TVasof2021E(EURm) 2513

Page 1DiscontedCashFlow –EURm 2017A 2018E 2019E 2020E 2021EEBIT -93 -77 -12 70 138EffectiveTaxRate 2% -2% -9% 28% 13%NOPAT -91 -79 -13 51 120+D&A 1 3 8 11 12–ChangeinWorkingCapital -29 -3 -12 -11 -11–Capex 10 29 36 21 26FreeCashFlow -108 -51 20 73 146TerminalValue 2.513Discountperiod 1 2 3 4Discountrate 9% 9% 9% 9%Discountfactor 0,91743 0,84168 0,77218 0,70843DiscountedCashFlow -46 17 56 1.884

69

Figure26:HelloFreshDCFimpliedvaluation

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

Considering theprojections taken fromthebrokerconsensuswith thegiven

assumptions for the WACC and Terminal Value, we get an Enterprise Value of

€1,9bnwithanimpliedmarketsharepriceof€13,7asofDecember2017.

Nevertheless,theassumptionsconsideredinthecalculationoftheDiscounted

CashFlowsanalysisaretakenfrombrokerconsensus,whichslightlyvarybetween

each other by small variations on the WACC and Perpetuity Growth rate

assumptions, affecting on the final Enterprise Value result. In order to take into

accountthesevariationsintheassumptionsandtounderstandhowtheEnterprise

ValueandSharePricechangewithavariationontheWACCandLong-Termgrowth,

asensitivityanalysishasbeencarriedout.

Figure27:HelloFreshEnterpriseValue(EURm)sensitivitytable

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

Page 1ImpliedValuationEnterpriseValue(EURm) 1.911

NetDebt(EURm) -286EquityValue(EURm) 2.196

Sharesoutstanding(m) 160ShareValue(EUR) 13,7

Page 11.911 7,0% 7,5% 8,0% 8,5% 9,0% 9,5%0,50% 1.868 1.712 1.578 1.460 1.357 1.265

1% 2.021 1.842 1.688 1.556 1.440 1.3381,5% 2.202 1.993 1.816 1.665 1.534 1.4202,0% 2.420 2.171 1.965 1.791 1.642 1.5132,5% 2.685 2.386 2.141 1.938 1.766 1.6193,0% 3.017 2.648 2.352 2.111 1.911 1.7413,5% 3.444 2.975 2.611 2.320 2.082 1.884LT

GrowthRate

WACC

70

Figure28:HelloFreshShareValue(EUR)sensitivitytable

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

Moreover, this sensitivity analysis shows us the possible ranges that the

EnterpriseValuewouldtakeassumingdifferentvaluesforWACCandLong-Term

Growthrate.SinceallthebrokerreportsthatwereanalyzedagreedinaLTGrowth

Rateof3%andaWACCbetween8%and9%,theEnterpriseValueandSharePrice

ValuerangesconsideredaspossibleoutcomesfortheEnterpriseValueandShare

Price,arehighlightedinlightblueinthetablesabove.

4.4.2. ComparableCompanies

The Comparable Companies or Peer Comps method is a common relative

valuation methodology, very useful and reliable when the range of comparable

companies is wide. Since the business model of HelloFresh is quite new and

innovative,thereareverylimitedpubliccompaniesthatcanbeconsideredasapeer

with a truly comparable businessmodel.Moreover, according to the projections

shownintheFigure21onSection4.4.1,HelloFreshisnotexpectedtobeprofitable

until2019,factthatenhancestheideatofocusonEV/Salesmultiples,bothpresent

and forward multiples. For all these reasons, in this case study this valuation

methodologyisusefulasacross-checkwiththeothervaluationmethods.

Ascommented,projectionsofHelloFresh financialsexpect that thecompany

willdeliverarevenueCAGRFY17–FY21of23%,from€892min2017to€2.058m

in2021,withthebusinessturningprofitableatEBITDAandFCFlevelin2019.Over

time,thecompanywillbeabletooperatewithEBITDAmarginsinhightomid-teens

levels.Consideringthatthebusinesshasverylimitedpeerswithatrulycomparable

14 7,0% 7,5% 8,0% 8,5% 9,0% 9,5%0,50% 13,5 12,5 11,6 10,9 10,3 9,71,00% 14,4 13,3 12,3 11,5 10,8 10,11,50% 15,5 14,2 13,1 12,2 11,4 10,72,00% 16,9 15,3 14,1 13,0 12,0 11,22,50% 18,6 16,7 15,2 13,9 12,8 11,93,00% 20,6 18,3 16,5 15,0 13,7 12,73,50% 23,3 20,4 18,1 16,3 14,8 13,6

WACC

LTGrowthRate

71

businessmodel, and with the guideline of the broker consensus, we decided to

considernotonlydirectbusinesspeersbutalsocompaniesoperating inthefood

marketplace industry and online retailers, taking into account that HelloFresh

operatesonline.

Directpeers

BlueApronistheonlypubliccompanywithatrulycomparablebusinessmodel.

AscommentedintheSection4.3.2.1,thecompanywasfoundedin2012andasof

2017onlyoperatesintheUS.BlueApronbecamepublicinJune2017.

Foodmarketplacecompanies

Therearedifferentcompaniesoperatinginthefoodmarketplaceindustry.For

thiscasestudy,andfollowingtheguidelineoftheconsideredbrokers,wehavetaken

ascompanycomparablesometakeawayplatformssuchasDeliveryHero,JustEat

and Takeaway.com. Although these companies do not operate in the meal-kit

industry,thereareseveralfeaturessharedwiththebusinessmodelofHelloFresh

(disruptivecompanieswitharelatively lowonlinepenetration in theiroperating

markets).Onepointtoconsideristhefactthatthesecompaniesgeneraterevenues

through commissionswithoutbeing engaged in thedeliverypart, accounting for

highermarginscomparedtoHelloFresh.

Onlineretailcompanies

Companies such asASOS,Ocado, Zalando, Zooplus,Boohoo andYooxNet-A-

Porterarerelativelyyoungcompanies,operatingthroughtheonlineservices,which

shareswithHelloFreshthechallengeofthesupplychaintosourcetheproductand

carryoutthedeliverytothecustomer.WeflagthatthegrowthrateofHelloFreshis

higherthanthisgroupofcompanies.

Analyzing theexpectedperformanceofeachof thepeers,which is shown in

Figure29,weobserveageneralcorrelationbetweenrevenueCAGRFY16–FY19,

andEV/Salesmultiple.

72

Figure29:CorrelationbetweenCAGRFY16-19andEV/Salesmultiple

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

WeexpectHelloFreshtopresentaEV/Salesmultiplebetween2,0x–2,5x,similarto

thepeerswithexpectedrevenueCAGRFY16-FY19closetotherevenueCAGRof

HelloFreshexpected for thesameperiod.Carryingout theComparableCompany

analysis,wefindouttheresultsdisplayedinFigure30.

Figure30:HelloFreshcomparablecompaniesanalysis

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

AlthoughthemetricsshownaboverepresentEV/SalesandEV/EBITDAmultiples,it

is important tonote thatwewillonlyuse theSalesmultiple inouranalysis.The

reasonbehindthisdecisionisrelatedtothefactthatthecompanyisexpectedto

becomeprofitableatEBITDAlevelinmid-2019,whichwouldimplyaverylowEV

outcomethroughtheEV/EBITDAanalysis.

BlueApron

DeliveryHero

JustEat

Takeaway.com

ASOS

Ocado

ZalandoZooplus

Boohoo

0%

10%

20%

30%

40%

50%

60%

- 2,0x 4,0x 6,0x 8,0x 10,0x 12,0x 14,0x

Company Country MarketCap EnterpriseValue$m $m FY17A FY18E FY19E FY17A FY18E FY19E

DirectpeersBlueApron US 749 713 0,7x 0,7x 0,6x - - -Foodmarketplaces

DeliveryHero Germany 7.570 6.868 9,3x 6,6x 5,0x - - 65,7xJustEat UK 7.348 7.439 10,4x 8,0x 6,7x 33,9x 23,5x 17,2xTakeaway.com Netherlands 2.483 2.375 11,5x 8,7x 6,9x - 67,1x 29,5xOnlineretailers

ASOS UK 6.752 6.544 2,3x 1,8x 1,8x 37,1x 27,5x 21,2xOcado UK 2.980 3.232 1,6x 1,5x 1,3x 25,5x 21,5x 19,7xZalando Germany 13.800 12.712 2,2x 1,9x 1,5x 38,6x 30,2x 23,2xZooplus Germany 1.146 1.102 0,9x 0,7x 0,6x 110,7x 49,6x 32,0xBoohoo UK 2.720 2.604 3,5x 2,6x 2,0x 33,5x 36,5x 25,5xYooxNet-A-Porter Italy 4.920 4.902 1,9x 1,6x 1,4x 23,7x 17,8x 13,5xAverage 4,4x 3,4x 2,8x 43,3x 34,2x 27,5xMedian 2,3x 1,9x 1,7x 33,9x 28,9x 23,2x

EV/Sales EV/EBITDA

73

Figure31:PublicCompsvaluationmodel

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

Figure32:HelloFreshpeers’EV/Salesmultiples

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

Fortheenterprisevaluecalculation,webelievethatitismoreappropriatetobase

ourcalculationonthemedianofthepeer’smultiples,ratherthantheaverage,since

therearesomeoutliersthatweidentified,correspondingtotheFoodMarketplace

companies,thatcandistortiontheaveragemultipleoutcome.Theseoutlierspresent

ahigherrevenueCAGRFY16–FY19compared toHelloFreshand therestof the

selected peers, which would justify their high revenue multiples. Moreover, we

EnterpriseValuefromEV/SalesinEURmFY17A FY18E FY19E

Peer'sAverage 4,4x 3,4x 2,8xImpliedHelloFreshEV(EURm) 3.940 4.147 4.267Peer'sMedian 2,3x 1,9x 1,7xImpliedHelloFreshEV(EURm) 2.022 2.251 2.561

NetDebt(EURm) -286 -186 -170EquityValue(EURm) 2.308 2.437 2.731

Sharesoutstanding(m) 160 160 160ShareValue(EUR) 14,4 15,2 17,1

0,7x 0,7x 0,6x

11,5x

8,7x

6,9x

4,4x3,4x

2,8x2,3x 1,9x 1,7x

-

2,0x

4,0x

6,0x

8,0x

10,0x

12,0x

FY17A FY18E FY19E

MinMaxMeanMedian

74

decidedtocarryouttheEVcalculationthroughthemedianofthepeers’multiples

inordertobemoreconservative,sincethevaluesobtainedthroughthemedianof

themultiplesarelowercomparedtothevaluesobtainedthroughtheaverageofthe

samemultiples.

Havingsaidthat,thevaluesobtainedthroughtheComparableCompanyvaluation

methodsuggestanEnterpriseValuerangedbetween€2.022mand€2.561manda

sharepriceintherangeof€14,4and€17,1pershare.

4.4.3. RealOptions

InordertovalueHelloFreshusingtheRealOptionsmethod,wehavedecided

tofollowtheBinomialModel.Firstly,asexplainedinSection3.1.4,wehavedefined

twopossiblescenarios.Sincewebasedouranalysisondifferentinvestmentbanks

estimations,weassimilatedourUp-Statetothemostoptimisticbusinessplan–i.e.

the one developed by JP Morgan–, and our Down-State to the most pessimistic

businessplan–i.e.Barclays’one–.

TocomeupwiththestockpricethatHelloFreshwouldhavehadundereach

scenario,weperformedthesameDCFvaluationanalysisexplainedinSection4.1.1

tocomeupwitheachofthem.Wegavesomeflexibilitytothemodelbytakingto

possible stock prices, min and max, considering the WACC to be 9% and 8%

respectively.TheresultsareshowninFigure33.

Figure33:RealOptionssharepricecomputationunderUp-StateandDown-State

Source:JPMorgan,Barclays,companyreportsandownanalysis

Max Min Max MinEnterpriseValue(EURm) 3.417 2.782 1.397 1.133NetDebt(EURm) -286 -286 -286 -286EquityValue(EURm) 3.702 3.068 1.682 1.419Sharesoutstanding(m) 160 160 160 160ShareValue(EUR) 23,1 19,2 10,5 8,9

Up-State Down-StateFutureStockValue

75

Then,tocomputethecurrentstockprice,weusedtheHelloFreshlastfinancing

round,whichtookplaceinDecember2016andinwhichthecompanyraised€85m

reachingavaluationof€2bn.

Figure34:RealOptionscurrentsharepricecomputation

Source:MorganStanley,companyreportsandownanalysis

Regardingthestrikepriceoftheoption,weconsideredthatapotentialinvestor

wouldonlybeinterestedinowningHelloFreshsharesiftheywereabletogivehim

anequalorhigherreturnthanhisexpectedrateofreturn,i.e.HelloFreshcostof

equity,computedinSection4.4.1andamountingto9%.So,wecomputedthestrike

priceasthecurrentstockvaluetimestheinvestorrequiredrateofreturn.Theonly

remaininginputwastherisk-freerateofreturn,forwhichwetookthesamevalue

asintheDCFmethod,correspondingto3%.

ThecomputationsandfinaloutcomesareshowninFigure35.

CurrentStockValueEquityValue(EURm) 2.000Sharesoutstanding(m) 160ShareValue(EUR) 12,5

76

Figure35:RealOptionsvaluationmodel

Source:MorganStanley,companyreportsandownanalysis

4.4.4. BookValue

TheBookValuemethodisaverysimpleoneinwhichweassumetheenterprise

valueofthecompanytobethesameasitsbookvalue.

Following this concept, we computed the book value of Hello Fresh as the

differencebetweenitsassetsandliabilitiesandthencalculateditssharevalueas

showninFigure36.

RealOptionsMethod Min MaxRf :Risk-freerateofreturn 3% 3%So :Currentstockvalue(EUR) 12,5 12,5Su :StockvalueatUp-State(EUR) 19,2 23,1Sd :StockvalueatDown-State(EUR) 8,9 10,5K :Strikeprice(EUR) 13,6 13,6Ce:Investorexpectedrateofreturn 9% 9%

u :Up-Statefactorofvalueincrease 1,5 1,9d:Down-Statefactorofvaluedecrease 0,7 0,8

Cu :OptionvalueatUp-State 5,5 9,5Cd :OptionvalueatDown-State 0,0 0,0

a :Stockportfolioallocation 0,5 0,8b :Bondportfolioallocation 10,0 16,9

RealOptionsValuation(EUR) 16,7 26,3

Sharesoutstanding(m) 160 160EquityValue(EURm) 2.680 4.216

NetDebt(EURm) -286 -186EnterpriseValue(EURm) 2.395 4.030

77

Figure36:BookValuevaluationmodel

Source:JPMorgan,MorganStanley,Barclays,companyreportsandownanalysis

4.4.5. VentureCapital

ApplyingtheVentureCapitalmethodtovalueHelloFresh,wefirstlycomputed

theterminalvaluethatthecompanywouldhaveoncethepotentialinvestorexited

thecompany.Inthissense,assuminganinvestmenthorizonoffouryears–i.e.until

2021–,weusedthe2021forecastedsalesandEBITDAandthefurthestrespective

multiples –i.e. 2019 forwardmultiples–. Regarding thesemultiples,we used the

sameasinthePublicCompsvaluationinSection4.4.2.

Tocomputethereturnoninvestment(ROI)thatapotentialinvestorwouldaim,

weusedthepreviouslymentionedcostofequityof9%astheexpectedannualrate

ofreturnandthe4-yearinvestmenthorizon.

ThecomputationsandresultsaredisplayedinFigure37.

BookValueMethodTotalAssets(EURm) 446TotalLiabilities(EURm) 422BookValue(EURm) 24

NetDebt(EURm) -286EquityValue(EURm) 309

Sharesoutstanding(m) 160ShareValue(EUR) 1,9

78

Figure37:VentureCapitalvaluationmodel

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

4.4.6. FirstChicago

To value HelloFresh using the First Chicagomethod, we first defined three

possiblescenarios.WeusedtheforecastsofJPMorgan,MorganStanleyandBarclays

fortheBest-Casescenario,Mid-CasescenarioandWorst-Casescenariorespectively.

Weassign25%probabilityforbothBest-CaseandWorst-Casescenarios,and50%

fortheMid-Casescenarioasrecommendedbythemethoditself.

Then,wecomputedtheterminalvalueundereachscenariointhesamewayas

intheVentureCapitalmethod,inSection4.4.5.TheoutcomeisshowninFigure38.

Figure38:FirstChicagoscenariosdefinition

VentureCapitalMethod EV/Sales EV/EBITDASales2021(EURm) 2.058 2.058EBITDA2021(EURm) 165 165Compsmultiple 1,7x 23,2xTerminalValue(EURm) 3.431 3.835

ROI 141% 141%Expectedannualrateofreturn 9% 9%InvestmentHorizon 4 years 4 years

Post-MoneyValuation(EURm) 2.430 2.717

Expectedcapitalraised(EURm) 363 363Pre-MoneyValuation(EURm) 2.067 2.354

NetDebt(EURm) -286 -286EquityValue(EURm) 2.353 2.640

Sharesoutstanding(m) 160 160ShareValue(EUR) 14,7 16,5

EV/Sales EV/EBITDA EV/Sales EV/EBITDA EV/Sales EV/EBITDAScenarioprobability 25% 25% 50% 50% 25% 25%

Sales2021(EURm) 1.960 1.960 2.034 2.034 2.182 2.182EBITDA2021(EURm) 216 216 193 193 87 87Compsmultiple 1,7x 23,2x 1,7x 23,2x 1,7x 23,2xTerminalValue(EURm) 3.266 5.009 3.390 4.478 3.636 2.018

Mid-CaseScenarioScenarioDefinition

Best-CaseScenario Worst-CaseScenario

79

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

Finally,assumingasinthepreviousmethodaninvestorexpectedrateofreturn

of9%anda4-year investmenthorizon,andconsidering thatHelloFreshwillnot

distribute any dividend to the investor during the holding period, the valuation

modelandoutcomearedisplayedinFigure39.

Figure39:FirstChicagovaluationmodel

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

4.4.7. RiskFactorSummation

Finally,thelastvaluationmethodusedtovalueHelloFreshistheRiskFactor

Summationmethod.

Firstly,weassignedtoeachofthekeyriskfactorsidentifiedbythemethod,by

comparingHelloFreshwith itspeers. Inthiscase,aswearevaluinganEuropean

startup, we multiplied the recommended adjustment of $250k per point by a

conversionfactorof0.5–accountingforthedifferenceinvaluationsbetweenEurope

andtheUS–.HelloFreshriskassessmentisshowninFigure40.

FirstChicagoMethod EV/Sales EV/EBITDAExpectedannualrateofreturn 9% 9%InvestmentHorizon 4 years 4 years

Expectedannualdividendpayments 0 0

EnterpriseValue(EURm) 2.423 2.831

NetDebt(EURm) -286 -286EquityValue(EURm) 2.709 3.116

Sharesoutstanding(m) 160 160ShareValue(EUR) 16,9 19,5

80

Figure40:RiskFactorSummationriskassessment

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

Then,weappliedtheresultingtotaladjustmenttothepeers-averagedvaluation

tofindHelloFreshfairvalue.Inthisstage,aswedidinothervaluationsmethodsin

whichmultiplesareinvolved,wetriedtodoitthroughnotonlyEV/Salesmultiples

but also othermultiples such as EV/EBITDA or P/E. However, since HelloFresh

presentsbothnegativeEBITDAandearningsfor2017,itwasnotpossible.Thefinal

outcomeisshowninFigure41.

Figure41:RiskFactorSummationvaluationmodel

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

RiskAssessment Grade AdjustmentManagement 0 0Stageofthebusiness +2 250.000Legislation/Politicalrisk +1 125.000Manufacturingrisk -1 -125.000Salesandmarketingrisk +1 125.000Funding/capitalraisingrisk 0 0Competitionrisk -1 -125.000Technologyrisk +2 250.000Litigationrisk 0 0Internationalrisk -1 -125.000Reputationrisk -1 -125.000Potentiallucrativeexit +1 125.000TotalAdjustment(EUR) 375.000

RiskFactorSummationMethod EV/Sales EV/EBITDARevenue2017(EURm) 892 892EBITDA2017(EURm) -77 -77Compsmultiple 2,3x 33,9xPeers-averagedValuation(EURm) 2.022 -

TotalAdjustment(EURm) 0,375 -EnterpriseValue(EURm) 2.022 -

NetDebt(EURm) -286 -EquityValue(EURm) 2.308 -

Sharesoutstanding(m) 160 -ShareValue(EUR) 14,4 -

81

4.4.8. ValuationFootballField

OncewevaluedHelloFreshusingdifferentmethods,wedevelopedaFootball

Fieldanalysisinordertodeterminethefinalvaluationofourstartupfocusingon

thetwomainoutcomesofourvaluation,itsEnterpriseValueanditsShareValue.

Thisanalysiswillalsoallowustoidentifyoutliersandmethodsthatwereclearly

notabletocomeupwithanappropriatevaluation.

RegardingtheEnterpriseValue,theresultsareshowninFigure42.

Figure42:SummarytableoftheHelloFreshEnterpriseValuefootballfieldanalysis

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

At a first sight, we can note that the valuation provided by the Book Value

methodmassively differs from the others due to its extremely low value. If we

consider the rational of themethod, as it was explained in Section 3.1.5, it only

captures the current picture of the analyzed company, but it does not take into

accountitsfutureprospects.Thisisperseagreatdrawback,butitisevenworse

whenvaluingstartups,whicharepreciselycharacterizedbythepotentialofscaling

itsbusinessandreachingamuchmaturestateoftheirbusiness.Forthisreason,the

BookValuemethodisdiscardedforourfinalHelloFreshvaluation.

Examining the resulting valuations, we can realize that the Real Options

method,althoughitdidnotprovidesuchanextremevaluationastheBookValueit

deliveredasignificantlyhighervaluationthantherest.Moreover,thisvaluationis

alsocomprisedwithinawiderange,withahighdifferencebetweenitslowestand

highestvalues.

Finally,wecanalsoobserve–orremember fromSection4.4.7– thatwith the

RiskFactorSummationmethodwewereabletoobtainasinglevaluation,notbeing

ValuationFootballField–EnterpriseValue –EURm Min Max Diff Weight1 Weight2DCF 1.911 2.352 442 20,00% 25,00%PublicComps 2.022 2.561 539 20,00% 25,00%RealOptions 2.395 4.030 1.635 10,00% 0,00%BookValue 24 24 0 0,00% 0,00%VentureCapital 2.067 2.354 286 20,00% 25,00%FirstChicago 2.423 2.831 407 20,00% 25,00%RiskFactorSummation 2.022 2.022 0 10,00% 0,00%Weighted-AverageValuation1 2.126 2.625 498 100% 100%Weighted-AverageValuation2 2.106 2.524 419 100% 100%

82

possibletoestablishavaluationrangecomprisedwithinaminimumandmaximum

value.Weconsiderthatthisfactdiminishesthereliabilityoftheoutcome.

Becauseoftheabovementioned,whenperformingtheFootballFieldanalysis

of the HelloFresh valuationwemade the decision of discarding the Book Value

method for our final HelloFresh valuation. In addition, we carried out two final

valuations. In the first one, we included the Real Options and the Risk Factor

Summationmethods,althoughwegavethemlowerweightthantotherest.Inthe

secondonewediscardedthesetwolastmethodsaswell.

SincetheeffectsproducedbytheRealOptionsandtheRiskFactorSummation

methodsareopposed–the firstonepushesup thevaluationand the secondone

pushesitdown–,thefinalHelloFreshvaluationdoesnotdifferssomuchfromthe

oneobtainedwithoutthesetwomethods.Eventhough,weconsideredthelastone

as the most reliable, so that we picked it as the final outcome of our analysis,

resulting in an Enterprise Value of between€2.1bn and€2.5bn. The results are

plottedinFigure43.

Figure43:HelloFreshEnterpriseValuefootballfieldgraph

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

OncetheFootballFieldanalysisisperformed,wewanttoknowwhathasbeen

themethodwhichhasproducedthemostaccurateresultbyitsowncomparedto

thefinalvaluation.Inthissense,wecomparedthedeviationbetweentheaverage

2,0

2,4

2,1

2,4

2,0

1,9

2,0

2,8

2,4

4,0

2,6

2,4

€1bn €2bn €3bn €4bn €5bn

RiskFactorSummation

FirstChicago

VentureCapital

RealOptions

PublicComps

DCF

2,52,1

83

valueofeachselectedmethodandtheaverageofthefinaloutcomerange–shownin

Figure44–.Bydoingso,werealizedthattheonewhichperformedmostaccurately

wasthePublicCompsmethod.

Figure44:AccuracyofeachmethodanalysisforEnterpriseValue

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

RegardingtheShareValue,theresultsareshowninFigure45.

Figure45:SummarytableoftheHelloFreshShareValuefootballfieldanalysis

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

ThesameobservationsextractedinthecaseoftheFootballFieldanalysisofthe

EnterpriseValueholdfortheShareValue,resultinginaHelloFreshfinalShareValue

ofbetween€14,9and€17,4.TheresultsareplottedinFigure46.

AccuracyoftheMethod–EnterpriseValue –EURm Average Error Error(%)DCF 2.132 -184 -7,9%PublicComps 2.292 -24 -1,0%VentureCapital 2.211 -105 -4,5%FirstChicago 2.627 312 13,5%Weighted-AverageValuation2 2.315 0 0,0%

ValuationFootballField–ShareValue –EUR Min Max Diff Weight1 Weight2DCF 13,7 16,5 2,8 20,00% 25,00%PublicComps 14,4 17,1 2,6 20,00% 25,00%RealOptions 16,7 26,3 9,6 10,00% 0,00%BookValue 1,9 1,9 0,0 0,00% 0,00%VentureCapital 14,7 16,5 1,8 20,00% 25,00%FirstChicago 16,9 19,5 2,5 20,00% 25,00%RiskFactorSummation 14,4 14,4 0,0 10,00% 0,00%Weighted-AverageValuation1 15,1 18,0 2,9 100% 100%Weighted-AverageValuation2 14,9 17,4 2,4 100% 100%

84

Figure46:HelloFreshShareValuefootballfieldgraph

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

Whencarryingoutthesamepreviouslyexplainedaccuracyanalysisbutforthe

ShareValue,wereachedthesameconclusion;thePublicCompsmethodwastheone

whichdeviatedthelessfromthefinalvaluationoutcomeagain.

Figure47:AccuracyofeachmethodanalysisforShareValue

Source:JPMorgan,MorganStanley,Barclays,DeutscheBank,companyreportsandownanalysis

14,4

16,9

14,7

16,3

14,4

13,7

14,4

19,5

16,5

25,9

17,1

16,5

€10 €13 €15 €18 €20 €23 €25 €28 €30

RiskFactorSummation

FirstChicago

VentureCapital

RealOptions

PublicComps

DCF

17,414,9

AccuracyoftheMethod–ShareValue –EUR Average Error Error(%)DCF 15,1 -1,1 -6,5%PublicComps 15,7 -0,4 -2,6%VentureCapital 15,6 -0,6 -3,5%FirstChicago 18,2 2,0 12,6%Weighted-AverageValuation2 16,2 0,0 0,0%

85

5. Conclusions

Atthebeginningofthisresearchpaper,wehaveseenthat,althoughnowadays

the termstartup ismassively spread, it isnot alwaysappropriatelyused. In this

sense, we identified the main criteria which identify companies as startups:

operatinginabinarybusinessmodel,holdingnegativefreecashflows,andbeing

equity financed. Nevertheless, not all startups look alike, andwe can categorize

themintosixdifferentmaturitystages–fromearliesttolatest:pre-seed,seed,early,

growth, expansion and exit–, each one with its own particularities in terms of

objectives,needs,risksandfinancing.

Thepreviouslymentionedneedoffinancing,mainlycarriedoutthroughequity

issuances, brings us to the next point of our paper: the necessity of valuing the

startup.However,giventheidiosyncrasyofthistypeofcompanies,whichpresent

negativefreecashflowsandoperateinmostofthecasesinnichemarketswithvery

fewcompetitorsandverylittlepublicandhistoricdataavailable,alongsidethehuge

uncertaintythatinvolvesthebusinessmodelitself,makesthistaskahuge–andat

thesametimeanextremelyinteresting–challenge.

Inthissense,wedivedintotheavailableoptionsthatapotentialinvestororthe

ownerofastartuphimselfcanuseinordertocomeupwiththefairvalueofthe

company.Wedividedthemethodsthatcanbeusedintotwotypes:thetraditional

ones,whichmaybecommonlyusedaswelltovaluematurecompanies,andthenon-

traditionalones,whichhavebeendevelopedduringtheyearsforpractitionersand

expertsinthemattertosurpasstheexitinglimitationofthetraditionaloneswhen

thosecannotbeused.

Finally,we dared to apply those studied valuationmethods in the real case

studyinordertotestthemanalyzingtheHelloFresh’scompanyvaluepost-IPOin

2017.Inthisregard,weputtheminpracticeandcarriedoutafootballfieldanalysis

of the outcomes of each valuation method, resulting in an enterprise value of

between€2.1bnand€2.5bn,andasharevalueofbetween€14.9and€17.4.

Comparing these results with the actual HelloFresh share performance, we

realizedthatourrecommendedsharevaluewasprettymuchinlinewithwhatithad

86

turnedouttobetheactualsharepricetwoyearsaftertheIPO–seeFigure48–.We

think that the initial difference between our recommended share price and the

actual one possibly comes from the conservatism over the expectations of

HelloFresh, the potential threat of other big players getting in the business and

disrupting it, and the difficulties to scale of the business itself. Nevertheless,

HelloFreshshowedthatitcouldmeetitsforecasts,andthemarketpricedit.Inthe

most recent times, we can see how the share price has dramatically increased

because of the Coronavirus crisis that we are currently suffering, from which

HelloFreshcantakeprofit.

Figure48:HelloFreshsharepriceevolution

Source:YahooFinance

All inall,we candefinitely conclude thatvaluinga startup is a complexand

challengingprocess,moredrivenbytheknow-howandexpertiseonthefieldofthe

onewho performs the valuation than formature companies, not being an exact

sciencebutratheranart itself.Thatsaid,usingdifferentmethods,andrationally

choosingordiscardingthemtocomeupwithafinalvaluationmightleadtoasound

resultwhich,usedwisely,mightalsoleadtoimpressivecapitalgainsderivedfrom

rationally-selectedinvestmentopportunities.

€5

€15

€25

€35

€45

ShareValueRange COVID-19Crisis HelloFreshSharePrice

87

Appendix

1. HelloFreshIncomeStatement

1.1. WeightedAverageHelloFreshIncomeStatement

1.2. JPMorganHelloFreshIncomeStatement–OptimisticScenario

88

1.3. MorganStanleyHelloFreshIncomeStatement–NeutralScenario

1.4. BarclaysHelloFreshIncomeStatement–PessimisticScenario

89

2. HelloFreshBalanceSheet

2.1. WeightedAverageHelloFreshBalanceSheet

2.2. JPMorganHelloFreshBalanceSheet–OptimisticScenario

JPMorgan–Optimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EPP&E 6 38 36 44 52 52 57

OtherIntangibleAssets 15 21 22 23 23 23 23

DeferredIncomeTaxAssets 0 1 8 16 25 35 45

TotalNon-CurrentAssets 21 60 66 83 99 109 125

Inventories 6 10 14 17 20 22 24

TradeReceivables 12 9 23 31 39 46 53

OtherCurrentAssets 11 14 14 14 14 14 14

Cash&CashEquivalents 109 58 313 256 272 406 605

TotalCurrentAssets 137 91 365 319 345 488 696

TotalAssets 159 152 431 402 444 597 821

ShareCapital 115 117 117 117 117 117 117

CapitalReserves 94 113 470 470 470 470 470

OtherReserves 22 27 37 49 58 65 72

AccumulatedLosses -142 -236 -348 -419 -414 -292 -99

OtherComprehensiveIncome -1 -1 -1 -1 -1 -1 -1

ShareholdersEquity 88 21 276 217 231 359 560

Non-ControllingInterests 0 0 0 0 0 0 0

TotalEquity 88 21 276 217 231 359 560

Non-FinancialLiabilities 10 16 16 16 16 16 16

Long-TermDebt 0 46 28 28 28 28 28

TotalNon-CurrentLiabilities 10 62 44 44 44 44 44

FinancialLiabilities 0 2 2 2 2 2 2

TradeandOtherPayables 46 43 86 115 144 168 191

Provisions 3 4 4 4 4 4 4

IncomeTaxLiabilities 0 0 0 0 0 0 0

Non-FinancialLiabilities 13 19 19 19 19 19 19

TotalCurrentLiabilities 61 69 111 141 170 194 217

TotalEquity&Liabilities 159 152 431 402 444 597 821

90

2.3. MorganStanleyHelloFreshBalanceSheet–NeutralScenario

2.4. BarclaysHelloFreshBalanceSheet–PessimisticScenario

MorganStanley–Neutralscenario– EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EPP&E 6 38 37 62 73 87 100

OtherIntangibleAssets 15 21 25 23 21 20 20

DeferredIncomeTaxAssets 0 1 5 5 5 5 5

TotalNon-CurrentAssets 21 60 67 90 99 112 125

Inventories 6 10 14 12 14 17 19

TradeReceivables 11 9 14 31 38 45 50

OtherCurrentAssets 11 14 19 19 19 19 19

Cash&CashEquivalents 109 58 340 245 237 298 442

TotalCurrentAssets 137 91 387 307 308 379 530

TotalAssets 159 152 453 395 407 490 654

ShareCapital 125 127 161 161 161 161 161

CapitalReserves 94 113 442 442 442 442 442

OtherReserves 12 17 30 30 30 30 30

AccumulatedLosses -142 -236 -328 -398 -408 -350 -212

OtherComprehensiveIncome -1 -1 -2 10 20 30 42

ShareholdersEquity 88 20 303 245 245 313 463

Non-ControllingInterests 0 0 0 0 0 0 0

TotalEquity 88 20 303 245 245 313 463

Non-FinancialLiabilities 9 6 0 0 0 0 0

Long-TermDebt 1 56 42 42 42 42 42

TotalNon-CurrentLiabilities 10 62 42 42 42 42 42

FinancialLiabilities 0 2 3 3 3 3 3

TradeandOtherPayables 46 43 77 77 90 104 119

Provisions 3 4 3 3 3 3 3

IncomeTaxLiabilities 0 0 1 1 1 1 1

Non-FinancialLiabilities 13 19 24 24 24 24 24

TotalCurrentLiabilities 62 68 108 108 121 135 150

TotalEquity&Liabilities 159 152 453 395 407 490 654

Barclays–Pesimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EPP&E 6 38 37 83 126 129 135OtherIntangibleAssets 15 21 24 43 45 43 42DeferredIncomeTaxAssets 0 1 5 5 5 5 5TotalNon-CurrentAssets 21 60 66 130 176 176 181

Inventories 6 10 14 20 25 29 34TradeReceivables 12 9 14 24 31 36 42OtherCurrentAssets 11 14 19 19 19 19 19Cash&CashEquivalents 109 58 340 164 107 143 215TotalCurrentAssets 137 91 387 227 181 228 309

TotalAssets 159 152 453 357 358 404 490

ShareCapital n.a. n.a. n.a. n.a. n.a. n.a. n.a.CapitalReserves n.a. n.a. n.a. n.a. n.a. n.a. n.a.OtherReserves n.a. n.a. n.a. n.a. n.a. n.a. n.a.AccumulatedLosses n.a. n.a. n.a. n.a. n.a. n.a. n.a.OtherComprehensiveIncome n.a. n.a. n.a. n.a. n.a. n.a. n.a.ShareholdersEquity 88 21 303 216 190 214 279

Non-ControllingInterests 0 0 0 0 -1 -1 0TotalEquity 88 21 303 215 190 214 278

Non-FinancialLiabilities 10 16 12 12 12 12 12Long-TermDebt 0 46 29 0 0 0 0TotalNon-CurrentLiabilities 10 62 42 12 12 12 12

FinancialLiabilities 0 2 3 3 3 3 3TradeandOtherPayables 45 43 77 99 124 146 168Provisions 3 4 3 3 3 3 3IncomeTaxLiabilities 0 0 1 1 1 1 1Non-FinancialLiabilities 13 19 24 24 24 24 24TotalCurrentLiabilities 61 69 108 130 155 177 199

TotalEquity&Liabilities 159 152 453 357 358 404 490

91

3. HelloFreshCashFlowStatement

3.1. WeightedAverageHelloFreshCashFlowStatement

3.2. JPMorganHelloFreshCashFlowStatement–OptimisticScenario

Source Scenario WeightJPMorgan Optimistic 33,3%MorganStanley Neutral 33,3%Barclays Pesimistic 33,3%

WeightedAverageScenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EChangeinWorkingCapital 24 -1 29 3 12 11 11OperatingCashFlow -66 -76 -55 -53 24 101 167Capex -6 -36 -10 -29 -36 -21 -26InvestingCashFlow -18 -42 -13 -46 -41 -24 -29FinancingCashFlow 174 67 344 -10 0 0 0

TotalCashFlow 90 -51 277 -109 -16 77 138Cash&CashEquivalentsatEndofYear 109 57 331 222 206 282 420

FreeCashFlowCalculation –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EEBIT -114 -90 -93 -77 -12 70 138EffectiveTaxRate 0,0% 0,0% 2,1% -2,5% -9,2% 27,5% 13,3%NOPAT -114 -90 -91 -79 -13 51 120+D&A 0 1 1 3 8 11 12–ChangeinWorkingCapital -24 1 -29 -3 -12 -11 -11–Capex 6 36 10 29 36 21 26FreeCashFlow -132 -51 -108 -51 20 73 146

JPMorgan–Optimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EProfitorLoss -117 -94 -112 -71 5 122 193

NetFinancialInterest 1 4 6 2 1 1 0

IncomeTax 0 0 0 0 0 0 1

D&AandImpairments 1 4 12 17 18 12 10

OtherAdjustments 18 6 10 12 9 7 11

ChangeinWorkingCapital 23 -1 24 19 18 16 15IncomeTaxPaid 0 0 -7 -8 -9 -10 -10

InterestPaid 0 -1 -6 -2 -1 -1 -1

OtherOperatingCashFlow 8 6 0 0 0 0 0

OperatingCashFlow -66 -76 -73 -32 40 146 218

Capex -6 -35 -9 -23 -22 -9 -16

SoftwareDevelopmentExpenditures 0 0 -2 -2 -3 -3 -4

OtherInvestingCashFlow -12 -7 0 0 0 0 0

InvestingCashFlow -17 -43 -10 -25 -25 -12 -20

CapitalContributionsfromShareholders 184 23 0 0 0 0 0

NetIPOProceeds 0 0 357 0 0 0 0

Increase/DecreaseinDebt 0 44 -18 0 0 0 0

RepurchaseofSharesintoTreasury -10 0 0 0 0 0 0

FinancingCashFlow 174 67 339 0 0 0 0

TotalCashFlow 91 -52 256 -57 16 134 199

Cash&CashEquivalentsatBeginningofYear 20 109 58 313 256 272 406

EffectsofExchangeRateChanges -1 -1 0 0 0 0 0

Cash&CashEquivalentsatEndofYear 109 57 313 256 272 406 605

92

3.3. Morgan Stanley HelloFresh Cash Flow Statement – Neutral

Scenario

3.4. BarclaysHelloFreshCashFlowStatement–PessimisticScenario

MorganStanley–Neutralscenario– EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021EEBIT -116 -90 -89 -71 -11 68 160D&A 1 4 8 12 15 18 21ChangeinWorkingCapital 23 -1 31 -15 3 5 7IncomeTaxPaid 0 0 0 0 0 -10 -23InterestPaid 0 -1 -4 1 1 1 1OtherOperatingCashFlow 26 12 8 13 10 10 12OperatingCashFlow -66 -76 -46 -60 18 92 178

Capex -6 -37 -14 -35 -25 -31 -35Acquisitions -3 0 0 0 0 0 0OtherInvestingCashFlow -9 -5 0 0 0 0 0InvestingCashFlow -18 -42 -14 -35 -25 -31 -35

CapitalContributionsfromShareholders 184 23 0 0 0 0 0NetIPOProceeds 0 0 363 0 0 0 0Increase/DecreaseinDebt 0 44 -16 0 0 0 0RepurchaseofSharesintoTreasury -10 0 0 0 0 0 0FinancingCashFlow 174 67 347 0 0 0 0

TotalCashFlow 90 -51 287 -95 -7 61 143

Cash&CashEquivalentsatBeginningofYear 20 109 58 340 245 237 298EffectsofExchangeRateChanges -1 -1 -5 0 0 0 0Cash&CashEquivalentsatEndofYear 109 57 340 245 238 298 441

Barclays–Pesimisticscenario –EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E

Adj.EBITDA-Barclays -111 -85 -78 -78 -4 47 87

ChangeinWorkingCapital 25 -1 31 6 14 12 12

IncomeTaxPaid 0 0 -3 -7 -9 -12 -15

InterestPaid 0 -1 -4 -2 -2 -2 -2

OtherOperatingCashFlow 20 11 8 13 16 19 22

OperatingCashFlow -66 -76 -46 -69 15 64 104

Capex -6 -35 -9 -28 -62 -24 -28

SoftwareDevelopmentExpenditures 0 -2 -4 -4 -9 -3 -4

OtherInvestingCashFlow -12 -5 -1 -46 -2 -1 -1

InvestingCashFlow -17 -43 -14 -78 -72 -29 -33

CapitalContributionsfromShareholders 184 23 0 0 0 0 0

NetIPOProceeds 0 0 363 0 0 0 0

Increase/DecreaseinDebt 0 44 -16 -29 0 0 0

RepurchaseofSharesintoTreasury -10 0 0 0 0 0 0

FinancingCashFlow 174 68 347 -29 0 0 0

TotalCashFlow 91 -51 288 -176 -58 36 72

Cash&CashEquivalentsatBeginningofYear 20 109 58 340 164 107 143

EffectsofExchangeRateChanges -1 -1 -5 0 0 0 0

Cash&CashEquivalentsatEndofYear 109 58 340 164 107 143 215

93

Bibliography

TimKoller,MarcGoedhart,DavidWessels;Valuation,MeasuringandManagingthe

ValueofCompanies;McKinsey&Company,2010.

Jeffrey C. Hooke; Security Analysis and Business Valuation on Wall Street, A

ComprehensiveGuidetoToday’sValuationMethods;Wiley,2010.

ZviBodie,AlexKane,AlanJ.Marcus;Investments;McGrawHill,2014.

AlexanderB.vanPutten,IanMacMillan;MakingRealOptionsReallyWork;Harvard

BusinessReview,2004.

PierreVernimmen,PascalQuiry,YannLeFur,MaurizioDallocchio,AntonioAlvi;

CorporateFinance:TheoryandPractice,Chapter40:SettingUpaCompanyor

FinancingStart-Ups;Wiley,2017.

Guntet Festel, Martin Wuermseher, Giacomo Cattaneo; Valuation of Early Stage

High-TechStart-UpCompanies;InternationalJournalofBusiness,2013.

KothariMonika,MehtaNitu,SharmaLatika;IntangibleAssets:AStudyofValuation

Models;ResearchJournalofManagementSciences,2013.

AswathDamodaran;ValuingYoungGrowthCompanies;AAIIJournal,2011.

Nicolas Kachaner, George Stalk, Alain Bloch;What You Can Learn from Family

Business, FocusonResilience,NotShort-TermPerformance;HarvardBusiness

Review,2012.

HamdiUlukaya;Growing a Start-UpWithoutOutside Investors;HarvardBusiness

Review,2013.

Tobias Eichner, Hans Georg Gemünden, Thomas Kautzsch;What is Technology

Worth?,ARealOptionsCaseStudyonTechnologyCarve-OutVentureValuation;

TheJournalofInvesting,2007.

94

Ranjay Gulati, Alicia Desantola; Start-Ups That Last, How to Scale Your Business;

HarvardBusinessReview,2016.

Daniel J. Isenberg;How to Start anEntrepreneurialRevolution;HarvardBusiness

Review,2010.

EricaField,SeemaJayachandran,RohiniPande,NataliaRigol;AFriend’sSupportCan

MakeWomenBetterEntrepreneurs;HarvardBusinessReview,2015.

ScottD.Anthony;TheNewCorporateGarage,WhereToday’sMostInnovative–and

World-Changing–ThinkingIsTakingPlace;HarvardBusinessReview,2012.

DavidA.Broadwin;AnIntroductiontoAntidilutionProvisions;ThePracticalLawyer,

2004.

MartinReeves,SimonLevin,DaichiUeda;TheBiologyofCorporateSurvival;Natural

Ecosystem Hold Surprising Lessosns for Business; Harvard Business Review,

2016.

George Bene, Fred Wainwright, Colin Blaydon; Note on Private Equity Deal

Structures; Center forPrivateEquity andEntrepreneurship, Tuck Schoold of

BusinessatDartmouth,2005.

Ervin L. Black, Usefulness of Financial Statement Components in Valuation: An

ExaminationofStart-UpAndGrowthFirms;VentureCapital,Taylor&Francis,

2003.

NoamWasserman;TheFounder’sDilemma;HarvardBusinessReview,2008.

SteveBlank;WhytheLeanStart-UpChangesEverything;HarvardBusinessReview,

2013.

David Collis; Lean Strategy, Start-Ups Need Both Agility and Direction; Harvard

BusinessReview,2016.

ScottPepis,JacobEvans,PieterdeJong;TheValuationofStartupsinNewMarkets:

AnAppliedCaseinAsteroidMining;InternationalJournalofBusinessandSocial

Science,2018.

95

Vincent Onyemah, Martha Rivera Pesquera, Abdul Ali;What Entrepreneurs Get

Wrong;HarvardBusinessReview,2013.

AchimBerg,OliverF.Gottschalg;UnderstandingValueCreationinBuyouts;Journal

ofRestructuringFinance,2005.

Nick Antill, Kenneth Lee; Company Valuation under IFRS, Interpreting and

Forecasting Accounts Using International Financial Reporting Standards

HarrimanHouse,2008.

Michael E. Porter, Mark. R. Kramer; Creating Shared Value; Harvard Business

Review,2011.

Aswath Damodaran; Investment Fables, Exposing the Myths of “Can’t Miss”

InvestmentStrategies;PrenticeHall,2004.

Benjamin Graham; The Intelligent Investor, Revised Edition; Harper Business

Essentials,2003.

DanMoller;PropertyandtheCreationofValue;CambridgeUniversityPress,2015.

ShailendraKumar,KristianeHanstedBlomqvist;Strategy&Leadership,Mergersand

Acquisitions: Making Brand Equity a Key Factor in M&A Decision-Making;

EmeraldGroup,2004.

RosabethMossKanter;MergersThatStick;HarvardBusinessReview,2009.

McKinsey&Company,CorporateFinancePractice;TakingaLonger-TermLookat

M&AValueCreation;McKinseyQuarterly,2012.

Enrique R. Arzac; Do Your Business Units Create Shareholder Value?; Harvard

BusinessReview,1986.

Charlotte Tucker; How is Coronavirus Impacting the Funding Landscape for

Startups?;EU-Startups,2020.

AlejandroCremades;HowFundingRoundsWorkForStartups;Forbes,2018.

96

MarcGoedhart,TimKoller,DavidWessels;ValuingHigh-TechCompanies;McKinsey

&Company,2016.

DaveBerkus;TheBerkusMethod:ValuinganEarlyStageInvestment;Berkonomics,

2012.

97