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35 Cards in this Set
- Front
- Back
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Pros / Cons of IRR Valuation |
+ Factors risk and time value of money through discount rate + Based on feasible/achievable exit value - Very sensitive to discount rate - Not based on company fundamentals - Based on exit/liquidation which may not apply to all investors
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Which valuation method to use? |
- Nature of the industry - Current/anticipated market conditions - Quality and reliability of the data - Stage of the enterprise - Unique aspects of the enterprise - Valuers informed and experienced judgement |
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How to estimate the discount rate? |
- Basic cost of capital - Adjusted costs due to government fund leverage, etc - Risk assessment: - Market - Product - Entrepreneur - Time - Opportunity cost - Portfolio statistics - Promised returns - Segment "heat" |
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Pros/Cons of comparable valuation |
- Finding comparable company - Finding out their value anyway - Finding comparable time, geography, etc |
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Pros/Cons of sunk costs valuation |
- Why does value care? + Ongoing research / exploration costs |
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Pros/Cons multiples valuation |
+ Some industries have standards - If not, which multiple to use? Sales, EBIT, EBITDA, etc? - Pre-revenue |
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Pros/Cons net assets valuation |
- Not necessarily linked to profit potential + Liquidation value - Irrelevant for low-asset industries |
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Stages of companies |
- Seed - Development - Start up - Early growth - Pre-IPO - IPO - M&A possible across all stages
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Seed financing |
Used to determine if business idea viable |
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Startup financing |
Takes viable idea to initial production and sales |
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First round financing |
Cover cash shortfall when expense exceed revenues |
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Second round financing |
Funds rapid growth to support WC needs |
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Mezzanine financing |
Funds for IPO, marketing, WC or product improvements |
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Bridge financing |
Temporary financing until next raise |
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Seasoned securities offering |
Selling shares/securities after initial IPO |
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Sources of finance |
- Friends, family, fools - Suppliers, vendors - Government - Lenders (banks) - VC - Mature investors (mutual funds, etc) |
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Product adoption curve |
- Innovators - Early adopters - Early majority - Late majority - Laggards |
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Questions for investees |
- How big is the market? - Who is in the market? - What type of customers are in your market? - How will you reach the market? - What will it cost to acquire a customer? - How will you keep a customer? |
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VCs screen investments by assessing... |
- Opportunity - Business model - Business plan - Credibility (experience, knowledge, etc) - Management team - Due diligence |
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Breakeven analysis shows... |
- EBIT shows operating income B/E - EBITDA shows cashflow B/E - EBDAT shows all operations B/E |
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Survival revenues |
EBDAT = R - VC - CFC S.R. whan EBDAT = 0 |
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Reasons for investment |
- Fund a resource base (WC) - ... quickly (for stability, protection, competitive pressure, growth) - ... in order to survive |
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Reasons for strategic investment |
- Product or service initiative (you have a product that is good for us) - Market development (we can grow it better together) - Innovation (you drive R&D, etc) |
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Reasons for strategic M&A |
- Defensive - patents, anti-litigation, etc - Aggressive - acquihire - Creative - kick start new business |
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VC follow on |
Typically keep $2 for every $1 invested |
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Primary VC concerns |
- Extreme caution over act of investment - Obsession with exit potential - Insistence on uncapped upside - Insistence on downside risk management - Dynamic capital allocation |
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Investee considerations re: VC |
- Are these the right investors? - Do they have the right connections? - Are they able to follow on? (Time and $) - How can they add value over the money? - What successes have they had to date? - Have other investees been happy? |
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Term sheet outlines... |
- Amount and valuation - Security instrument - Management control parameters - Investment control parameters - Exit parameters |
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Harvesting and exit considerations |
- Size of company - Public market valuation - Synergies within industry - Ease of valuation - Timing - Ownership and control - Taxes and transaction costs |
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Exit options |
- IPO - M&A - LBO and MBO - Exit by puts (buy back clause) - Finding a new/replacement investor - Liquidation |
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IPO Pros/Cons |
+ Perception of premium value + Perception that current mgmt stays + Greater credibility for company + Significant cash injection - Premium value not guaranteed - Current mgmt not necessarily stay - Costs in listing, compliance - Could hinder international M&A |
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M&A Pros/Cons |
+ More common, better known + May provide synergies with acquirer - May require relinquishing control - May not be cash acquisition |
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LBO/MBO Pros/Cons |
+ Current mgmt likely to stay - Requires proven cashflows to leverage |
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Weight average ratchet price |
(Total shares * Original price) + New Investment $ / Total shares pre-investment + Total New Shares |
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Participating preferred gets... |
- Original investment - Interest - Equity share |
