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About Inventus
• Early-stage, tech-focussed VC Fund– Internet, Mobile, Software & Services
• Investment Size: Rs. 3 - 15 crores to start with
• Team– Kanwal Rekhi, John Dougery & Manu Rekhi (Silicon Valley)
– Samir Kumar, Parag Dhol & Rutvik Doshi (Bangalore)
• Investments– India: redBus, Vizury, Sokrati, Savaari, Power2SME, PolicyBazaar,
eDreams, Unbxd, Avaz, peel-works, MoveInSync, Aasaan Jobs
– US: ViVu, Sierra, Credit Sesame, Dhingana, PoshMark, FarFaria, Resilinc, Activity Hero, Assured Risk Cover, Syscloud
• Find us at www.inventusvc.com
What is Value?
• Quotable quotes– “Value lies in the eye of the beholder.”
– “A broker knows the price of everything and
the value of nothing.”
• Valuation is a systematic, disciplined approach, not (always) a science.
• Value = Monetary estimate of the benefit from owning an asset
• Useful for – Raising Capital
– Selling /buying / merging businesses and companies
– Public floatation
Why Care About Valuation
Founder Ownership Before Sharing
Founder Ownership After Sharing
Two possibleoutcomes
• Share of Wealth
• Control
Performance – Return – Valuation
Financial Performance
ReturnExpectation
Valuation Multiple
EquityValuation
• Sales• EBIDTA• EBIT• PAT
• Value / Sales• Value / Profit• Value / EBIDTA• Value / EBIT
Steps in Valuation
• Develop a sound business plan
• Be clear about all the underlying assumptions
• Develop a set of forecast financials – P&L, Balance Sheet, Cash Flow Statement
• Decide on appropriate method of valuation
• Estimate valuation
• Test Valuation under various scenarios
• Decide objective behind purchase – passive interest, JV, strategic investment, controlling interest
• Add premium, if any, for achieving strategic
or other objectives, such as “control”.
Stages….
Stage I
Stage 2
Stage 3
0-12 months
12-24 months
18- 36 months
Stage 4
Product DevelopmentTest Marketing
Proof of ConceptBiz ModelManagementSales & DistributionEconomics
Activity
Risks
Cash
100
500
2,000
Mkt. DevelopmentManagementSourcing / Mfg.Biz ModelSales & DistributionEconomics
Mkt. DevelopmentManagementGrowthCompetition
Market DevelopmentMfg. / Sourcing Stabilization
Biz Expansion Exit for Early Investors?
Elapsed Time
Biz
Grow
th
Guilty as Charged….
• First Stage Investors (typically)– Sometimes, Start-up Stage
• Valuation by a First Stage Investor; Ad-hoc combination of…– Experience
– Thumb-rules
– Gut-feel
– Fundamental Analysis
– Comparison with relevant matches
Gating Factors….
• Management– Integrity
– Depth of knowledge – in chosen market segment
– Cohesiveness & complementary skills amongst founders
– Passion, persistence, frugal mindset
– Willingness to share!
• Market– Large, growing
• Competitive Advantage– Tech. superiority, new business models
– “Me-too” hardly ever works
– Vitamins vs. Pain-killers
Key things we evaluate
Other Thoughts….
• DCF: Limitations– Forecast for next 5-10 years?
– Hard to predict cash flows
– What discount rate to use?
– Terminal value
• Porter’s Five Forces framework
• Valuation depends on stage
Seed Start-Up First Second Late Exit
Stage Stage Stage
Art Science
Drivers of Valuation
• Environment Related– Macro-economic outlook
– Industry Outlook
• Firm Related– Fundamentals of the firm, esp. strategic aspects.
• Deal Related– Stage of investment and expected investment horizon
– Relative size of exposure in relation to the size of the deal.
– Previous round investors’ expectations
– Exit prospects and path
• Valuation Trends– Comparable deals. Caution : Compare likes.
– Public market valuations and liquidity
Thoughts
• Does Valuation depend on other terms of a deal?
• Does Valuation have to be frozen at the time of raising a round of funding?
• Do deals fall through on Valuation?
• Does modelling help improve Valuation?
• How much effort / time does one spend modelling valuation?
• Where does one find the information required for Valuation?
• How reliable is published information on Valuation?
• Is it worth turning to a professional for Valuation?
Additional Thoughts…
• Multiple rounds are not just important but inevitable for early stage, high growth businesses – Multiple stages mean progressive dilution
• Successful development of investee means wealth of founders’ as well as early round investors grows, in spite of dilution– Equally, unsuccessful development could mean “washing out” of
incumbents’ wealth
• Challenges– Anticipating requirement of funds: Too much vs. Too little
– Calling capital market conditions
– Bases of Valuation
– Forecasting performance and “Incentives”
Liquidation Preference
4.8 4.0
15.2 16.0
0.0
5.0
10.0
15.0
20.0
$M $M
Founders
VC
1x
Participative LP
1x Non-
Participative LP
crorescrores
1 crore raise, 4 crores pre-money; Strategic Sale at 20 crores