An eValuation ModelAn eValuation ModelPresentation to Investors-R-UsBoard of Directors

Presentation by:

2B (or not 2B) Consulting

Neil Gall

Marek Ryfko

Richard Schwartz

Mayank Sharma

Jawad Tareen

March 18, 2000

2

Problem Statement

Develop a set of criteria and application and assessment guidelines for use in evaluating the investment and

financial potential of e-business plans.

3

Agenda

Uniqueness of E-Commerce

TraditionalValuation Methods

New Model

Rationalization

Case Study

Implementation

Conclusion

4

The Changing Face of Business

Physical Product

Digital Product

Physical Agent

Digital Agent

Digital Process

Physical Process

Traditional Commerce

E-Business

Adapted from “Electronic Commerce: A Managerial Perspective” by Efraim Truban et. al. 1999

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How E-Commerce is Different

Pace of Change is Faster than Legislation and Regulation

Traditional Valuation Models do not Fully Capture the Value of E-Business Companies

Continuous Evolution in Terms of Customer Value

Generally Require Large Investment in Marketing as Opposed to Capital Expenditures

6

E-Business Models

E-Tailing

Auction (C2C)

Community

Professional Services

Portal

Exchange (B2C and B2B)

Search Engine

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Traditional Firms

Main Assets are Facilities & Equipment

Debt Raised for Firm’s Operations and Asset Acquisition

Funding from Investment Banks

Lending Based on Cash Flows of the Firm

E-Business

Main Assets are Customers

Huge Marketing Expense

Debt Largely Unavailable - Investors want Equity

Funding from Venture Capital Firms

Cash Flow not Used for Firm Valuation

Dot Coms that issue Debt are rated by Moody’s as JUNK (e.g. Amazon, E*Trade)

Traditional vs. E-Business Firm Valuation Considerations

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Traditional Valuation Methods

Method Problems

Payback Arrival of EarningsAscertaining FC & VC

P/E or P/S E’s are initially negativeSales does not mean returns

Op. Cash Flows are negativeEvaluation of Risk

Disc. Cash Flows

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Traditional Valuation Methods

Operating Profit ???Capital intensity meaningless

Method Problems

EVA

Real Options Complexity of useNo time value of option

Market Cap inflatedCustomers are ill-defined

Market Cap / customers

Requirement of a New E-Business Framework

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What Should the New Model Look Like?

TangiblesTangiblesIntangiblesIntangibles

eValuationeValuation

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The eValuation Model

+Gross Revenue

# of Customers

Earnings

# of Customers

Risk Free Rate + WACC + Market Return

x [ # of Customers x (1 + Growth) ]

x [ Intangibles ]

Value =

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The eValuation Model

Revenue Streams

• Content• Access• e-Commerce• Advertising• Affiliate Programs

Customer Types

• Subscribers• Buyers• Visitors

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The eValuation Model

Costs

• Customer Acquisition• Updating Content• Logistics in sales process• Marketing & Promotion• Overhead

Earnings

• Reflects the payback time• Earnings reduce the risk profile• Returns get factored in the model

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The eValuation Model

Discount Factor• Factors in risk free rate & cost of capital• Risk premium assigns the riskiness of the venture • Earnings are co-related to a reduced risk premium

# of Customers & Growth Rates• Establishes the importance of the customer• Growth rate incorporates penetration rate

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Customers = Assets

VALUE PROPOSITION

COMPETITIVE SUSTAINABLE ADVANTAGE

CUSTOMERS

What do customers really value?

How original is the idea?

What needs are going to be met?

What is the management skills set ?

What are the back-end processes?

What are the technological resources?

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Value Proposition

StrategyMarketing

CRM

Product-Service

VALUE PROPOSITION

Channel Conflicts

Mass Customization

Global Reach

Customer Awareness

Branding

Cross Selling

One to One

Customer Feedback

Customer Satisfaction

Customer Retention

Customer Support

Customer Involvement

R&D

Market Opportunity

Unique eBusiness Solution

Innovation

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Competitive Sustainable Advantage

Management & HR

Tax & Legal

Processes

Technology

Alliances

COMPETITIVE SUSTAINABLE ADVANTAGE

Quality of Management

Organizational Structure

Compensation

Training

Employee Attraction/Retention

Electronic Signature

Jurisdiction

Trademark Registration

Payment

Taxation

Fulfillment

Operations

Virtual Communities Site Design

Data Warehousing

Database Management

Scalability of Infrastructure

Security

Outsourcing

Suppliers

Partners

Affiliates

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Intangibles Score Card

Intangibles Weight1-3

Score1-10

Cut-off1-10

Weight xScore

Value PropositionProduct-ServiceMarketingStrategyCRMCompetitive Sustainable AdvantageManagement & HRAlliancesTechnologyProcessesTax & Legal

Composite TotalComposite Index

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The eValuation Model Captures the Complete Value

TangiblesTangiblesIntangiblesIntangibles

eValuationeValuation

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Mitigating the Risks

• Customization (Overlapping Businesses - e.g. AOL)

• Growth is Constant and based on Current Economic Situation (No Seasonality or Recession Market)

• Subjective Attribution of Weights to Intangibles by Venture Evaluators

• Hurdle eValuation Figure needs to be established based on appropriate eBusiness model

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Model Customization

•E-Auction Houses (e.g. eBay)

• # of Customers & Growth easier to establish

• Customer Interface more critical in Intangible evaluation

• E-Brokerage (e.g. E*Trade)

• Revenue / Customer easily measurable

• Technological Infrastructure weighted more heavily

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Customization of Intangibles

10

1

5

Tax & Legal

Alliances

Technology

Marketing

Management & HR

Products/Services

Strategy

Processes

CRM

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Case Study

vs.

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Comparing Models

eValuation

Current Valuation

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Analysis of Intangibles

eV Index = .67eV Index = .67

Intangibles Weight(1-3)

Score(1-10)

Cut-off(1-10)

Weight xScore

Value PropositionProduct-Service 3 7 7 21Marketing 2 7 6 14Strategy 2 8 6 16CRM 3 7 7 21Sustainable Competitive AdvantageManagement & HR 3 6 7 18Alliances 3 7 7 21Technology 2 7 4 14Processes 1 5 2 5Tax & Legal 1 4 2 4

Composite Gross 134/200Composite Index .67

eV Index = .86eV Index = .86

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eValuation Analysis

$135.5 Million

30 Million Visitors

- $52 Million

30 Million Visitors+

1 + 9.3%

x [30 Million Visitors x (1 + 1.41) ] x [0.67]

= $ 123.4 Million= $ 123.4 Million

= $ 1,468.2 Million= $ 1,468.2 Million

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Current vs. eValuation Model Relative Relationship

Market Capitalization:

eValuation:

= $ 123.4 Million

= $ 1,468.2 Million

= $ 83.2 Billion

= $ 7.667 Billion

Y!:L Ratio: 10.85:1Y!:L Ratio: 10.85:1

Y!:L Ratio: 11.90:1Y!:L Ratio: 11.90:1

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Case Study Wrap-Up

• eValuation model considers both Tangibles as well as Intangibles

• eValuation Model is to start-ups what Market Capitalization is to established E-Businesses

• Offers “Go” or “No Go” Criteria based on investor specific business model Hurdle Rate

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Implementation Plan

Phase 1

Framework questions specificationTraining

Industry templates specificationWeb publication preparation

Feedback Maintenance& SupportTraining

Phase 2

Phase 3

Phase 4

Web publicationTraffic generation

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Implementing the eValuation Model

Speed Cost

Acceptance

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What About Larbi?

Client Develops Business Plan

Client Researches Funding Alternatives Online

Client Completes Online Profile

Contact is Initiated with Investors-R-Us

Face-to-Face Interview

eValuation Performed

Funding Decision

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Conclusion

+Gross Revenue

# of Customers

Earnings

# of Customers

Risk Free Rate + WACC + Market Return

x [ # of Customers x (1 + Growth) ]

x [ Intangibles ]

Value =