ValuationConcepts & Issues

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Misconceptions about Valuation Myth 1: A valuation is an objective search for “true” value

Truth 1.1: All valuations are biased. The only questions are how much and in which direction.

Truth 1.2: The direction and magnitude of the bias in your valuation is directly proportional to who pays you and how much you are paid.

Myth 2.: A good valuation provides a precise estimate of value Truth 2.1: There are no precise valuations Truth 2.2: The payoff to valuation is greatest when valuation is least

precise. Myth 3: . The more quantitative a model, the better the valuation

Truth 3.1: One’s understanding of a valuation model is inversely proportional to the number of inputs required for the model.

Truth 3.2: Simpler valuation models do much better than complex ones.

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Approaches to ValuationValuation Models

Asset BasedValuation

Discounted CashflowModels

Relative Valuation Contingent Claim Models

LiquidationValue

ReplacementCost

Equity ValuationModels

Firm ValuationModels

Cost of capitalapproach

APVapproach

Excess ReturnModels

Stable

Two-stage

Three-stageor n-stage

Current

Normalized

Equity

Firm

Earnings BookValue

Revenues Sectorspecific

Sector

Market

Option todelay

Option toexpand

Option toliquidate

Patent UndevelopedReserves

Youngfirms

Undevelopedland

Equity introubledfirm

Dividends

Free Cashflowto Firm

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The “Hierarchy of Values”

Non-MarketableMinority Interest

Value

Strategic Value

Control Value

MarketableMinority Interest

Value

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Issues to Concernc

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Valuation Methodologies

“Exit” Options Affect the Appropriate Methodology/Premise of Value Strategic Buyer

Synergistic value (transactions and DCF)

Financial Buyer (Private) Control value (DCF, public comps, transactions)

Public Acquirer EBITDA and earnings multiples, interested in earnings accretion/dilution

IPO/Post-IPO P/E multiples, sometimes FCF or revenue multiples

Intrinsic Value DCF

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Valuation Methodologies

Other Factors That Affect Valuation Management Team

Many VC’s say they would rather have a “C” idea with an ‘A” management team rather than an “A” idea with a “C” management team.

Technology/Product Development Does the technology/product provide a competitive

advantage? Market Potential/Attractiveness

What is the expected market growth? What does the competitive landscape look like?

Supply and Demand for CapitalSaeed Eslami Bidgoli

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Sizing Up the Companies

Key Questions to Ask During the Process Can a good working relationship be established with the

management team? How much relevant operational experience does the

management team possess? What type of capital requirements will be necessary to

develop the products and grow the company? What is the market size in terms of annual revenue,

growth rate and growth drivers? Who will be the customers of the products/services and

how will the company distribute its products? Is the Company’s business model sustainable? Who will be on the board of directors?Saeed Eslami Bidgoli

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Which approach should you use? Depends upon the asset being valued..

Mature businessesSeparable & marketable assets

Growth businessesLinked and non-marketable assets

Liquidation &Replacement costvaluation

Other valuation models

Asset Marketability and Valuation Approaches

Cashflows currently orexpected in near future

Assets that will never generate cashflows

Discounted cashflow or relative valuation models

Relative valuation models

Cash Flows and Valuation Approaches

Cashflows if a contingencyoccurs

Option pricing models

Unique asset or businessLarge number of similar assets that are priced

Discounted cashflow or option pricing models

Relative valuation models

Uniqueness of Asset and Valuation Approaches

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And the analyst doing the valuation….

Very short time horizonLong Time Horizon

Liquidation value Discounted Cashflow value

Investor Time Horizon and Valuation Approaches

Option pricing models

Relative valuation

Markets are correct on average but make mistakes on individual assets

Discounted Cashflow value

Views on market and Valuation Approaches

Option pricing models

Relative valuation

Markets make mistakes but correct them over time

Asset markets and financialmarkets may diverge

Liquidation value

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Sizing Up the Capital Structure

Concerns and Considerations What Types of Financial Securities Should

be Held?Convertible Preferred Stock

Most common form of investment for VC’s Liquidation preference can be valuable especially in the early-

stages of the company• Participating Preferred Stock

Typically used when the most likely exit is not a highly valued initial public offering but the sale of the company

Receive principle plus dividends ahead of the proceeds to common shareholders as well as participate in equity proceeds

How Much Dilution Can be Expected?What Will be the Impact of Stock Options?

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Accountant’s Review

Discounted Cash Flow Valuation Free Cash Flows Discount Rate Price-Multiple Models

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Thanks for your attention

Comments or

Questions?

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