Valua%on of University Startups
PanelDiscussionwith:• Moderator:BobHisrich,PhD,KentStateUniversity
• HelenaWisniewski,PhD,UniversityofAlaska,Anchorage
• GaryGibbons,PhDThunderbirdSchoolofGlobalManagement
• SteveRoberts,KentStateUniversityDirector,TechnologyCommercializaHon
Valuing University Startup Companies
• ThreeacceptedvaluaHonmethods-
• MarketApproach.LookatsimilartransacHonsinopenmarkets.
• CostApproach.DeterminethevaluebycalculaHngtheamountofmoneyrequiredtorecreatetheproperty.
• IncomeApproach.Howmuchincomecanthiscompanygenerateoverthelifeofthecompany?
Intheory,thisisfarandawaythebestmethod.
Valuing Startup Companies- Pre-Revenue
• It’sHard!
Valuing Startup Companies- The Balance Sheet
• BalanceSheet• Assets-
• LicenseoropHontolicenseuniversitytechnology(usuallyuntestedtechnology)• SmartpeoplewithaStory(probablythesourceofanyrealvalue)• Friendsandfamily• Somelocaloruniversityentrepreneurialecosystem
• LiabiliHes-• LiUleornocashoraccesstocapital• LiUleornomanagementexperience• Limitedunderstandingofthemarket• Regulatoryhurdles• Lotsofmouthstofeed• AngryandaggressivecompeHtors
Valuing Startup Companies- Beware of Hockey S%cks
Spendinga$1forEvery$1ofRevenue-Notarecipeforsuccess
Valuing Startup Companies- Why it is important to get the value correct • Iftheseed-stagevaluaHonistoohigh…
• ThefinancialcontribuHonisundervaluedandtooliUlestockreceivedbyinvestors• Easierforsmartmoneytowalkaway• SeedroundsHmingcanbesignificantlyextendedandahigherlikelihoodofadownroundlater• Problemsifthecompanymissesanimportantmilestone
• Iftheseed-stagevaluaHonistoolow…• EntrepreneursarelessmoHvated• IncreaseddiluHona]ermulHpleroundsoffunding
Valuing Pre-Revenue Startup Companies- 3 handy methods • VentureCapitalMethod
• ScorecardMethod
• BerkusMethod
Valuing Startup Companies- Venture Capital Method • Post-moneyValuaHon=TerminalValue÷AnHcipatedROI
• Where-TerminalValueisanHcipatedsellingpriceofthecompanyin5to8years• AnHcipatedROI10to30X
• Example-companyneeds$1millioncashandexpectedtosellfor$50million.Investorsdemand20%ROI
$50,000,00020=$2,500,000.Less$1millioninvestment=$1.5millionPre-money valuaHon.
Valuing Startup Companies- Scorecard Method
Criteria Weigh*ng ComparisonAdjustedWeigh*ngEntrepreneur,Team,Board 30% SizeofOpportunity 25% Product/Technology 15% Compe**veEnvironment 10% Sales/Marke*ng 10% NeedforMoreFinancing 5% Other 5%
Valua%on of Startup Companies- Berkus Method
Fora“perfect”idea,possibilityof$2to$2.5millionpre-moneyenterprisevaluaHon
Valua&onofEarlyStageStartups–ArtorScience?
Dr.HelenaS.WisniewskiViceProvostforResearch&GraduateStudies
UniversityofAlaskaAnchorage
v Ihavehearditsaidthat:Businessvalua+onismoreartthanscience.Ifthisistrue,thenstartupvalua1onisindomainofthear1st.
v Buttheissueisthatyouneedtoputavalueofyourstartuptoraisemoney,andinvestorsneedtoputvalueontheirinvestmentstogenerateliquidity.
v Ifyouhavesoldahouseyouknowthatyoutakecertainfactorsintoaccount:loca1on,salesofcomparablehousesinyourarea,upgradesetc.,butintheenditisworthwhatsomeonewillpayforit.
• Similarforvalua1onofstartups,inpar1cular,earlystagepre-moneyvalua1ons.
v Therearepercep1onsandgeneralrulesofthumbandsomemethodsthatIwillshare.Theseincludepercep1onsbasedonmyexperiencesfromastartuppointofview,andfromexperienceswithinvestorsfromtheirpointofview-andwheredotheyconverge?
ArtorScience?
v WhenIformedmyfirststartupinbiometrics,Isoughtguidancefromaco-founderoftheTitanCorp.,whomIhadworkedfor.
v Hetoldmesomegeneralrulestodeterminevalua1onthatwerepointsthatinvestors
willconsiderwhendecidingtoinvestornotthatincluded:• IPporGolio.• Prototypedeveloped.• Customers–orleIersofsupportthatsaytheywillbuyitonceproductisavailable.• Needfortheproduct–nicetohaveormusthave.• Financialprojec1ons–marketsize.
• Howlongbeforeitisprofitable.• Breakevenpoint.
• Exitstrategy.• StrongManagementteam.
v Alsodoacapitaliza&ontabletodeterminehowmuchyouneednowtogettonextlevel,ifyouwillneedmoremoneybeyondtheseedlevel,andhowmuchdoyouwanttoendupwithasthefounder.
BythewayIconvincedhimthatIhadthesepoints,weagreedona$2Mvalua=on,andhebecamemyfirstinvestor.IthenusedthemforstartupsIformedatStevensandUAA.
SomeGeneralRulesofThumb
TheDavidBerkusMethodIfExists:
AddtoCompanyValue
upto:SoundIdea(basicvalue) $1/2million
Prototype(reducingtechnologyrisk) $1/2million
QualityManagementTeam(reducingexecu1onrisk) $1/2million
Strategicrela1onships(reducingmarketrisk) $1/2million
ProductRolloutorSales(reducingproduc1onrisk) $1/2million
Total:$1.5M
v Thereisnoperfectmethodology,althoughsomepopularmethodsusedbyangelinvestorsandVCsare:• DaveBerkusmethod.• ScoreCardmethod.• RiskFactormethod.• VCmethod.
NoPerfectMethodology
v ScoreCardMethod–usescomparables-needtounderstandhowmuchsimilarcompaniesinyourindustry/geographyareworth.
• Thefirststep:determinetheaveragepre-moneyvalua1onofthepre-
revenuecompaniesinyourregionandbusinesssectorofyourcompany.Varieswiththeeconomyandthecompe11veenvironmentforstartupventureswithinaregion.
• Thenextstepistocompareyourcompanytoyourpercep1onofsimilardealsdoneinyourregion,consideringthefollowingfactors:
o StrengthoftheManagementTeam 0–30%o SizeoftheOpportunity 0–25%o Product/Technology 0–15%o Compe11veEnvironment 0–10%o Marke1ng/SalesChannels/Partnerships 0–10%o NeedforAddi1onalInvestment 0–5%o Other 0–5%
ScoreCardMethod
v Whatcanyouexpectinthesizeofinvestment?
• Onaverageearlyseedaround$1Mto$5M.• However,ifyoudonothaveallthenecessaryvalida1onelements,butthe
investorlikeswhatyoudohave,theninvestormightprovide$50-100Ktoprovevalida1on–theyget20%withrightoffirstrefusaltoprovidenexttrancheoffunding.
v Sohowmuchdoyougiveup?• %variesbycase,butonaveragepremoneyinvestorcaptures15%to20%.v Alsonotethat:
• Agoodmanagementteamismorevaluedthanagoodtechnology.
HowMuchCanyouExpect?
v Supposethatyouhaveabigideabutdon’tknowhowbig,thenconsidera
SAFEnote-“simpleagreementforfutureequity”–unlikeaconver1blenoteitisnotdebt.
• ASAFEisanagreementbetweenacompanyandaninvestor.• Inexchangeforthemoney,theinvestorreceivestherighttopurchase
stockinafutureequityround(whenoneoccurs)subjecttocertainparameterssetinadvanceintheSAFE.
• Ididonerecentlyforastartup.
v AReferencestoorganizeyourvalida&onthoughts:• Altainnova&on.com–BigIdeaAnaly&csgivesa5stepmethodtoassessnewideasbyansweringcri1calques1onsupfrontforanewtechnology.Processhelpsyouunderstandifyourtechnologyhaswhat'sneededtoraiseventurecapital.
Alterna&veMethod
• Yourcompanyisworthwhatsomeonewill
paytoinvestinit,anditisuptoyoutoconvincethemitisworthwhatyouareasking.
• Youcanusetheseorsimilartoolstoconvincethem.
FinalThoughts
Problems Encountered When Valuing Entrepreneurial Firms
CopyrightDr.GaryGibbons2017
Informa;on
• Risk• Knowable• Abletoes=mate• Measuredsta=s=callyorwithexpertknowledge
• Uncertainty• Unknowable• Cannotbemeasuredsta=s=callyorwithexpertknowledge
CopyrightDr.GaryGibbons2017
Lack of Cash Flow Now or in the Near Future
• Expertopinion• Conjointanalysis• Problemisindustryspecific
CopyrightDr.GaryGibbons2017
Basic Valua;on Hypothesis
• Thevalueofanyassetisequaltothevalueofallfuturebenefitsdiscountedbacktotodayattheappropriateriskadjustedrateofreturn.• Theproblemsare:
• Whatarethefuturebenefits• Whatistheappropriateriskadjustedrateofreturn
CopyrightDr.GaryGibbons2017
Graphically this Problem is Expressed:
CopyrightDr.GaryGibbons2017
TerminalValue
ValueToday
I=RRRi=periodicrrr
Perio
dic
CashFlow
N=NumberofYearsn=numberofperiods
Whatarethefuturebenefits?
Whatistheappropriateriskadjustedrateofreturn(RRR)?
Problems with Future Benefit Flows
• Whatarefuturebenefitflows?• Whatformorshapedotheytake?• Howlongdotheycon=nue?• Aretheygrowingordeclining• Dothey“workthewaythefirmworks?”
CopyrightDr.GaryGibbons2017
Problems with Appropriate Risk Adjusted Rate of Return: Type I - Where Heuris;cs and/or Rela;ve Measurements are used • P/E
• P/B• P/S• XEBITDA
• Easytouse(maybeappliedtonextcashflowortoasinglevalue)• Thesearegeneralnotfirmspecifices=mates;Theyarebasedongeneralcondi=onssubjecttochangeandinaccuracy• Theydonotexpressanyuniqueaspectsregardingthetargetfirm;theydonot“workthewaythefirmworks”
CopyrightDr.GaryGibbons2017
Problems with Appropriate Risk Adjusted Rate of Return: Type II- Where Computed Risk Premiums like MCC and WACC are used
• Costofdebt• Costofpreferredstock• Costofequity
• CAPM/Fama-French• GordonGrowth• Build-up• Manyothers
• Thesemethodsabempttodeterminea“firmspecific”requiredrateofreturn(RRR)• Thesemethodsassumeasta=ccapitalstructureandunchangingyieldcurve
CopyrightDr.GaryGibbons2017
Problems with firm specific opportunity assessment where cash flow is not yet present
• Comparablefirmanalysis• Useaqualita=vescoringmethodologythatisconsistentfromfirmtofirm• Bestprocedureisto:
• Problem/marketandcompe==on• Productposi=oninmarket(andintrinsicvalue)• Businessmodel(cantheentrepreneurmakeandsellatagrossprofit)• Managementteam• Financialneeds,projec=onsandinvestmentstructure
CopyrightDr.GaryGibbons2017