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Extract from a workshop on evaluation of business angel investments prepared for a workshop at EPFL, May 22, 2012. Contributors included Swiss business angels : Claude Florin, Frank Gerritzen, Balz Roth, , Pascal Dutheil, Diego Braguglia.
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2 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
Supported by
EVALUATION AND DUE DILIGENCE OF BUSINESS ANGELS INVESTMENTS
Claude Florin, A3 Angels
4 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of projects impacts results
Source: Kaufmann foundation 2007 N= 539 BAs - 3’000 BA investments
010203040506070
less than 1X
1X to 5X
5X to 10X
10X to 30X
more than 30X
% exits
Less than 20 hoursMore than 20 hours
5 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Assessing and mitigating market risks
Scenario analysis Uncertain predictions Market size
Market dynamics
Market needs
Willingness to pay
Target market
8 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Valuation matters
Principles A bad business at a good price is a looser A good business at a bad price is not a winner Price matters
Pre-money valuation impact The future determines the value, not the past
Investment example CHF 1M investment CHF 20M exit ROI simulation
Pre-money valuation
Exit after 5 years
Exit after 7 years
1 58% 39% 5 27% 19% 10 13% 9%
Source : Peter Pfister, CTI Start-up, 2010
12 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Team - Why does it matter so much?
The product/service is what attracts attention People transform the project into reality No individual has an infinite array of qualities and competencies The observer (i.e. you!) matters as much as the one observed Source : Frank Gerritzen,, CTI Start-UP, Angel Days 2012
13 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Inventory of competencies
Team Inventor or entrepreneur ? Who is part of the team? Are competencies overlapping or complementary?
Assesment bias How to assess the personality and competencies of the entrepreneur and founding team? Usus magister est optimus! Beware your own experience and projections. Do not trust your instincts: objectivity! Source : Frank Gerritzen,, CTI Start-UP, Angel Days 2012
14 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Competencies vs. attitude Frequent attitudes
1. Resistance to change
2. Difficulty to question own competencies
3. Infatuation with product / service / colleagues.
4. Lack of sales skills / willingness to ‘hit the road’
Life goals
Include entrepreneur and team Driving factors Looking for lifetime employment ? Industry experience Ready to give up CEO title Paranoid, strong personality
Source : Frank Gerritzen,, CTI Start-UP, Angel Days 2012
16 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Team organization and recruitment What do you bring to the table? What is the start-up looking for? Transparency, honesty and clarity (no hurt feelings!) Know your limitations as much as the entrepreneur’s
Young entrepreneurs
Experienced Business Angels
24 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Strong personality may impact performance Risk factors
Underperformance • Poor delegation • Poor planning • Excessive optimism • Lack of awareness of the environment • Inability to adapt to change.
Personality • Over confidence • Reliance on of personal taste
and opinion • Intuitive decision-making led
by emotive factors • Education or experience
gaps • Resistance to advice
25 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Young entrepreneurs
Experienced Business Angels
Role of BA in the team
Share strategy Manage problems Act in good faith No self-serving interest
“Bring something to the party” Expertise Skills Time Networking Money
28 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Team motivation with participation Salaries lower than the market rate but performance bonus
Stock are a useful tool for start-ups. Shares : employee tax discount 6% year of the lockup period, max 60% (law revision 2010). Options : taxed at exercise date.(GE, VD if vesting period)
Attract key management and employees
Act as an incentive for achieving growth targets
Cost effective method for rewarding employees for
extraordinary efforts
Limit size of pool to prevent the dilution of overall share
value
29 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Investment sectors ICT,
Software and Multimedia Medtech, biotech Environment, Energy and Health Creative industries Manufacturing, Food, Retail Services
Source : Popular sectors for investments in EBAN 2008 survey
30 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Involvement in Company Lead investor
Board member Advisor / coach / mentor Crisis management support Exit or next round of fund raising Passive
32 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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«More or Less Correct» vs. «Completely Wrong»
vs
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
33 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Technology Adoption Life Cycle
Innovators 2.5%
Early adopters 13.5%
Early majority 34%
Late majority 34%
Laggards 16%
Visionaries: Be the first mover!
Bowling Alley
Early market
Techies: Try it!
Pragmatists: Use it when it’s ready!
Skeptics: Never happen!
Conservatives: Make sure it’s ready!
Late market
Mainstreet market
© Chasm Group
34 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Assessing the target market # patients Total value of segment Growth rate Accessibility Potential for reimbursement # competitors per segment Maturity of product/services Market penetration and share Revenue, profitability, pricing SWOT Intensity of competition (Porter) Investor interest in segment Variability of needs in segment Are needs met by current treatments Unmet needs and gaps Openness of stakeholders to innovations Likelihood of adopting innovations Willingness to absorb costs
Market size
Market dynamics
Market needs
Willingness to pay
Target market Source : Stanford Bio design
35 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Market size evaluation Market Size for product and / or technology to be correctly identified
Top Down Reports, Conferences, Web, Stats, …
Bottom Up Harvest “real” numbers from different sources Interviews with industry experts & veterans, sales reps, local players, Re-calculate the market size
Top Down and Bottom UP estimations should be in the same log range
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
37 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Market Size Identification Market Size for Product and / or Technology to be Correctly Identified
Strength of the “selling proposition” New Markets to be created (i.e. social media, …) Prime Market vs. OEM “off label” sale potential Generic vs Branded Strength of Brand IP and Trade Mark …
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
39 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Medtech market analysis
0 5 10 15 20
Mild CKD
Moderate CKD
Severe CKD
ESRD
Prevalence
Mild CKD Moderate CKD Severe CKD ESRD
274%
47%
190%
15%
1000
10000
100000
10 100 1000
Source : Stanford Bio design
Market size
Cos
t / p
atie
nt /
year
$
Total medical expenses $B
%
41 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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“Shifts”
Founder(s) Friends Science Prototype Unit: 1x $
Entrepreneur Team
Product Trial/Small Scale
Unit: 10x $$$
Manager Organisation Market Manufacture / Sale Unit: 100x $$$...$
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
48 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Porter’s Five Forces
Competitive environment Customers
Newcomers
Suppliers
Substitution
products
Competitive strength of rival firms
Ability of new entrants to start operations
Ability of new products to replace existing products
Relative strength and number of buyers
Relative strength and number of sellers
53 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Medtech sales channels Complex / expensive
medical device ?
No dedicated sales force Dedicated sales force
Funding supports sales force ?
Sales force
Complex product pipeline
Volume ?
Manufacturer licensing Hybrid model Direct sales
force Specialized distributor Distributor
Yes
Access to KOL relationships Yes
High Yes
2-4 years
No
Low No
No
Source : Stanford Bio design
67 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Questions you should consider in relation to products
Is or could the product/technology solving a core problem? What could be the applications the technology can be used for? Is the technology disruptive (By factors, not just 10%) e.g.:
Faster Lighter Cheaper Less power consumption Etc.
What is the status of the development (Research, prototype, industrialization)
Source : Balz Roth, CTI Start-UP, Angel Days 2012
68 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Be aware: • You might not find the disruptive element in the product/technology but in
the meta-system of potential client (E.g. Lemoptix: Pico-projector: unreached miniaturization makes it useful for mobile phones. Arktis: Reduction of false alarms in container ports)
• Calculate the cost-, product-advantage of a potential client application to get a feel for the market demand, pull.
Source : Balz Roth, CTI Start-UP, Angel Days 2012
69 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Questions you should consider in relations to clients
Are some clients already willing to pay for services, prototypes? Has the company identified the most promising application to “test the water”? Are they focused or just all over the place? Are they talking to engineers only or is there some pull from business development of the client company? Are they able/willing to develop the final product/services in an iterative way with clients?
Source : Balz Roth, CTI Start-UP, Angel Days 2012
70 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Be aware:
Don’t get dragged away by the technology. It’s all about the application, even if the startup does not yet know, which application might be the most promising one. What is the design in effort for the client? Even if the technology might have a huge advantage for the client, if his own engineering effort is substantial he might be reluctant. The “pain relieve” for the client is the key, not the nice technology!
Source : Balz Roth, CTI Start-UP, Angel Days 2012
71 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Intellectual Property Rights - Intangible assets
Patent
Trademark
Design Copyright
Author right
Topography
Plant varieties
Trade secrets
Know How Domain names
73 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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IP Due Diligence
Granted Patents Granted claims covering the product on the market Maintenance fees (annuities) paid ? Appropriate territorial coverage Assess FTO and enforceability of IPR Review licensing policies Review the register for security interests
Patent Applications Assess patentability of existing patent applications Scope of protection (Interpretation of the claims may differ from one country to another) Further searches may be needed to ascertain patentability Ownership of rights Take into account the 18 months ‘blind period’
74 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Decision to apply IP Protection
Pros protection from infringement competitive advantage returns on R&D investments increasing company value licensing revenues raising image of company security for investors
Cons risk of disclosure of sensitive knowledge long, complex and costly procedures potential difficulties in enforcement of IPRs short life-cycle of products lack of knowledge
76 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Questions you should consider considering IP, patents
Who owns the IP, it is protected & has freedom to act Do the have a second opinion report, e.g. CTI label package? What’s the patent all about? Can it easily be circumvented (Most of them can)?
Source : Balz Roth, CTI Start-UP, Angel Days 2012
77 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Be aware:
• Can you defend a patent as a startup? Most likely you cant. Think about
ways to protect your IP differently (E.g. produce the building blocks with different outsourcing partners)
Source : Balz Roth, CTI Start-UP, Angel Days 2012
78 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Evaluation of the product and technology Take away:
Connect the dots, try to think about the meta-system: the client application the clients effort to use the particular technology
Iterate 3h First meeting, read docs, are there enough green lights? 3 days Are the red lights manageable, what do clients say? 3 month Interview with field experts, IP analyses, etc. Don’t analyze endlessly, rather stop, you never know it all
Source : Balz Roth, CTI Start-UP, Angel Days 2012
79 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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IP Due Diligence
Registered Trademarks Check effective use of the trademark Renewal fee paid ? Appropriate territorial coverage Review licensing policies Review the register for security interests Review commercial agreements (exclusivity …)
Trademark applications Assess registrability (availibilty searches) Ownership of rights
85 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Patents Exclusive right or monopoly to prevent competitors from manufacturing, using, selling, offering for sale, importing the invention in a specific territory for a limited time. Protect inventions that are new, involve an inventive step and are susceptible of industrial application. They protect :
Technical characteristics / features (product claim) Process of manufacturing or functions (method or use claim) 20 years from filing date (+5 years for medical
87 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Trademarks ® ™ Sign for distinguishing goods and services from competitors on the market place May take different forms (word, image, logo, sound, smell, three dimensional representation …) Not limited in time Protection for specific goods or services in a determined territory Prevent others from using, selling, offering to sale, advertising identical or similar products or services under the registered trademark
89 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Designs ® Protect the aesthetical aspect (two or three dimensional, shape, contour, line, appearance, colour, texture …) of a product for a limited time in a specific territory.
Criteria for registration
Novelty (Prior disclosure prevents obtaining a valid design) Original creation (Not original if the overall impression only distinguishes from existing designs by minor characteristic)
Registered for five years, may be renewed for 4 additional 5 years periods
90 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Copyright / Author Right © Protects the original work of an author.
books, manual, maps, charts, prints, musical compositions, dramatic works, photographs, paintings, drawings, sculptures, motion pictures, computer programs, sound recordings, choreography and architectural works
Protects the expression or the materialization of an idea, not the idea or concept itself Automatic protection, does not need registration (use of the © copyright, [date], [name], all rights reserved) mention recommended Duration 70 years after the death of the author International recognition (Bern convention)
95 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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How to Protect IP and Manage it ? Keep invention related information confidential Use 'Non-Disclosure Agreement' in preliminary discussions, studies or collaboration with sub contractors or academics Determine ownership of IPR Assess patentability of the invention (prior art searches) Determine a strategy for protecting the invention File and prosecute patent applications Monitor the market and enforce IP rights
107 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Choose your VC VCs will become your partners and you will spend a lot of time & energy
with them > Choose them carefully; Target equity at exit is not a function of initial equity stake but the reflects of the company strategy; Equity at exit depends on:
Technology success; Negotiation power; Market; Competition.
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
111 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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The VC’s new Investment Model Same as before for the beginning of the story (Company creation with
100k, founders and F&F are shareholders), but… Once the business model is in place, the first round of investors come into the company. Ideally some smart money together with deep pockets to follow over time. Small investment “to see”… This shareholders’ group is ready to support the company even in rough times as long as the end goal is still in sight and reachable with reasonable means. Else down-rounds occur frequently. New investors may be attracted at a later stage, depending on the actual cash needs of the company. Will not happen at a “huge” premium towards initial investors. Exceptions are always possible! Only investors with long term view and deep pockets might end-up having healthy portfolios.
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
112 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Some Lessons Learnt What comes out of our experience …
A game is not won (or lost) until is really over; Always think a couple of strokes in advance; Common sense is key; Grab your luck when you recognize it; Endurance, Endurance, Endurance; Timing is key
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
113 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Some Lessons Learnt II Consider fully funded scenarios only;
Ensure full support of investors and co-investors in rough times; Start with very small amounts; Be patient; Ensure support of larger funds; Back mainly big ideas; Small ideas have to be “cheap” or avoided…
Source : Diego Braguglia, CTI Start-UP, Angel Days 2012
114 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Com
pany
Levels and methods of valuation
Inve
stor
Investor‘s return
Dividends + capital C
usto
mer
s expenses
Cash Inflow
„VC“ method
•Discounted cash-flow , •Multiples (comparables)
Operating revenues earnings
Investor‘s expenses
Operating costs
Capital payment
Cash Outflow
116 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Valuation on the timeline
Time Foundation
Par Value Price a Price b
Financing Rounds
Most important Valuation
Final Price
Exit (Trade Sale, watch out
for IPO issues)
Intermediate Valuations (with up- and downrounds)
Pie Calculator
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
119 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Valuation: two views Company’s View (DCF Method classical) Company Value = Sum of discounted FCF + discounted CV
CV Continuing Value
t 1 2 3 4 5
Investor’s View (Venture Capital Method) IRR (Internal rate of return) Sum discounted CF = 0 EXIT Value
t
∞
1 2 3 4 5
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
120 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Success rate
Source: Rule of thumb of the VC industry.
Number of Projects
Category Probability (in %)
1-2
Highflyer (IPO) Star (Trade Sale) Successful EXIT
10-20 %
3-4
LifeStyle company Survival mode
30-40 %
5-6
Bankruptcy Failure Winding down
50-60 %
121 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Expected return by stage of company
Put those numbers in relation the expected success rates and the VC Business model!
Project stage Expected Return (p.a.)
Multiplicator (holding period:
5 Years)
Seed 60-80 % 10.5 - 18.9 x
Start-up 50-70 % 7.6 - 14.2 x
First stage 40-60 % 5.4 - 10.5 x
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
122 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Business model Venture Capital
Initial situation : VC Company with CHF 10 Mio. in funds 10 Investments of CHF 1 Mio. in Start-up All Exits in 5 years
Data Factor Return Target IRR for all projects 40% 5.3 x
Highflyers / Star (successful exit) 2 5.3 x CHF 10.6 Mio.
Lifestyle companies (buyback founders) 4 1 x CHF 4.0 Mio.
Bankruptcy 4 0 x 0
Return of VC in 5 years CHF 14.6 Mio.
Return of VC in % p.a. (IRR) (calculated on profit of CHF 4.6 for 5 years)
8%
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
126 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Business Angel methods Berkus Method
Sound idea CHF 1 Mio. Prototype + CHF 1 Mio. Quality mgt team + CHF 1-2 M. Quality board + CHF 1 Mio. Any roll-out, sales + CHF 1 Mio. Value Range: HF 1 - 6 Mio.
Meier Method 1 Manager CHF 1.5 Mio. 2 Managers + CHF 1.5 Mio. Value Range: CHF 1.5 - 6 Mio.
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
127 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Business Angel methods
Morbitzer method Businessidea CHF 0.75 Mio. Mgt Team CHF 1.5 Mio. Prototype (PoC) CHF 0.75 Mio. Board/Investors CHF 0.75 Mio. Total CHF 3.75 Mio. -Value add investor CHF 0.75 to 1.0 Mio. Valuation CHF 2.75 - 3 Mio.
Rule of thirds 1/3 Founders 1/3 Management Tea 1/3 Investor (BA)
Price range method Only consider to invest if: Valuation range proposed by founders is CHF 2 - 5 Mio.
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
128 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Valuation of an high potential venture (1) Lemoptix case study
24-month old technology company, Successfully beta-tested its product Seeking $2 million of venture capital to go into volume production and distribution. Forecasting sales revenue of $30 million with net income of $5 million in 5 years. What percent of the equity will the venture capitalists require?
What do we need ? 1. Risk adjusted cost of capital (IRR) 2. Capital Need (investment) 3. Exit timing of investor 4. Exit Value:
-Future earnings and profits (NP = net profit) -Comparable P/E
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
131 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Pre- and post-money valuation Post-money valuation CHF 9.5 Mio 100 %
-Investment CHF 2.0 Mio. 42 % Pre-money valuation CHF 7.5 Mio. 58 %
Source : Jean-Pierre Vuilleumier, Angel Days 2012 © CTI -Invest
136 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Internal rate of return (IRR) to compensate risk
.xls function = IRR(values, guess) e.g.: IRR(D1:D:60,0.3/12)
monthly or annual compounding
IRR % Years 1 2 3 4 5 6 7
Mul
tiple
1 - - - - - - - 2 100 41 26 19 15 12 10 3 200 73 44 32 25 20 17 4 300 100 59 41 32 26 22 5 400 124 71 50 38 31 26 6 500 145 82 57 43 35 29 7 600 165 91 63 48 38 32
Multiple Years
1 2 3 4 5 6 7
IRR
%
0% 1.00 1.00 1.00 1.00 1.00 1.00 1.00
5% 1.05 1.10 1.16 1.22 1.28 1.34 1.41
10% 1.10 1.21 1.33 1.46 1.61 1.77 1.95
15% 1.15 1.32 1.52 1.75 2.01 2.31 2.66
20% 1.20 1.44 1.73 2.07 2.49 2.99 3.58
25% 1.25 1.56 1.95 2.44 3.05 3.81 4.77
30% 1.30 1.69 2.20 2.86 3.71 4.83 6.27
35% 1.35 1.82 2.46 3.32 4.48 6.05 8.17
40% 1.40 1.96 2.74 3.84 5.38 7.53 10.5
137 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Valuation matters
Principles A bad business at a good price is a looser A good business at a bad price is not a winner Price matters
Pre-money valuation impact The future determines the value, not the past
Investment example CHF 1M investment CHF 20M exit ROI simulation
Pre-money valuation
Exit after 5 years
Exit after 7 years
1 58% 39% 5 27% 19% 10 13% 9%
Source : Peter Pfister, CTI Start-UP, 2010
142 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Discounted Cash Flow
0 1 2 3 4 5 > 5
Point of time of valuation
Residual value
Net residual value
Net value of the free cash-flow during the
planning period
Discounted by capital costs
Planning period
143 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Discount rates
Stage Discount CAPM
Seed stage 70-100% 4-14%
Start-up stage 50-70% 4-14%
First stage 50-70%
Second stage 35-50%
Later stage 25-40%
Source: Patrick Frei & Benoît Leleux
145 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Every method gives a different valuation Discounted Cash-Flow
Often over estimates real value Uncertain assumptions Not applicable for growth companies
Multiples Simple– no negative numbers Time value not considered Just a high-level forecast
8% 10% 15%35% 4,850 5,144 6,13540% 3,351 3,517 4,04845% 2,359 2,458 2,76650% 1,675 1,737 1,92655% 1,190 1,230 1,351risk
ratio
annual growth of the residual value
year2011 2012 2013 2014 2015 2016
0.5 0 250 1,000 2,500 5,000 10,0001.0 0 500 2,000 5,000 10,000 20,0001.5 0 750 3,000 7,500 15,000 30,0002.0 0 1,000 4,000 10,000 20,000 40,0002.5 0 1,250 5,000 12,500 25,000 50,000
year2011 2012 2013 2014 2015 2016
5.0 neg. neg. neg. 2,500 10,000 25,0006.0 neg. neg. neg. 3,000 12,000 30,0007.0 neg. neg. neg. 3,500 14,000 35,0008.0 neg. neg. neg. 4,000 16,000 40,0009.0 neg. neg. neg. 4,500 18,000 45,000
turn
over
mul
tipEB
IT-M
ultip
le
149 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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A growing stream of cash flows with a fixed maturity. Present value of a growing annuity:
0 1
C
2
C×(1+g)
3
C ×(1+g)2
T
C×(1+g)T-1
…
Growing annuity
153 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Comparables (public companies Europe) Industry EV/EBITDA EV/EBIT Biotechnology NA NA Communications Equipment 5.33 7.75 Computer Hardware 4.91 7.40 Consumer Electronics 3.44 6.35 Consumer Finance 42.67 49.19 Electronic Components 3.70 6.39 Electronic Equipment and Instruments 5.62 8.01 Health Care Technology 5.51 10.45 Home Entertainment Software 4.17 31.04 Integrated Telecommunication Services 5.17 10.28 Internet Retail 13.73 18.41 Internet Software and Services 8.03 22.55 Semiconductor Equipment 4.65 6.37 Semiconductors 6.31 NA Systems Software 6.27 8.90 Wireless Telecommunication Services 6.61 12.17
Source: Damodoran on-line
154 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Comparables (public companies Europe)
Industry Group Price/Sales Net Margin EV/Sales Pre-tax Operating Margin Biotechnology 4.72 -11.84% 4.63 -4.23% Computer Software 2.89 11.09% 2.94 18.16% Computers/Peripherals 0.85 8.62% 0.84 10.23% Electronics 1.29 5.48% 1.41 10.25% Electronics (Consumer & Office) 0.81 3.21% 1.00 7.77% Heathcare Information and Technology 1.61 5.47% 1.79 10.84% Heathcare Products & Services 2.85 14.19% 2.97 19.21% Internet software and services 1.62 4.63% 1.68 6.87% Pharma & Drugs 2.22 15.48% 2.57 24.46% Power 0.89 7.69% 1.62 14.59% Semiconductor 1.40 1.42% 1.53 6.42% Semiconductor Equip 2.33 11.85% 2.27 19.44% Telecom (Wireless) 1.83 23.63% 2.46 16.07% Telecom. Equipment 0.80 2.54% 0.84 6.53%
158 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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Creating a startup is a tough journey! Many interesting projects do not take off, or die…
Project Technical validation
Financing Industrialisation
Commercialisation
Product development
Growth
Commercial validation
159 CTI Commission for Technology and Innovation | Start-up program Venture Concept Sàrl
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To build a successful startup, one must:
“Solve an important, valuable problem… For clients who have money… Who want to pay well… With a short sales cycle… And will buy more, soon”
Source: Index - Adapted from Ken Morse, MIT
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The process Timeline and milestones Investments criteria SWOT and strategic analysis Due diligence Contract, term sheet
Deal flow generation
Deal screening
Due diligence
Investment decision
Structure transaction
Investment management
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Investment process
4 Months
50% Screening
Evaluation
Due diligence
Investment 1%
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Due diligence process as an ongoing dialogue
Entrepreneur Business Angel
Source: fiban.org
Introduction Pitching
Deal flow identification
Negotiations of business opportunity
Valuation discussions Due diligence Business plan
Investment readiness
Shareholder agreement Financing
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Steps in the investment process
Source : Guide to private equity, BVCA / PWC, 2003
Stage Evaluating B. Plan Due diligence Negotiation Monitoring EXIT
Entrepreneur Prepare Business Plan Contact investors
Provide information
Disclose all relevant business information
Provide periodic management accounts Communicate with investors
Entrepreneur & investor
Meet to discuss BP Build relationship Outline terms Liaise with external consultants and accountants
Negotiate final terms Document constitution and voting rights
Investor Review the Business Plan
Conduct enquiries Value the business Consider financing structure Initiate external DD
Draw up completion documentation
Seat on board ? Monitor investment Constructive input Involvement in major decisions
Reports Business Plan Offer letter Consultants reports Accountant reports
Disclosure letter Warranties and indemnities Memorandum and articles of association Shareholder agreement
Management accounts Minutes of boards and other meetings
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Investors are evaluating a number of parameters
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Four main risks to evaluate Product risk Financial risk People risks Market risks
Technology, patents Expenses, refinancing Entrepreneur, team Business model, customer demand
Source : Peter Pfister, CTI Start-UP, 2010
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Top Investment criteria Selected Criteria BAs VCs Enthusiasm of the entrepreneur(s) 1 3 Trustworthiness of entrepreneurs(s) 2 1 Sales potential of the product 3 5 Expertise of the entrepreneur(s) 4 2 Investor liked entrepreneur(s) upon meeting 5 9 Growth potential of the market 6 6 Quality of the product 7 10 Perceived financial rewards (for investors) 8 4 Niche market 9 13 Track record of the entrepreneurs 10 8
Source : Mark Van Osnabrugge and Robert J. Robinson, Angel Investing, 2000
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Key Partners
Value Propositions
Customer Segments
Customer Relationships
Cost structure
Revenue streams
Channels
Key Resources
Key Activities
Business model
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Financial Forecasts
© Dilbert – International Herald Tribune 17.09.2011
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Five Types of Start-ups – Be aligned ! Lifestyle Small business Scalable start-ups Buyable start-ups Social start-ups
Work to live their passion Work to feed the family Born to be big Born to Flip Driven to make a difference
Source : Steve Blank’s blog, Sept 6th, 2011
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Due Diligence Process
Source: http://www.angelcapitalwiki.org/mediawiki/index.php5?title=Due_Diligence
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Due Diligence Process
Source: http://www.angelcapitalwiki.org/mediawiki/index.php5?title=Due_Diligence
Eyes-wide-shut investing
Reasonable investigations
Exhaustive due diligence
Forget cardinal rule : killer ideas + profitable business
To ensure as far as possible that entrepreneurs can do what they say
See themselves as financial moguls rather than mentors with money
Extreme A Best Practice Extreme B
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Source : Mark Van Osnabrugge and Robert J. Robinson, Angel Investing: Matching Start-Up Funds With Start-Up Companies
Due Diligence checklist Track record of the management Size and growth potential of the market Demand for product/service among target customers Ability to deliver product/service on time and at agreed price Competitive advantage of the product Competitors Marketing and distribution plans Soundness of financial projections Assessment of the intellectual property rights, if any Existing or possible legal contingencies Valuation for the venture