1. LESSON 6 How Business Angel and Venture Capital evaluate investments
FOR DISCUSSION
LESSON 6
How Business Angel and Venture Capital evaluate investments
Prof. Vittorio de Pedys 1

2. WOULD YOU HAVE INVESTED?
MICROSOFT CORPORATION, 1978
Bill gates (e forse c’è anche steve ballmer) 2

3. START SMALL AND THINK BIG3

4. START SMALL AND THINK BIG4

5. GRANDFATHER OF SILICON VALLEY5

6. GRANDFATHER OF SILICON VALLEY6

7. PRIVATE EQUITY AND VENTURE CAPITAL7

8. VENTURE CAPITAL INVESTMENT PROCESS
5 steps of investment process
They are all important but the first one is very important. Maybe you dont know, but in the world there are more money than ideas. Finding good ideas is a competitive advantage. We go to fair, we advertise our fund, we try creating solution to find ideas. In the past funds waited for ideas, now is different (talking to people in the sector) 8

9. U.S. Venture Capital in 2010 26 B$ into 2800 deals; up 11%
800 firms have partners
Average partner manages 223 M$ of investments, sits on 6 company boards
72 IPO’s vs 12 in 2009 & 160 average
1° California ; 2° Massachusettsss ; 3° NY
Source: UCLA 9

10. Italian Venture Capital in 2010
90 M€ investments in 30 companies (early stage)
13 players
2-3 disinvestments
Exit generally through selling to other companies
Italian venture capital & private equity association
Source: AIFI 10

11. Introduction to raising capital11

12. Capital raising sequence
Personal savings & credit card debt
Friends, families and “fools”
Business Angels
Venture capital
IPO or acquisition 12

13. Stages
Seed = product developed & launched, CEO in place, some early sales, not profitable
Early stage = paying customers, proven business model, management team in place, break even revenue
Expansion = needs investment for sales & marketing investments to sell more 13

14. Business Angels
Typically retired or semi-retired, successful professionals who have investment cash
Many want to mentor CEO’s
To be considered “accredited investors” need > € net worth
Typical angel investment 40-60k per year
Like Venture Capitals, do not sign NDA agreements
Normally invest locally & for themselves 14

15. Angels groups Angel groups in almost every city
Most are non-profit organizations
Each member invests individually
Use standard deal term sheets
All investors sign same term sheet
Investors may invest different amounts 15

16. The Italian Business Angels organization is called IBAN (Italian Business Angels Network) 16

17. Typical angel deal in U.S. (2010)
1.7 B$ total investment*
400 K$ investment
1.5 M$ pre-money valuation
20-25% equity
One seat on the board of directors
Source: ACA 2010 17

18. Typical angel deal in Italy (2010)
33 M€ total investment
145 K€ average investment in each company
40-60 K€ average investment per Business Angel
Consider 1-5 investment opportunities during the year
One seat on the board of directors
Source: IBAN 18

19. Venture Capital vs Business Angels
Venture Capital’s have:
Expensive offices & high overhead costs (vs. angel’s home office)
High labour costs (vs. angels work solo)
Investors who expect high profits (vs. angels have lower profit expectations)
VC board of directors (vs. no board) 19

20. Club degli investitori
Group of entrepreneurs of the Piemonte region that invests in new or recent constitution companies that are innovative, with highly growth potential
Investments realized: Arenaways – Authix – Caspertech - Lachesi – Microcinema – Microwine – Skuola.net – Nicanti
The club is formed by 40 members
Gruppo di imprenditori piemontesi che investe in società di nuova o recente costituzione, aventi consistente contenuto innovativo ed elevato potenziale di crescita
Investimenti realizzati: Arenaways – Authix – Caspertech - Lachesi – Microcinema – Microwine – Skuola.net – Nicanti
Il Club è composto da circa 40 soci
Source: clubdeglinvestitori.it 20

21. Source: clubdeglinvestitori.it
Evaluation process 1/2
Entrepreneur sends Business Plan to the club
Every member can examine the Business Plan
Selection is based on :
Innovation level of the product or the service proposed
Credibility of the entrepreneur and the management team
Target market and selling strategy
Headquarters in the Piemonte region
Livello di innovazione dei prodotti o servizi proposti
Credibilità  dell'imprenditore e del management della società 
Mercati di riferimento e strategia di vendita dei prodotti o servizi
Collocazione geografica: Piemonte
Source: clubdeglinvestitori.it

22. Evaluation process 2/2
Club reviews plan & decides if appropriate to present to all members
Entrepreneur makes 15 minute presentation & 20 minute Q&A
If 4-6 Angels investors express interest, due-diligence team formed & meets with entrepreneur for 2-3 hours to learn more
Typical pre-money valuation = 500K€ - 1M€
Viene deciso se si ritiene appropriata una presentazione dell’imprenditore
L’imprenditore viene invitato a presentare per 15 minuti di fronte ai soci rispondendo ad eventuali domande
Se 4-6 Business angels manifestano interesse viene formato un team due-diligence che incontra l’imprenditore per 2-3 ore
Tipica valutazione pre-money 500K€-1M€

23. VCs AND ANGELS LOOKS FOR CREDIBLE DIFFERENTIATION…
Competitor 10
New Co
Competitor 9 Y1
Competitor 11
Competitor 7
Competitor 1
Competitor 6 Y2
Competitor 2
Competitor 3
Operando in un mondo globale è importante secondo noi investire in aziende che operino in delle nicchie e che si differenzino bene…
Competitor 5
Competitor 8
Competitor 4 X1 X2 23

24. …AND DEFENSIBLE BARRIERS3.
PRODUCT
&TECHNOLOGY
PARTNERSHIPS
NETWORK
SIMPLICITY
TECHNOLOGY
DOMAIN KNOWLEDGE
…ed è per quello che investiamo in aziende con barriere all’ingresso…soprattutto brevetti
BUSINESS PROCESS 24

25. METHODS TO EVALUATE A VC DEAL
It is important to know the meaning of post-money and pre-money valuation in Venture Capital or Private Equity

26. A pre-money valuation refers to the valuation of a company
The premoney is the value of the company

27. POST MONEY VALUATION
Post-money valuation is the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity
If a company is worth $100 million (pre-money) and an investor makes an investment of $25 million, the new, post-money valuation of the company will be $125 million. The investor will now own 20% of the company.
The post money is the value of the company + the investment

28. METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
ANGEL VALUATION
VENTURE CAPITAL METHOD

29. METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
ANGEL VALUATION
VENTURE CAPITAL METHOD

30. TIPICAL ANGEL VALUATION (1/2)
NO REVENUES? 500K-1M€ STANTARD PRE-MONEY VALUATION

31. TIPICAL ANGEL VALUATION (2/2)
….or bridge loan to A round Venture capital investment:
Angels can buy A round shares at 75% share price

32. METHODS TO EVALUATE A VC DEAL IF THE COMPANY IS A START UP
ANGEL VALUATION
VENTURE CAPITAL METHOD

33. VC METHOD POST = V/ (1+r)t V= EBITDA x multiple exit
R= required annual return of the fund
t= time to exit
Value discounted with the fund IRR for the numer of years in with the fund will be in the company

34. EXAMPLE EBITDA Year 4 = 5M€ Value in 4 years= 5 M€ x 5 = 25M€
10,1
EXAMPLE
EBITDA Year 4 = 5M€
Value in 4 years= 5 M€ x 5 = 25M€
Required annual return: 50%
Time to exit = 4 years
Investment = 3 M€
POST = 25/ (1+50%) 4 = 4.9 M€
Minimum Piemontech IRR is 40% (that means if i invest 1, i want to have 5.5 in 5 years, or x3 in 3 years
VC QUOTA = 3/ 4.9 = 60%
PRE = = 1.9 M€

35. We value different scenarios, we make hypothesis
We value different scenarios, we make hypothesis. For example we decrease revenues if we think there will be price erosion
We always leave a 10% options for employees. Usually we want everybody in the team to be motivated

36. METHODS TO EVALUATE A VC DEAL IF THE COMPANY EXISTS
DCF
MULTIPLES

37. DCF MODEL
Sum of all future cash flows that are estimated and discounted to give their present values
WACC: Kd (no debt) + ke (35%-50%)
Used by VC to check
Used to verify if the managemetn thought about potential future revenues, costs etc.
We value TAM (mobile phones) and SAV (phones with cameras), for example if you sell cameras

38. METHODS TO EVALUATE A VC DEAL IF THE COMPANY EXISTS
DCF
MULTIPLES

39. MULTIPLES EV/EBIDTA EV/REVENUES EV/CASH FLOW EV/EBIT P/E
Private comparable companies + AIM companies
Very simple but easy to make mistakes
EV= equity + debt – cash
2000 listed companieso on aim

40. AVERAGE EBITDA MULTIPLE = 5 X EBITDA
10,1
AVERAGE EBITDA MULTIPLE = 5 X EBITDA
That’s the italian average. Of course every company is different, but if you want to know the value of your company you multiply the ebitda x 5 less debt