b2b softwaare days: startups – investment, valuation and exit
TRANSCRIPT
Startups – Investment, Valuation and Exit
www.i5invest.com
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Experience of the founder team Product with a
Unique Selling Proposition
Traction / Momentum
Consistence / completeness of business model
Scalability of business model
Market potential and competition
Business Plan and capital
required
External proof of concept
What can Angel contribute in addition to
capital?
Fair valuation (for the region) with
reasonable stake
Ability to work together over the investment period
Exit / liquidation event
Issues from an Angel Investor’s perspective
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Traffic
Engagement
Registered users
Active users
Revenues
Profitability
Pre-seed & seed investment
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Issues from a VC’s perspective
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Venture Capital Firm
Portfolio (based on risk / return profile)
Failure IPO Trade Sale
What is the best exit option for the company?
What price can be realized?
“Invest, Hold and Exit”
What stage is the company currently at?
Does the company fit into existing portfolio?
How much is the company worth now?
How much will the company be worth at exit?
Main value drivers for VCs are Entry Value, Exit Value and Investment Horizon
Investment (Series A, B, … )
Company 1 Company 2 Company ... Company n
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An overview of valuation approaches
VC Method Asset based Valuation Scoring Method
Entry / Exit Value and investment horizon
Bottom up valuation of assets → sum of the parts
Benchmarking target vs. regional market average
Entry Exit
IRR
Investment Horizon
Tangible Assets
NWC
Intangible Assets
GW
Tota
l Val
ue
Scoring Categories
Weighting Factor
Bench- mark
Total Value x =
Weighting
…and of course there are the traditional approaches such as Discounted Cash Flow Valuation and Multiple Valuation
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Venture Capital Method
The VC approach reflects the business model of invest, hold and exit
Pre-money value
Post-money value
Capital raised
Exit Value
Discount Rate = Expected IRR
Exit Value drivers
Revenue potential
Profitability: e.g. EBITDA
Multiple based on revenues / EBITDA
Competitive bidding process
Investment horizon: 5 – 8 years
Terminal Value (EUR in m) 20,0 IRR 65% Investment Horizon (yrs) 6 Post-money value 1,0 Capital raised 0,3 Pre-money value 0,7
Share in the Company 30%
Cash on Cash Multiple 20
Efficient exit process
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All approaches provide a great framework…
…in the end supply and demand for investment opportunities drive the valuation
(Sta
rtup
) inv
estm
ent
oppo
rtun
ities
Investors (Angels and VCs)
(Deals) experience and points of reference for
valuation
Industry knowledge
Investor network
Supply Demand
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What is happening in venture markets?
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Equity investment in venture-backed companies – Europe vs US
Source: VentureSource, Capital IQ & i5invest Analysis
Development of average investment in Internet Software
0
1
2
3
4
5
6
7
8
Europe and USA USA Europe
Private Placements per region - Internet Software (money raised)
Q3 2014 Q4 2014
+20% +38%
-30%
($m)
• Investments in venture-backed companies much higher in the US than in Europe
• Investments in venture-backed companies in the US is up 77% compared to 1Q12, in Europe only 57%
• 3Q14 vs 4Q14: USA → 23% increase; Europe → 29% decrease
• The number of investment in internet software companies decreased, whereas the average money raised increased to almost $8m
• Average money raised through private placements decreased 30% in Europe, whereas in the US it increased by 38% in 4Q14
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+18%
+13% +15% +11%
+33% +12%
What is going on in the financial markets? Development of trading multiples in
Application Software Development of trading multiples in Data
Processing / Outsourced Services
Source: Capital IQ & i5invest Analysis
Enterprise Value / Sales
• In 2014, companies in APAC showed a higher valuation than Europe for the first time in the last three years
• Data Processing companies in APAC trade at a much lower level than their peers in Europe and North America
• Companies in North America significantly higher valued than in Europe and APAC • EV/Sales Multiples in all three areas increased over the last three years
Enterprise Value / Sales
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What is happening in transaction markets?
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Development of transaction multiples in Application Software*
Development of transaction multiples in Data Processing & Systems Software*
Enterprise Value / Sales Enterprise Value / Sales
* Adjusted for outliers Source: Capital IQ & i5invest Analysis
• Transaction multiples in North America and Europe increased (slightly)
• The EV/Sales multiple in APAC increased significantly in 2014
• This was driven by the 1.5bn USD acquisition of AutoNavi Holdings by Alibaba (EV/Sales 8.2x)
• Transaction multiples in Europe moved sideways
• The EV/Sales multiples in North America and APAC increased significantly (especially in 2014)
• One of the highest valued US transactions in 2014 was the acquisition of Mandiant by FireEye (EV/Sales 8.1x)
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COMPANY
Partners
Customers
Competitors
Suppliers
Outside current product focus
Outside current industry focus
Outside current geography
New business?
Business and Corporate Development – an integrated process
Strategic Preparation Strategic Business / Corporate Development
Corporate Development / M&A
COMPANY
Potential Leads
Long list
Short list
3 months 3 - 6 months 6 months
Define current positioning
Establish right first point of contact
Assure efficient and competitive process
Phase 1
Preparation
Phase 3
Due Diligence
Phase 2
Reach Out
Phase 4
Negotiation Exit
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Exit Process is the final stage
Deepen company and market analysis
Financial model and business plan
Preparation of transaction documents
Indicative valuation Long- and shortlisting
of potential buyers
Contacting short list with teaser and NDA
Distribution of transaction documents after receipt of signed NDAs
Preparation of management presentation
Setup of data room Selection of bidders
SPA negotiation with preferred buyer(s)
Development of final transaction structure (share/asset deal)
Signing of SPA Receipt of approvals Closing
Management presentations and site visits
Coordinating due diligence, expert meetings and Q&A session
Assessment of binding offers / term sheets
Selection of preferred buyer(s)
Phase 1 Preparation
Phase 2 Reach Out
Phase 3 Due Diligence
Phase 4 Negotiation
Key steps
Key success factors Understanding the
dynamics of transaction environment
Business development to assure Fit for Exit
Establishing the right first point of contact (be it business or corporate development)
Creating competitive process with several potential bidders
Negotiation tactics and mitigating reps & warranties
Leverage different stakeholders
Bridging the value gap
Comprehensive preparation of company documents and data
Fast, streamlined and efficient due diligence with several bidders
Efficient sell side process to maximize returns
Thank you!
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What we do – Our Services
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We focus on max 2 new companies per year – we aren’t spray & pray investors. We focus on sector expertise, mostly strong IP/technology, international/US markets, rarely copycat business models
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Who we are – Our Team Founded 2007, Vienna - partner i5growth Inc. in Palo Alto
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Advisory Board, CEO - i5growth
Inc./ USA
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