Equity Value for Startups.pdf
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This document discusses various methods that investors use to value startups, including: 1) Multiplier methods that value a startup based on comparable companies and expected future earnings or revenues multiplied by an appropriate market multiplier. 2) Discounted cash flow methods that discount projected future cash flows back to the present using an appropriate discount rate. 3) The Chicago Method which combines scenario analysis with discounted cash flows to account for uncertainty in projections.
Equity Value for Startups.pdf
- 1. Equity Value for startups 101 Andrea Gigli https://www.linkedin.com/in/agigli/
- 2. Ingredients
- 3. Balancesheet
- 4. Bilancio Prospettico Balance Sheet Asset = Debt + Equity Fiwed Income Statement +Revenues =Net Income -Costs
- 5. Time
- 6. Time is (part of the) value t = 0 100$ × (1+R) × (1+R) =100$ × (1+R)𝟐 100$+100$*R= 100$ × (1+R) 100$ t = 1 year t = 2 years 100$ = 100$ × (1+R)2 (1+R)2 R R R Terminal Value Present Value
- 7. Time in action t = 1 t = 0 t = 2 t = 3 t = 4 t = 5 t = 0 100$ t = 5 100$ 1 + 𝑅 5 𝑖=1 5 𝐶𝐹𝑖 1 + 𝑅 𝑖
- 9. Risk free return (no risk) Systematic risk premia Liquidity premia Return for added value generated by investment Other adjustment to compensate context risk Return determinants in Startup funding + + + +
- 10. Rate of return and funding phases Tasso Base Rate of return Seed Stage1 Stage2 Bridge IPO
- 11. Rate of return and funding phases Rate of Return Seed Stage1 Stage2 Bridge IPO 45% - 70% 35% -60% 30% - 45% 15% - 35% 8% - 20% Fonte: Harvard Business Review *
- 12. Investor
- 13. Types of investors Investor Amount (euro) You have Goal First-Stage Financing Investor 500k-2mios Working Product, Some Revenues Support to profitability Second-Stage Financing Investor 1mios-10mios Some profits Expansion Bridge Financing Investor … Profitable Company Time to IPO Restart Financing Investor … Troubled Company Exit Seed Financing Investor 25k-300k No BP, No full team, No prototype Hope Startup Financing Investor 200k-1mios Prototype, Impressive Team, Powerful Concept Show me who You are
- 15. How investors evaluate your idea 1) Multipliers (idea: similar things have similar value) 2) Discounted Cash Flow (idea: business is the value of cash flows it generates) 3) Chicago Method (combine above) Not exhaustive
- 16. Multipliers Equity Value T = Easy to predict proxy 𝑇 × 𝑀𝑎𝑟𝑘𝑒𝑡 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 t = 0 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒0 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒𝑇 (1 + 𝑅)𝑇 𝑬𝒒𝒖𝒊𝒕𝒚 𝑽𝒂𝒍𝒖𝒆𝑻 T = Exit Date
- 17. Some multipliers Multiplier Definition PROS CONS P/E ratio Market Value per Share Earnings per Share (EPS) • Easy to find • P/E depends on accounting rules • P/E impacted by not- ordinary business decisions EV/EBITDA Enterprise Value _ Earnings + Interest + Taxes + Depreciation + Amortization • Earnings as a proxy of cash flow • Less affected by accounting rules • Not really cash flows • Cost of capital is ignored Price/Sales Share price____ sales per share • Easy to compute • Can be applied to company in loss • Limited impact by accounting rules • Mix things together (EV/Sales much better for example, but not easy to compute) • Too much proxy
- 18. Multiplier = P/E 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒𝑇 = 𝑃 𝐸 Similar 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 × E Startup,T 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒𝑡𝑜𝑑𝑎𝑦 = 𝐸𝑞𝑢𝑖𝑡𝑦𝑉𝑎𝑙𝑢𝑒𝑇=𝐸𝑥𝑖𝑡 𝐷𝑎𝑡𝑒 (1 + 𝑅)𝑇 Systematic factors Idiosyncratic factors
- 19. P/E per sectors Industry Name Number of Firms Price/Current EPS Price/Forward EPS Automotive 12 16.03 9.99 Bank 416 19.74 14.38 Biotechnology 214 32.89 47.35 Building Materials 43 81.34 67.27 Computer Software 191 53.18 37.59 E-Commerce 64 61.67 121.56 Electric Util. 20 17.45 15.47 Electronics 123 18.47 15.90 Homebuilding 22 87.95 83.51 IT Services 63 50.48 25.44 Recreation 51 39.31 25.76 Retail (Hardlines) 79 26.15 16.83 Retail (Softlines) 42 20.91 21.56 Retail/Wholesale Food 30 17.64 14.02 Wireless Networking 58 50.04 218.55 Fonte: Yahoo! Finance
- 20. P/E ratio and systematic risk
- 21. Application: P/E • Let’s assume a startup is expected to generate 2.5 mios/y at time T=5 • Expected P/E at time T=5 by investor is 15 • Startup Value at time T=5 is 15 × 2.5𝑀𝐼𝑂𝑆 = 37.5𝑀𝐼𝑂𝑆 • Investor expect a retur of 65% 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒𝑡𝑜𝑑𝑎𝑦 = 37.5𝑀𝐼𝑂𝑆 (1 + 65%)5 ≈ 3𝑀𝐼𝑂𝑆 • If investor want to invest 1 mios she will ask 30-35% equity share of the startup
- 22. Discounted Cash Flows method Let’s imagine a company will generate the following cash flows in the next 5 years CF5 CF4 CF3 CF2 CF1 t = 1 t = 0 t = 2 t = 3 t = 4 t = 5 𝑖=1 5 𝐶𝐹𝑖 1 + 𝑅 𝑖
- 23. Discounted Cash Flows method Financial Statemen Asset = Debt Equity + } } FCF Asset Value r(WACC) FCFE Equity Value r(equity) - Debt Value } FCF Asset Value r(WACC) - Debt Value
- 24. Metodo dei Discounted Cash Flows Value of the company today is ✓ 𝐴𝑠𝑠𝑒𝑡 𝑉𝑎𝑙𝑢𝑒0 = 𝐹𝐶𝐹1 (1+𝑊𝐴𝐶𝐶)1 + 𝐹𝐶𝐹2 (1+𝑊𝐴𝐶𝐶)2 + ⋯ + 𝐹𝐶𝐹𝑁 1+𝑊𝐴𝐶𝐶 𝑁 ✓ 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒0 = 𝐴𝑠𝑠𝑒𝑡 𝑉𝑎𝑙𝑢𝑒0 − 𝐷𝑒𝑏𝑡 𝑉𝑎𝑙𝑢𝑒0 or ✓ 𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒0 = 𝐹𝐶𝐹𝐸1 (1+𝑅)1 + 𝐹𝐶𝐹𝐸2 (1+𝑅)2 + ⋯ + 𝐹𝐶𝐹𝐸𝑁 (1+𝑅)𝑁 per N ∞
- 25. Flow to equity calculation EBIDTA (Earnings Before Interests, Depreciation, Taxes, Amortization) - Depreciation and amortization EBIT (Earnings before Interests and Taxes) - Taxes Unlevered Net Income + Depreciation - CAPEX - Delta Working Capital Unlevered Free Cash Flow +/- Interests + Interest tax shield + Increment in debt Flow to equity
- 26. Calcolo dei Cash Flows Vedi foglio excel
- 27. First Chicago Method • 3 scenarios (success, survival, failure) • For each scenario – Predict company Cash-Flow till time T=5 – Compute the value of the company at T=5 using a Multiplier – Discount cash flows and Exit value of the company at time T=5 at Return required by investor • Average the values calculated under each scenario to get the Expected Present Value of the company
- 28. Applicazione del First Chicago Method Success Survival Failure After-tax Earnings at Exit Date (5Y) 4,000,000 300,000 0 Expected Market Value 𝟒, 𝟔𝟏𝟔, 𝟎𝟎𝟎 Probability 0.4 0.4 0.2 Present Market Value (R=40%) 11,150,000 390,000 0 Market Value at Exit Date 60,000,000 2,100,000 0 P/E ratio 15 7 0
- 30. All prediction are wrong Even if predictions are made under robust assumption, different scenario can happen But how much can we be wrong? How to mitigate prediction uncertainty 1) Scenario Analysis 2) Sensitivity Analysis 3) Monte Carlo methods
- 31. Monte Carlo application See excel file
- 32. Revenues distribution according to simulated scenarios 0 20 40 60 80 100 120 140 160 180 € 15,900 € 20,793 € 25,685 € 30,578 € 35,471 € 40,363 € 45,256 € 50,149 € 55,041 € 59,934 € 64,827 € 69,719 € 74,612 € 79,504 € 84,397 € 89,290 € 94,182 € 99,075 € 103,968 € 108,860 € 113,753 € 118,646 € 123,538 € 128,431 € 133,324 € 138,216 € 143,109 € 148,002 € 152,894 € 157,787 € 162,680 € 167,572 € 172,465 € 177,358 € 182,250 Altro Frequenza Distribuzione del Fatturato al 6° anno
- 33. Simulated scenarios 15,214 24,530 33,081 35,995 50,515 71,244 € - € 20,000 € 40,000 € 60,000 € 80,000 € 100,000 € 120,000 € 140,000 € 160,000 € 180,000 0 1 2 3 4 5 6 7