06 18 15 Class Slides 1

Topics: Venture capital, Cash flow, Net present value Pages: 17 (1304 words) Published: June 17, 2015
Class #2
Administrative Details & Upcoming Assignments
• Please see me if you weren’t in the first class
• Please remember to submit your study question responses
• Please prepare the Technical Data Corp case

Today’s Schedule
• Beijing Sammies case discussion
• Bio-break
• Presentation on the approach Venture Capitalists use
• Beijing Sammies: How to contemplate a possible investment 1
Copyright 2015, Gregory L. Stoller

Lessons from Beijing Sammies - I
• People
a) Know your own strengths and weaknesses; be honest & humble b) Success is interconnected with your internal/external people skills c) Partnerships are like marriages and have ups and downs
d) Relationship management is a marathon, not a sprint
• Opportunity
a) Business planning is key; don’t use “ready, fire, aim” strategy b) Isolate business decisions from international expansion decisions c) Build diversification into your business strategy & experiment d) Identify a niche and then focus your energies on expanding it… e) … you don’t need to be “all things to all people” to be successful 2

Copyright 2015, Gregory L. Stoller

Lessons from Beijing Sammies - II
• Context
a) Know your industry inside-and-out (Porter’s 5 Forces analysis) b) Know your industry’s value chain and products
c) It’s not necessarily what you sell, but also how you deliver it d) Understand cultural differences and broadcast to ALL stakeholders e) Customize offerings to make customers feel as if they’re unique • Deal

a) From whom you raise money is more important than the funding b) If at first you don’t succeed…
c) Ideas are everywhere, execution is elusive

3
Copyright 2015, Gregory L. Stoller

Background Survey
• Prior to this class, have you:
(1) Ever taken a course in Entrepreneurship or Starting New Ventures, etc.? (2) Taken a Finance course?
(3) Do you have a comfortable, working knowledge of the following Finance and Accounting Statements:
a) NPV
b) IRR
c) Free Cash Flow
d) Discounted Cash Flow Valuation Method
e) Venture Capital Valuation Method
f) Income Statement, Cash Flow Statement, Balance Sheet

4
Copyright 2015, Gregory L. Stoller

A Comment on Finance
• Integral part of company analysis (i.e. building blocks of bridge) • Important to learn the basics and then proceed from there • This is difficult material, especially if you don’t like numbers • This is NOT a finance course, but you have to know the basics... • Please contact me if you want to read up on finance & valuations

5
Copyright 2015, Gregory L. Stoller

Overview of V.C. Method
• (1) Essentially picks up where D.C.F. method ended
• Utilizes net income (earnings) calculation from “steady-state year” • Incorporates P/E value calculated through comps or dividend calculation

• (2) Value of venture calculated through present value formula • Emphasis on entire company, rather than on a single year’s cash flow • Discount rate:
• Extremely high due to riskiness of entire company and liquidity risk • Differs based on stage of company operations (i.e. seed, start-up) • Usually in 20-70% range, and reflects required rate-of-return

• (3) Pre and post-money calculations to compute ownership % • (4) Effects of dilution computed for original shareholders Copyright 2015, Gregory L. Stoller

Source: HBS note: A Method for Valuing High-Risk, Long-Term Investments

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V.C. Method Example
• XYZ company:
• Steady-state year:
• Steady-state Net Income:
• Steady-state P/E Ratio:
• Outstanding Shares:

Year 5
$2.5 million
15x earnings
1,000,000 (preferred) at $1.40 / share

• ABC Venture Capitalist
• Potential Investment:
$3.5 million
• Required IRR (return):
50%
• Emphasis on company as a whole, rather than on a single year’s cash flow

• Objectives:
• Calculate percentage of company $3.5 million investment represents • Calculate value of company (pre-money and post-money)
• Calculate amount of dilution from founders
Copyright 2015, Gregory L....
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