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The Art and Science of Valuation

The Art and Science of Valuation. Prepared for Faegre & Benson April 19, 2006. Overall Agenda. Part 1: Capturing the Attention of the Venture Capitalist Part 2: Understanding the state of the Venture Capital Industry Part 3: Valuation Overview. Part 1 Agenda.

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The Art and Science of Valuation

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  1. The Art and Science of Valuation Prepared for Faegre & Benson April 19, 2006

  2. Overall Agenda • Part 1: Capturing the Attention of the Venture Capitalist • Part 2: Understanding the state of the Venture Capital Industry • Part 3: Valuation Overview

  3. Part 1 Agenda • Part 1: Capturing the Attention of the Venture Capitalist • Finding the right VC • Courting the right VC • Management Team • Market Characteristics • How hard can it be? • Part 2: Understanding the state of the Venture Capital Industry • Part 3: Valuation Overview

  4. Finding the Right VC • Do Your Homework • Buying Criteria • Just Like a Customer

  5. Courting the Right VC • Online Dating • Anonymous • Highly Competitive • 1 Chance

  6. “As a founder, think hardest about the team. Are these the people I want to be in trouble with for the next 5, 10, 15 years of my life? Because as you build a new business, one thing’s for sure: you will get into trouble.”John Doerr, Kleiner Perkins Caufield & Byers Management Team

  7. Investing In Talent Factors considered most important by investment professionals (Weighted importance out of 100*) Management Team 37 24 Market Sector Business Model 20 Proprietary Product/Service 19 Source: Spencer Stuart/NVCA VC-backed Leadership survey

  8. Market Characteristics • Worth Winning • $250 million • Sustainable Drivers • Y2k • Well Defined • Sub-segment

  9. How Hard can it Be?

  10. A Rapidly Evolving World 1995 • Yahoo raises $2 million • Amazon goes live • Netscape goes public • 45% heard of www • AltaVista 16 million pages

  11. Technology is only the Ante

  12. Sustaining vs. Disruptive Technologies • Sustaining Technology • Foster improved product performance • Disruptive Technology • Bring to the market a very different value proposition The Innovator’s Dilemma – Clayton Christensen

  13. Sustaining Technology B A Sustaining vs. Disruptive Technologies Sustaining Technology • Improves performance along an existing utility curve Cost Performance

  14. B Disruptive Technology A Sustaining vs. Disruptive Technologies Disruptive Technology • Moves the market to new utility curve Cost Performance

  15. Explicit Need / Compelling ROI IT Budgets and ROI: “Purse strings are loosening ever so slightly, but that won’t slow the quest for better metrics”

  16. Part 2 Agenda • Part 1: Capturing the Attention of the Venture Capitalist • Part 2: Understanding the state of the Venture Capital Industry • Locations: East Coast / West Coast and everywhere else • State of Emerging Market Funding • US Market Trend • Minnesota Market Trend • Pre-Bubble Normal • Part 3: Valuation Overview

  17. Locations: CA, MA and then the Rest

  18. State of Emerging Company Funding(Hint: Small VC Funds are Disappearing )

  19. U.S. Venture Capital Market Trend Info Group Median • Expansion – 53% • Later Stage – 18% • Early Stage – 22% • Seed Stage – 4% Source: PWC MoneyTree

  20. Minnesota vs. U.S. Venture Capital Market Trend Info Average MN vs. U.S VC Investment = 1.54% Source: PWC MoneyTree

  21. A Pre-Bubble Normal

  22. Part 3 Agenda • Part 1: Capturing the Attention of the Venture Capitalist • Part 2: Understanding the state of the Venture Capital Industry • Part 3: Valuation Overview • Valuation • Start-Up Stages • Equity Financing Food Chain • Sherpa Guide to Success • Valuation Methodology • A Lesson from Charles Darwin

  23. Valuation is Chess Not Checkers

  24. Stages of a Startup • Definition and Validation • Prove Solution is Repeatable • Grow the Channel to Capture Opportunity

  25. Equity Financing Food Chain Return Expectations Late Stage 20% - 12% IRR Expansion Stage 25% - 15% IRR Late Majority Customers Early Stage – (Sherpa) 50% - 20% IRR Early Majority Customers Seed Stage 100% – 30% IRR Early Adopter Customers Innovation Customers Friends/Family Angels Institutional - VCs Public Market

  26. Return Expectations

  27. Return Expectations 5-10x your investment or 30%+ IRR

  28. Sherpa Pocket Guide to Success Quick Go vs. No Go Decision (4x in 5 Years = 32% IRR)

  29. Determine valuation in an out year Revenue in year 5 is $20 million Use a multiplier (i.e., revenue, operating income, earnings, subscribers, locations, etc.) to determine value A revenue multiple of 2x would make the company value $40 million in year 5 Compare future value with current value Divide the future value ($40 million) by the post-money valuation Post-money value of $10 million means this investment increased in value by 4x ($40 million / $10 million) 4x in 5 years equals a 32% IRR Valuation Methodology

  30. “It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change.” - Charles Darwin, British Naturalist

  31. Recap • Part 1: Capturing the Attention of the Venture Capitalist • Part 2: Understanding the state of the Venture Capital Industry • Part 3: Valuation Overview

  32. Rick Brimacomb Founder, Brimacomb & Associates General Partner, Sherpa Partners Board Member, Minnesota Venture Capital Association 612.803.3169 rick@brimacomb.com Jason Voiovich Principal, Ecra Creative Group 651.209.2778 jason@ecracreative.com

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