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An eValuation Model Presentation to Investors-R-Us Board of Directors. Presentation by: 2B (or not 2B) Consulting Neil Gall Marek Ryfko Richard Schwartz Mayank Sharma Jawad Tareen March 18, 2000. Problem Statement.
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An eValuation ModelPresentation to Investors-R-UsBoard of Directors Presentation by: 2B (or not 2B) Consulting Neil Gall Marek Ryfko Richard Schwartz Mayank Sharma Jawad Tareen March 18, 2000
Problem Statement Develop a set of criteria and application and assessment guidelines for use in evaluating the investment and financial potential of e-business plans.
Agenda Uniqueness of E-Commerce Traditional Valuation Methods New Model Rationalization Case Study Implementation Conclusion
E-Business Traditional Commerce The Changing Face of Business Digital Product Physical Product Digital Process Physical Process Physical Agent Digital Agent Adapted from “Electronic Commerce: A Managerial Perspective” by Efraim Truban et. al. 1999
How E-Commerce is Different • Pace of Change is Faster than Legislation and Regulation • Traditional Valuation Models do not Fully Capture the Value of E-Business Companies • Continuous Evolution in Terms of Customer Value • Generally Require Large Investment in Marketing as Opposed to Capital Expenditures
E-Tailing Community Portal Search Engine Exchange (B2C and B2B) Auction (C2C) Professional Services E-Business Models
Traditional Firms Main Assets are Facilities & Equipment Debt Raised for Firm’s Operations and Asset Acquisition Funding from Investment Banks Lending Based on Cash Flows of the Firm E-Business Main Assets are Customers Huge Marketing Expense Debt Largely Unavailable - Investors want Equity Funding from Venture Capital Firms Cash Flow not Used for Firm Valuation Dot Coms that issue Debt are rated by Moody’s as JUNK (e.g. Amazon, E*Trade) Traditional vs. E-Business Firm Valuation Considerations
Traditional Valuation Methods Method Problems Arrival of Earnings Ascertaining FC & VC Payback E’s are initially negative Sales does not mean returns P/E or P/S Op. Cash Flows are negative Evaluation of Risk Disc. Cash Flows
Traditional Valuation Methods Method Problems Operating Profit ??? Capital intensity meaningless EVA Complexity of use No time value of option Real Options Market Cap inflated Customers are ill-defined Market Cap / customers Requirement of a New E-Business Framework
Tangibles Intangibles What Should the New Model Look Like? eValuation
Gross Revenue # of Customers Earnings # of Customers The eValuation Model Value = + Risk Free Rate + WACC + Market Return x [ # of Customers x (1 + Growth) ] x [ Intangibles ]
The eValuation Model • Revenue Streams • Content • Access • e-Commerce • Advertising • Affiliate Programs • Customer Types • Subscribers • Buyers • Visitors
The eValuation Model • Costs • Customer Acquisition • Updating Content • Logistics in sales process • Marketing & Promotion • Overhead • Earnings • Reflects the payback time • Earnings reduce the risk profile • Returns get factored in the model
The eValuation Model • Discount Factor • Factors in risk free rate & cost of capital • Risk premium assigns the riskiness of the venture • Earnings are co-related to a reduced risk premium • # of Customers & Growth Rates • Establishes the importance of the customer • Growth rate incorporates penetration rate
Customers = Assets CUSTOMERS COMPETITIVE SUSTAINABLE ADVANTAGE VALUE PROPOSITION 2 2 What do customers really value? What is the management skills set ? How original is the idea? What are the back-end processes? What needs are going to be met? What are the technological resources?
Channel Conflicts Customer Awareness Strategy Mass Customization Branding Marketing Global Reach Cross Selling One to One VALUE PROPOSITION R&D Market Opportunity Customer Feedback Product-Service Unique eBusiness Solution Customer Satisfaction CRM Innovation Customer Retention Customer Support Customer Involvement Value Proposition
Competitive Sustainable Advantage Electronic Signature Jurisdiction Quality of Management Tax & Legal Trademark Registration Organizational Structure Management & HR Payment Compensation Taxation Training Employee Attraction/Retention COMPETITIVE SUSTAINABLE ADVANTAGE Outsourcing Suppliers Alliances Partners Fulfillment Affiliates Processes Operations Virtual Communities Site Design Data Warehousing Technology Database Management Scalability of Infrastructure Security
Tangibles Intangibles The eValuation Model Captures the Complete Value eValuation
Mitigating the Risks • Customization (Overlapping Businesses - e.g. AOL) • Growth is Constant and based on Current Economic Situation (No Seasonality or Recession Market) • Subjective Attribution of Weights to Intangibles by Venture Evaluators • Hurdle eValuation Figure needs to be established based on appropriate eBusiness model
Model Customization • E-Auction Houses (e.g. eBay) • # of Customers & Growth easier to establish • Customer Interface more critical in Intangible evaluation • E-Brokerage (e.g. E*Trade) • Revenue / Customer easily measurable • Technological Infrastructure weighted more heavily
10 1 5 Customization of Intangibles CRM Marketing Alliances Strategy Products/ Services Tax & Legal Management & HR Processes Technology
Case Study vs.
Comparing Models Current Valuation eValuation
Analysis of Intangibles eV Index = .67 eV Index = .86
$135.5 Million 30 Million Visitors - $52 Million 30 Million Visitors eValuation Analysis + 1 + 9.3% x [30 Million Visitors x (1 + 1.41) ] x [0.67] = $ 123.4 Million = $ 1,468.2 Million
Current vs. eValuation Model Relative Relationship Market Capitalization: eValuation: = $ 7.667 Billion = $ 83.2 Billion Y!:L Ratio: 10.85:1 = $ 123.4 Million = $ 1,468.2 Million Y!:L Ratio: 11.90:1
Case Study Wrap-Up • eValuation model considers both Tangibles as well as Intangibles • eValuation Model is to start-ups what Market Capitalization is to established E-Businesses • Offers “Go” or “No Go” Criteria based on investor specific business model Hurdle Rate
Implementation Plan Feedback Maintenance& Support Training Phase 4 Web publication Traffic generation Phase 3 Industry templates specification Web publication preparation Phase 2 Framework questions specification Training Phase 1
Implementing the eValuation Model Education Acceptance Distribution Automation Speed Cost
What About Larbi? Client Develops Business Plan Client Researches Funding Alternatives Online Client Completes Online Profile Contact is Initiated with Investors-R-Us Face-to-Face Interview eValuation Performed Funding Decision
Gross Revenue # of Customers Earnings # of Customers Conclusion Value = + Risk Free Rate + WACC + Market Return x [ # of Customers x (1 + Growth) ] x [ Intangibles ]