E145/STS173 Workshop C Staged Venture FinancingAgendaRatios & Valuing Public Companies TodayMetrics in ActionA Sampling of Public CompaniesMetrics CalculationSlide 7The Venture Financing GameSlide 9The Exploding PieA Real Life Example: Chemdex*Chemdex in 1997: Series ASeries ASlide 14Series BSlide 16Slide 17Slide 18Chemdex - Series CChemdex FinancingCalculating DilutionChemdex and DilutionLessons LearnedE145/STS173E145/STS173Workshop CWorkshop CStaged Venture FinancingStaged Venture FinancingProfessor Tom ByersStanford UniversitySpecial Thanks to Scott Bowie and Mike RosenbluthCopyright © 2004 by the Board of Trustees of the Leland Stanford Junior University and Stanford Technology Ventures Program (STVP). This document may be reproduced for educational purposes only.AgendaAgenda1. Valuing public companies (Ratios)2. Dilution + Growth: The exploding pie3. Chemdex financingRatios & Valuing Public Companies TodayRatios & Valuing Public Companies Today•Market Cap = # shares outstanding x Share price–Answers “what does the market think the company is worth?”•Ratios–EPS = Earnings per share•An indicator of value created for shareholders –P/E = Market Cap / Annual Earnings or Stock Price / EPS•How much does $1 of earnings cost an investor? –P/S = Market Cap / Annual Sales•Similar companies facing similar risks should have similar ratiosMetrics in ActionMetrics in ActionMarket CapNet Income: $10 MP/E: 30$300 MShare Price: $15 # Shares: 20 M$300 MSales: $100 MP/S: 3$300 MA Sampling of Public CompaniesA Sampling of Public CompaniesStock Price($/share) Market Cap ($B)EPS ($/share)P/E P/SEbay 66.93 43.24 0.68 98.43 Microsoft 47.32 253.2 1.74 27.91 8.44Walmart 47.15 208.1 1.73 27.79 0.88Coca Cola 40.33 99.983 1.68 23.9 4.62Sony 39.39 36.229 1.885 21.22 0.57GE 23.05 229.4 1.51 15.66 1.79Yahoo! 17.75 10.488 0.18 99.83 11.14Palm 14.81 430.6M -9.57 0.46Gap 14.7 12.993 0.22 66.86 0.94Alkermes 7.35 475.8 M -2.39 11.3Sun 3.11 9.687 -0.74 0.82Handspring 0.79 114.4M -0.46 0.56BioTransplant 0.319 8.1M -1.89 4.81Metrics CalculationMetrics CalculationSales: $100 MNet Income: $10 MShares Outstanding: 20 MStock Price: $15Public Company Info:(must be filed with SEC)EPS:P/E:P/S:Market Cap:We can calculate:Metrics CalculationMetrics CalculationSales: $100 MNet Income: $10 MShares Outstanding: 20 MStock Price: $15Public Company Info:(must be filed with SEC)EPS: $0.50P/E: 30P/S: 3Market Cap: 300We can calculate:The Venture Financing GameThe Venture Financing GameKaplan’s StartupGame:A race against time to create value and reduce risk (1) Founding:An entrepreneur begins with a vision and shares of stock in the new venture.Entrepreneur trades stock for ideas, money, and people(2) Seed Stage:•Venture capitalists provide money in return for stock•Employees join via friends & associates in return for cash salary and stock options•Ideas become intellectual property which represents the initial value in the companyFurther growth is delayed until milestones are reached and risk of failure is reduced(3) Growth Stage:More money, ideas, and people are obtained, but for much less stock than in the earlier stage due to lower riskCompany balances earning cash, taking investment, and spending cash to create value(4) Exit Stage:•Company files for IPO•Entrepreneur, investors, and employees can cash in stock for money •A viable public company has been created•Each party continues to build the company, retires, or starts the game againValue has been successfully created.Reference: Start-Up by Jerry KaplanThe Exploding PieThe Exploding Pie•The smaller slice of the bigger pie–Goal: Trade shares to grow the pie–Is more fun and rewarding for most entrepreneurs–Is worth more than the whole pie that never grows–Requires high growth rates–Is not easy to achieve, even with lots of financing–Requires a good relationship between entrepreneur and investorsA Real Life Example: Chemdex*A Real Life Example: Chemdex*•How much money do the founders need?•How long until significant revenue?•How long until profitability?•What’s the going rate for 1st round deals? Valuation is an art, not a science.*Chemdex is now called NexPrise (NXPS)Chemdex in 1997: Series AChemdex in 1997: Series A1. How much does the company need to raise?Series ASeries A2. Negotiate a pre-money valuationpost $ = pre $ + amount raised = $2.7 M + $1.9 M% of company sold = amount raised / post $ valuation = $1.9 M / $4.6 MSeries ASeries A3. Determine share price and total number of sharesIn Round A, share price is set so total shares = 5-10 millionTotal Shares = post $ / share price = $4.6 M / $0.54 = 8.5 M sharesSeries BSeries B1. How much does the company need to raise?Series BSeries B2. Negotiate a pre-money valuationpost $ = pre $ + amount raised = $11 M + $13 M% of company sold = amount raised / post $ valuation = $13 M / $24 MSeries BSeries B3. Determine new share priceShare price = (pre-money valuation) / (total pre-money shares) = $11M / 8.5 M4. Determine total number of sharesTotal Shares = pre $ shares + amount raised / share price = 8.5 M + $13 M / $1.29Series BSeries BChemdex - Series CChemdex - Series C3. Determine new share price4. Calculate total number of shares1. Decide how much you need to raise2. Negotiate a valuationChemdex FinancingChemdex FinancingCalculating DilutionCalculating DilutionPercentage owned = owned shares / total sharesFounders’ shares = 59% of 8.5M = 5.02M sharesSeries B Dilution: 5.02M / 18.6M = 27%Series C Dilution: 5.02M / 24.2M = 21%IPO Dilution: 5.02M / 31.8M = 16%Chemdex and DilutionChemdex and DilutionLessons LearnedLessons Learned• Know what public company metrics mean • Most financings done in multiple rounds• A smaller piece of a big pie is better than a big piece of a small pie• Know how to work out multiple stage