E145/STS173E145/STS173WorkshopWorkshop BBStaged Venture FinancingStaged Venture FinancingPresented by Eric Carr (with Thanks to Professor Tom Byers)Stanford UniversitySpecial Thanks to Scott Bowie and Mike Rosenbluth, Past E145 TAsCopyright © 2006 by the Board of Trustees of the Leland Stanford Junior Universityand Stanford Technology Ventures Program (STVP). This document may bereproduced for educational purposes only.AgendaAgenda1. Valuing Public Companies (Ratios)2. Venture Funding (Cap Tables)• Dilution + Growth (The Exploding Pie)• Chemdex financing example3. Valuing Start-Ups (The Challenges)Ratios & Valuing Public Companies TodayRatios & Valuing Public Companies Today• Market Cap = # shares outstanding x Share price– Answers “what does the market think the company isworth?”• 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 havesimilar ratios (Comparables/Comps)• “Enterprise Value” - Market Cap + DebtMetrics in ActionMetrics in ActionMarket CapNet Income: $10 MP/E: 30$300 MShare Price: $15# Shares: 20 M$300 MSales: $100 MP/S: 3$300 MA Sampling of Public CompaniesA Sampling of Public CompaniesNote: Updated Feb 6, 2006 CloseStock Price($/share) Market Cap ($B)EPS ($/share)P/E P/SGE 32.75$ 346.04$ 1.54 21.25 2.09 Microsoft 27.17$ 280.76$ 1.21 22.45 7.27 Walmart 45.08$ 187.69$ 2.57 17.55 0.62 Google 385.10$ 113.82$ 5.02 76.70 21.48 Cisco 17.83$ 109.52$ 0.86 20.68 4.39 Coca Cola 40.94$ 97.40$ 2.17 18.88 4.23 Ebay 40.77$ 56.82$ 0.78 52.54 12.42 Apple 67.30$ 56.72$ 1.85 36.30 4.35 Sony 48.83$ 48.72$ 1.09 44.80 0.79 Disney 24.96$ 48.01$ 1.22 20.41 1.51 Yahoo! 32.92$ 46.70$ 1.28 25.80 9.84 Gap 18.74$ 16.30$ 1.27 14.79 1.01 Sun 4.36$ 14.89$ (0.10) 1.35 Alkermes 23.04$ 2.11$ (0.28) 17.91 Palm 39.84$ 2.01$ 5.83 6.84 1.37 BioTransplant 0.02$ $380.78k (1.97) 0.23Industry Comparables ExampleIndustry Comparables ExampleSource: Technology Ventures (Dorf/Byers) p. 520Metrics 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: $15Public Company Info:(must be filed with SEC)EPS: 0.50$ P/E: 30P/S: 3Market Cap: 300$ We can calculate:Other Possible Valuation MetricsOther Possible Valuation Metrics• Comparable Companies (Public Market Market Capsor Acquisition Prices)• Multiple of Operating Cash Flow (or Free Cash Flow)• Discounted Cash Flow Models• Cash Flow Return on Investment (or EVA)Since most Start-Ups are cash negative for the firstfew years of existence (i.e. EPS will be negative),other valuation methodologies must be used ...The Venture Financing GameThe Venture Financing GameKaplan’s StartupGame:A race against time tocreate value andreduce risk(1) Founding:An entrepreneur begins with a vision and shares of stock in the new venture.Entrepreneur trades stock forideas, money, and people(2) Seed Stage:•Venture capitalists providemoney in return for stock•Employees join via friends &associates in return for cashsalary and stock options•Ideas become intellectualproperty which represents theinitial value in the companyFurther growth is delayeduntil milestones arereached and risk offailure is reduced(3) Growth Stage:More money, ideas, and people areobtained, but for much less stock thanin the earlier stage due to lower riskCompany balances earningcash, taking investment, andspending cash to create value(4) Exit Stage:•Company files for IPO•Entrepreneur, investors, andemployees can cash in stockfor money•A viable public company hasbeen created•Each party continues to buildthe company, retires, or startsthe game againValue has beensuccessfully 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: A Real Life Example: ChemdexChemdex**• 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 Chemdex in 1997: Series Ain 1997: Series A1. How much does the company need toraise?RoundPre-money ValuationAmount RaisedPost-money Valuation% of Company SoldShare Price*Total Shares*Series A$2.7 $1.9 $4.6 41% $0.54 8.5Series B$11 $13 $24 54% $1.29 18.6RoundPre-money ValuationAmount RaisedPost-money Valuation% of Company SoldShare Price*Total Shares*Series A$2.7 $1.9 $4.6 41% $0.54 8.5Series B$11 $13 $24 54% $1.29 18.6Series 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 totalnumber 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 sharesRoundPre-money ValuationAmount RaisedPost-money Valuation% of Company SoldShare Price*Total Shares*Series A$2.7 $1.9 $4.6 41% $0.54 8.5Series B$11 $13 $24 54% $1.29 18.6RoundPre-money ValuationAmount RaisedPost-money Valuation% of Company SoldShare Price*Total Shares*Series A$2.7 $1.9 $4.6 41% $0.54 8.5Series B$11 $13 $24 54% $1.29 18.6Series BSeries B1. How much does the company need toraise?Series BSeries B2. Negotiate a pre-money valuationpost $ = pre $ + amount raised = $11 M + $13 M% of company sold = amount raised / post $ valuation = $13 M