Presentation by
Dr. Andreas O. Tobler
October 19, 2010
Tento projekt je spolufinancován Evropským sociálním fondem a státním rozpočtem České republiky
Determining the value of a growing
company is a critical step. It will come
into play when raising capital from
investors, selling assets, granting stock
options to employees or buying out a
partner.
Value your company too low, and you can give
too much of it away.
Value your company too high, and you may
turn investors away when you're raising future
rounds of capital
The process of determining a company's value
is part art and part science
The science is in the mathematics: looking at
cash flows, revenues and assets and crunching
the numbers. The art is in knowing how to
apply those numbers appropriately and
credibly
Cash flow, revenues & assets?
➤Usually
none of the three are existent or only
barely existent in a start-up
➤No cash flow, no revenues and no assets –
nothing to crunch
Is it all art and no science?
Entrepreneurs need to put a justifiable value
on their startups in order to raise money,
and…
Investors need to put a justifiable value on
their investments to generate liquidity
The value of your company is what the
market says?!
You might think it's worth more. You might
even know it's worth more
But if you are unable to raise money above
the valuation an investor is prepared to pay,
then you will have to accept this “market
valuation”
Caveat!
If you raise money from friends & family
rather than professional investors, it often
happens that your company has been
overvalued or undervalued (more likely,
overvalued)…
the price established with friends & family
does not necessarily give you a “market
price” – even if your business grows and
prospers
On the other hand…
by definition, startups don't have a history of
financial performance on which to base a
valuation. Therefore, it's up to you to
develop a process for valuing the company
…but based on what?
Comparables
Find out how much similar companies in
your industry and geography are worth
…not as easy as it seems in your industry!
Network with other biotech companies that
have received funding, talk to “insiders” e.g.
contacts at investment banks, lawyers,
accountants etc.
Comparables
First, try to find a “ballpark” number, i.e.
determine how much comparable companies
are valued at when they reach profitability
Comparables
Select companies with similar value
characteristics such as risks, growth rate,
capital structure and the size and timing of
cash flow. Easiest in public companies; see
for example:
http://www.altassets.com/private-equityknowledgebank/surveys/article/nz10900.html
Financial forecasts
Although it is exceptionally difficult to
forecast revenue at a biotech startup, you'll
need to do this to determine value - and
eventually to defend your valuation
If your business is not profitable, it is not
worth anything!
Financial forecasts
A biotech businesses typically takes time to
become profitable… the trick of valuing
startups is to focus on the future
Financial forecasts
There are various different financial
approaches to estimating the value of a startup
One of the most common approaches is
estimating future free cash flow and
calculating the net present value via the
Discounted Cash Flow [DCF] method
Financial forecasts
Biotech startups are often valued as a
collection of one or more experimental drugs,
each drug representing a potential market
opportunity
Using DCF analysis of all the promising
drugs in the portfolio, one can determine the
value of a company.
Financial forecasts
Start-up biotech companies often have
several drugs in their developmental
pipeline. In general, only those drugs in
phase I, II, or III are included for valuation. A
drug candidate that is in the discovery or
non-clinical stage is not a good bet, with less
than a 1% chance of reaching the market.
Therefore drugs in the non-clinical stage are
often assigned zero value by professional
investors!
Financial forecasts
Venture Capital Method is a method often
applied in the private equity industry. It
accounts for the fact that start-ups have
typically negative cash flow and earnings in
the early stages and highly uncertain but
potentially substantial future rewards.
Financial forecasts
The Venture Capital Method takes this
profile into consideration by talking a
multiple based on future positive cash flow
and earnings. This value is then discounted,
again to the present value at a high discount
rate (40% to 75%)
Other Considerations
➤ Quality of management team
➤ Current state of technology
➤ Current state of companies in similar market
➤ Current market conditions
➤ Size of the market and company’s potential
to acquire market share
➤ Track record of entrepreneur; repeat
entrepreneurs get better valuation
➤ Distribution of bargaining power between
VC and entrepreneur
Much like an artist, you need to use creativity
in valuing your biotech startup businesses