Introduction to VC - Chapter 3

• Technical: Working out the strength, weakness, opportunities, threat (SWOT) profile

• Financial: Cheking the assumptions for valuation and securing

• TAX: Prevention of tax liabilities

• Economic: Investigation and analysis business model and team

• Legal: Importance for gurantee, product and compeition claims

• Environmental: Stock market admission and sales brochure

• Contracts between you and your co-founders and previous investors

• Contracts between you and your customers and suppliers

• Financial statements, account receipts, insurance documents, etc.

• Technical documentations, environmental standards etc.

• Discounted cash flow

• Multiples

• Cash flows are calculated over a detailed forecast period and discounted to the present day

• A terminal value is determined which is also discounted

• More complex method

• Detailed information necessary

• Relative market value measures are calculated for comparable companies

• Derived multiples are applied to the own company

• Simplified approach

• Most common technique

Generally, several methods are used to determine a value range

Pro:

• Theoretically the best valuation approach

• Dynamic approach based on future firm perfomance

• Scenario simulation possible

• Less dependent on stock market movements

• Valuation of synergies possible

• In-depth understanding of the firm and its value drivers

Con:

• Detailed planning necessary

• Result highly sensitive to assumptions

• Terminal value often represents significant portion of total value

• Sometimes disconnect between market excpectations of value and DFC result

• Very complex compared to multiples

Pro:

• Easy to communicate

• Based on public data

• Very important valuation technique for investors and analysts

• Transaction multiples: Purchase price often available even for transactions where the target is not listed

• Transaction multiples: Additional information on takeover premium

Con:

• Lack of comparable companies

• Static approach, no consideration of future development

• Trading multiples: Highly dependent on stock market movements

• Transaction multiples: Low level of transparency

• The bully

• The nice guy

• The technocrat

• The wimp

• The curmudgeon

• people

• papers

• process

Do your homework, understand the paperwork, and you will move through the process much faster

• Pitchdeck

• Business plan

• Due Dilligence material

• Term sheet

• Contract

Questions you should ask yourself:

• Are you ready for VC?

• Is the VC ready to talk to you?

Process:

• Contact

• Rough analysis

• Detailed analysis

• Negotiations

• Is your CFO driving the process?

• Is your CEO ready to present in front of the VC?

• Who is on the other side? Can your contact person take a decision? Do you want to talk to the partner or analyst?