Early-Stage Company Valuation in NZ. With Specific Application to Equity Crowd Funding

Transcription

1 Early-Stage Company Valuation in NZ With Specific Application to Equity Crowd Funding

2 How are Companies Valued (generally)? Different methods for different contexts Discounted Cash Flow FCFF, FCFE, DDM, EVA etc. Comparable Company Multiples M&A transactions, publicly listed comps, capital raising valuation by similar firms Asset Based NAV, replacement cost, break-up value Previous transaction value Acquisition price, implied value at capital raised, most recent traded price

3 Early-stage Company Context Issues arise when applying traditional methods to early-stage companies Discounted Cash Flow Positive cash flows may be outside of reasonable forecast period Very sensitive to discount rate assumptions Comparable Company Multiples M&A comps imply control and/or synergy value Publicly listed comps imply lower discount rate (various reasons) Asset Based Does not assess value of future potential, very conservative Previous transaction value May not exist/be available or stale May relate to different class of capital e.g. liquidation preference, anti-dilution provisions, or board representation

4 A quick word on the Venture Capital Method A pricing tool rather than a valuation method. Assumes that funding is received. Determine the terminal value of the company at the point of exit Make forecasts for the company s financials for the holding period Assess value using one of the previous valuation methods e.g. 5x EBIT at end of year 5 Discount the terminal value to date of investment to give the post-money valuation e.g. discount back 5 years at 30% compound annual rate Adjust for additional future financing rounds if anticipated, base this on cash balances and burn rates over the forecast period Subtract the value of investment round to give the pre-money valuation e.g. If the post-money valuation from the previous step is $5m, and the forecast is based on the assumption of $1m invested, then the pre-money valuation is $4m

5 Discount Rate Selection Higher risk higher return expectations risk premium on discount rates The higher the level of risk associated with the investment, the higher the discount rate must be The venture capital method implicitly considers only the exit value in the case of success, rather than the (probability-based) expected case. There are two ways of dealing with this: Explicitly consider a number of scenarios at the point of exit and analyse on a probability-weighted basis. Increase the discount rate to incorporate an annual probability of failure (with zero residual value). e.g. a 20% discount rate for non-diversifiable risk combined with a 20% annual chance of failure in each of the five years forecast will equate to a combined discount rate of 50%

6 Where is the risk? At the shareholder level, require a discount (increase discount rate) for: Lack of control a minority interest in a company does not give meaningful voting rights Lack of marketability the costs and difficulty associated with finding a buyer for your shares Liquidity the costs associated with trading the shares quickly when there isn t a stable market price Information asymmetry shareholder s are only legally entitled little more than the annual financial accounts Agency problems incentives of directors and managers are not always aligned with that of shareholders Some of these issues can be mitigated e.g. by listing on a secondary exchange such as Unlisted or the NZAX.

7 Where is the risk? contd. For early-stage and small companies, a further discount may be required for: Lack of depth/quality of management including key person risk Weak bargaining power with customers/suppliers More vulnerable to threat of new entrants, substitutes, industry rivalry Lack of established customer base / market validation Risk associated with product development Revenue concentration risk Lack of runway / financial sustainability For shorthand, companies are often grouped into stages with respect to progress in addressing these factors.

8 Stages of Company Maturity Stages of company development are commonly associated with rounds of funding Stage Seed Start-up Early expansion Expansion New Zealand Venture Investment Fund (NZVIF) Definition An investee company is at the seed stage of its development if the investment will enable development, testing and preparation of a product or service to the point where it is feasible to start business operations. Most likely to be pre-revenue. An investee company is at the start-up stage of its development if the investment will enable actual business operations to get underway. This includes further development of the company s product(s) and initial production and marketing. May or may not be pre-revenue. An investee company is at the early expansion stage of its development if the investment provides capital to initiate or expand commercial production and marketing but where the company is normally still cash flow negative. An investee company is at the expansion stage of its development if the investment provides capital for the growth and expansion of a company, which may or may not break even or trade profitably. Capital may be used to finance increased production capacity, market or product development, or provide additional working capital. The differences between stages are not always well-defined, nor does every stage require its own funding round.

9 So what do the Comps Say? Good data in the early-stage private investment space is notoriously difficult to come by however the New Zealand Venture Investment Fund (NZVIF) have published summary statistics. Source: The Valuation of Early-stage Investments in New Zealand, NZVIF, December 2012

10 Crowd funding Data as Comp Crowd funding is still in its infancy in NZ (and globally), dataset is small and the market is yet to mature There are possible arguments that a crowd funded capital raise can/should command a higher valuation than from private investors Validation from crowd funding platform Validation from other investors (less due diligence) More diversified shareholder base and greater ability to list on a secondary exchange (improved access to future capital) Takeovers Code may provide additional protections Retail investors may have lower return expectations Availability of rewards/product discounts Personal connection with brand Belief in company mission (impact investing, ethical investment criteria) Smaller investment universe (unable to access VC/PE funds)

11 NZ Crowd funding Data First offer closed successfully in September 2014 As at 21 July offers to date, $11.5m raised 20 successful offers 6 fully subscribed (reached max target) 2 offers raised the $2m legal maximum allowable under crowdfunding 4 currently open Including the first company to do a second round of crowdfunding 6 failed offers Shareholder statistics Average number of investors per offer 131 Average investment size $4,400

12 NZ Crowd Funding Data contd. Industries: Fast Moving Consumer Goods (FMCG) 7 (23% of offers) Technology: Software & Services 8 (27% of offers) Financial 4 (13% of offers) Others include Energy, Technology Hardware, Hospitality, Consumer Durables, Health Care, Tourism, and a film project Rewards/Discounts available Yes 17 No 13 Rewards have included permanent discounts for shareholder, free products/services, exlusive or early access to new products, company memorabilia, and exclusive party invites Voting shares available Available to all, with no minimum investment threshold - 17 Only available to large investments over a specified minimum - 10 Voting shares not available 3

13 Valuation Data by Stage Pre-Money Valuation Crowd funding - Succeeded NZVIF Data Stage Count Median Average Count Median Average Seed 3 800,000 1,786, ,000 1,698,448 Start-up 7 2,400,609 3,644, ,265,401 4,207,319 Early Expansion 11 5,000,000 4,358, ,528,758 15,188,035 Overall 21 3,053,478 3,752, NA 5,738,771 Broadly speaking, crowd funding valuations have been in line with NZVIF s historic data although early expansion stage companies have tended to have lower valuations, likely due to being earlier stage in their expansions Important to note: Individual outliers present Stage classification is subjective

14 Valuation Data FMCG Industry Pre-Money Valuation - FMCG/Food & Beverage Crowd funding - Succeeded NZVIF Data Stage Count Median Average Count Median Average Seed Start-up 3 1,050,000 1,583, ,500,000 3,290,000 Early Expansion 3 5,000,326 5,500, ,682,756 3,656,074 Overall 6 3,276,739 3,541, NA 2,778,430 Start-up stage FMCG offers have tended to be at lower valuations than NZVIF data whilst early expansion stage offers have been at higher valuations Constituents: Start-up: Pineapple Heads, Angel Food, Sorbet by Ethique Early Expansion: Renaissance Brewing, Yeastie Boys, Invivo Wine

15 Valuation Data Software Industry Pre-Money Valuation - Software & Services Crowd funding - Succeeded NZVIF Data Stage Count Median Average Count Median Average Seed 1 800, , , ,700 Start-up 1 1,000,000 1,000, ,771,913 2,457,594 Early Expansion 3 5,000,000 4,650, ,200,000 15,622,776 Overall 5 1,000,000 3,150, NA 4,829,551 Software start-up and early expansion stage companies have had lower valuations than that observed in NZVIF s historic data Constituents: Seed: Chariot Start-up: Parent Interviews Early Expansion: TRNZ Digital Travel Guides, Sell Shed, Collect

16 Valuation Data Failed Offers Pre-Money Valuation Crowd funding - Failed NZVIF Data Stage Count Median Average Count Median Average Seed 2 873, , ,000 1,698,448 Start-up 3 4,058,169 4,207, ,265,401 4,207,319 Early Expansion 1 9,800,000 9,800, ,528,758 15,188,035 Overall 6 4,051,435 4,028, NA 5,738,771 Seed stage companies with offers that failed will likely have related to issues other than valuation. For the start up stage offers that failed, valuation may have been a contributing factor Constituents: Seed: Techvana The New Zealand Computer Museum, H2Explore Start-up: Be Intent Youth, Tapp, Liquid Waste Treament Systems Early Expansion: Mad Group

17 Questions, Comments, Enquiries? General enquiries: Media enquiries: Lewis Grafton Analyst David Wallace Managing Director

18 About Armillary Private Capital At Armillary Private Capital we have a purpose of enabling success for businesses, business owners and investors. We are an investment bank providing specialist asset and market place management, corporate finance, advisory and financial training services. We manage the Unlisted unlicensed financial product market. Armillary is also the manager of CrowdArm Limited (CrowdArm), a licenced crowd funding operator trading as CrowdCube in New Zealand. CrowdArm is 50% owned by Quadriga Acquisitions Limited, a related party to Armillary.