Investment process & Exits Flashcards
List the 6 steps in the investment process (6 marks)
- Pitching to investors
- Investor meetings (analysts) - informal due diligence - preliminary negotiations
- Investor meetings (partners) - decision to invest - term sheet negotiation (2-4 weeks)
- Term Sheet
- Legal Due Diligence (6-12 weeks) - close and sign
- Final Negotiation of milestones
In the appraisal of a new business venture, when does the Due Diligence process happen? (3 marks)
- Informal due diligence begins when the investors have decided to proceed with the startup. It may involve talking to customers, employees and other investors. - Formal legal due diligence takes place once the term sheet is negotiated.
How long does it take? (3 marks)
4-12 weeks
What are the 5Ms of due diligence?
5Ms
Money - financial strategy, capital requirements, structure, valuation.
Method - value proposition, business model
Management - team’s experience and expertise
Metrics - existing customers (feedback), traffic, conversions.
Market - size, growth rate, competition, barriers
What are the determinants to exit and explain their nature and impact upon the exit decision (10 marks)
- Entrepreneurial firm characteristics.
- size (minimum listing standards for IPO)
- quality (cannot take bad companies public)
- industry (high growth potential)
- location
- transaction synergies (important for IPOs) - VC characteristics
- small or big
- connections with IBs and/or acquirers - Control rights between VC and entrepreneur.
- entrepreneurs have a non-monetary preference for IPOs, because they maintain more control.
- so weak VC rights and common equity means IPO is more likely
- strong VC rights and convertible securities (preferred stock) means acquisitions more likely. - Market conditions
- Internet bubble; many IPOs
- Financial crush; no IPOs - Legal and Institutional factors
- quality of shareholder rights
- rule of law
- size of country’s stock market
Identify and explain the challenges you might face in undertaking the valuation of a business you are considering purchasing (6 marks)
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Identify and explain the rationale of any seven approaches to business valuation.
Asset Accumulation (asset approach)
- difference between value of all assets and current liabilities
- requires expertise (as it involves tangible and intangible assets)
Discounted cash flow (income approach)
- estimates future cash flows and discounts them by the desired rate of return.
- discount rate is determined by the desired rate of return
Market value (market approach - most frequently used).
- comparison to historic sales involving similar businesses in same geography.
- relationship between economic performance (profit and revenue) and potential selling price.
- at early stages talk to other entrepreneurs and benchmark, listen to investors.
What are the main issues that lawyers check before they proceed to close the round? (3 marks)
Company set-up and structure Ownership of IP Employment contracts
Motivation for acquisitions
Technology
Talent
Strategic reasons
Expansion - geography, product lines and market.
Partnerships
What is included on the term sheet ?
Pre-money valuation
• Employee pool
Founder and emplyee vesting
• Board seats
• Liquidation preferences
- Dividends
- Anti-dilution
- Closing conditions
Why is the valuation of a business so subjective?
It is related to income - often a startup has no startup so this is based on projections.
It is related to growth - many assumptions made
It changes based on geography - we operate in a competitive market
How to calculate the pre and post-money valuation
After valuing the company…
What is 25% of that number?
Pre-money valuation = 75% share allocation to founders
Investment = 25% share allocation to investors
Post money valuation = pre-money + investment
What is a capitalization table?
shows the ownership structure of a venture.
Includes all shareholders and all classes of shares.
What are the different types of exit?
IPO - public shareholders buy shares
Acquisition by a 3rd party
Secondary sale - 3rd party (e.g. PE partners) and entrerpreneur
