Valuation Strategies

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Valuation Strategies

• Chris Clement

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What is a cynic ?
A man who knows the price of everything and the
value of nothing. Oscar Wilde (1854 -
1900), Lady Windermere's Fan, 1892, Act III
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2 GREAT SPEAKERS
Scott Kothlow CFO, SomaLogic Scott Kothlow is
currently the Chief Financial Officer at
SomaLogic, Prior to joining SomaLogic, Scott
held various accounting and finance positions
with NeXstar Pharmaceuticals, Inc., and other
venture backed technology companies. Scott began
his career with Arthur Andersen Company as an
Audit Manager.
Larry Blankenship CEO and Chairman,
ValveXchange, Inc. Larry Blankenship is CEO
and Chairman of ValveXchange, Inc., an Aurora,
Colorado based company developing an innovative
new heart valve technology.  Mr. Blankenship
previously held executive positions at
CardioOptics, the IVAC division of Eli Lilly
Vitalmetrics, Inc. (acquired by Tyco) and the
Valleylab division of Pfizer (now part of
Covidien).  Larry was also CEO and co-founder of
The Larren Corporation, a Colorado medical device
development company later acquired by the
Battelle Memorial Institute, where Larry was Vice
President of Medical Programs.   Over the course
of his career, Larry has been responsible for
overseeing the development and market
introduction of dozens of medical devices
including surgical tools, catheters, drug
delivery systems, patient monitors and heart
valves.  Larry also serves on several boards of
directors and advisory boards, including as a
Director of the Colorado Bioscience Association.
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Valuation Strategies

• Scott Kothlow
• CFO
• SomaLogic Inc.

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Valuation the Challenge
What is the value of an idea (possibly
protected by some IP) that is often
unknown or unproven, .requiring new
technology or untested methods,
.for a new or nonexistent market,
to be managed by a new management team
And specifically for Biotech/Life Science
long, multiple stages of development,
with significant s per development stage,
that could fail during development stages,
with regulatory uncertainty of
product approval
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The Analytical Method for Valuation used for an
Established Company

• The accepted valuation method taught in every
  Finance course
• is the Discounted Cash Flow Method, with the
  following basic steps
• Project future revenues costs of the Company
• Project timing of capital expenditures
• Convert the net cash flow from the above into a
  projected cash flow
• Estimate the cost of capital to the business
• Discount the above projected cash flows using the
  cost of capital

The above analysis can be done for an early stage
company, but the input/output assumptions will
certainly be wrong.
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Why Valuation Analysis is not Right for Early
Stage Companies
From a Financial Analysis Perspective

• investors have different expected rates of
  return for each financing round
• significant negative cash flows in the early
  years carry a huge weighting in the analysis
  against the positive cash flow in outlying years
• success in Early Stage investments is mostly
  Binary, the venture eventually succeeds or it
  does not. There is not much value residual value
  in failure.

• From an Investors Perspective
• entrepreneurs always think it is going to take
  1-2 years less time, cost millions of dollars
  less to develop, and will generate revenue sooner
  and faster
• most importantly, you cant predict timing and
  outcomes in research science

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Why Forecast a 3-5 year Spending Plan?
If financial forecasts will not be accurate in
the outlying years have limited applicability
in determining a valuation for early stage
companies, why do I need to
create a long term forecast.?
A forecast is a critical tool for management in
analyzing understanding the future financing
dynamics, most importantly, for determining the
timing and s to reach critical milestones for
possible inflection points that are likely stages
of financings rounds at higher valuations..
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VCs Perspective on Valuing an Early Stage Company
A VC uses some type of black box process that
includes Judgment regarding tangible and
intangible considerations about the business ----
if you dont pass these, a VC will probably not
spend a lot of time on the number
crunching Leads to a deeper analysis of the
Financial Forecast, Funding Requirements, and
potential Exit Value
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Subjective Factors VCs use to Evaluate Early
Stage Companies

• There are many factors, but the early stage
  companies are generally driven by the following
  subjective factors
• experience and capabilities of the CEO and
  management team
• the novelty of the technology and proof of
  principle or validation
• evaluation of intellectual property
• estimated capital needs, and expected burn rate
• expected time-to-market, expected path to
  profitability
• terms and deal structure
• could the technology lead to potential
  acquirers of the company
• current economic climate

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VCs Perspective on Valuation
What value would the next round investor assign
to the Company
Are the investment s enough to get to the next
major milestone
What is the potential value at an exit
Value of the company in todays round
Potential value at next round
Estimated Value at Exit
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VCs Perspective on Valuation.. Working Backwards
10 20 times return
3 4 times return
6 8 times return
First Round Investor
Second Round Investor
Potential Exit Value
Pre-IPO Value
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Entrepreneurs Approach to Valuation

• Understand the short and long term operating and
  funding requirements of your company.
• How much must be raised now?
• When will the next financing be needed?
• What significant milestones will be accomplished
  during that time?

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Entrepreneurs Approach to Valuation

• Make sure your analysis is aligned with the way
  the VC thinks
• Build a strong case, that if the Company
  executes its business plan over the next 12-18
  months, the value will be significantly higher
  then it is today
• Emphasis should be on the increased value of the
  next milestone(s) the stages where development
  risk is reduced or proven
• See if you can find examples and the value of
  comparable deals for other successful companies
  ahead in terms of development

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Entrepreneurs Perspective
Develop a financing strategy based on building
value from one financing to the next and
understanding how value will be measured
Milestones that lower the development risk
Forecast investment and managed spending to the
next milestone some cushion
Know the public markets and values of comparable
companies
Estimated Value at Exit
Potential value at next round
Value of the company in todays round
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Entrepreneurs Need to Manage the Risk Factors
Source Nature BioTechnology
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Remember the Simple Investment Formula
Pre-Money Valuation Invested Capital
Post-Money Valuation
  Pre-Money Valuation - This is the estimated
value of the company as it stands prior to any
purchase of equity by the investor.------
establish through negotiations   Invested
Capital - the amount of money needed by the
company to reach next milestone or financing
round, this impacts the amount of equity
ownership in exchange for the investment
  Post-money Valuation is the resulting
valuation after the investment of capital
These two components determine how much ownership
you gave up for the investment
For example, in a company with a pre-money value
of 5 million, a 5 million investment would buy
a 50 ownership stake in the company
determining the capital that you need is probably
more important then the valuation negotiations