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Venture Capital Issues

Venture Capital Issues. With more slides on valuation. Weakening value proposition of VC. Biotech: The next bubble?. Pre-2010 biotech “too risky” for return potential – since 2010 , Nasdaq Biotech Index has outperformed other investment sectors by over 100 %

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Venture Capital Issues

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  1. Venture Capital Issues With more slides on valuation

  2. Weakening value proposition of VC

  3. Biotech: The next bubble? • Pre-2010 biotech “too risky” for return potential – since 2010, NasdaqBiotech Index has outperformed other investment sectors by over 100% • Strong IPOs in 2010-2012 vintage • High M&A activity for biotech firms • JOBS Act has greased the skids

  4. Angel investor valuation techniques for seed stage companies • Cost-to-duplicate • Market multiple • Discounted cash flow • Valuation by stage http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

  5. Cost-to-duplicate • Calculate how much it would cost to build another company just like it from scratch – the idea is that a smart investor wouldn't pay more than it would cost to duplicate. • The cost-to-duplicate a software business, for instance, might be figured as the total cost of programming time that is gone into designing its software. • Problem: Doesn’t reflect future earnings potential of company and ROI http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

  6. Market multiple • Values the company against recent acquisitions of similar companies in the market.  • Example: mobile application software firms are selling for 5x sales. Knowing what real investors are willing to pay for mobile software, you could use a five-times multiple as the basis for valuing your mobile apps venture, while adjusting the multiple up or down to factor for different characteristics (Note: if your mobile software company, say, were at an earlier stage of development than other comparable businesses, it would probably fetch a lower multiple than five, given that investors are taking on more risk) • Problem: Difficult to find comparables http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

  7. Discounted cash flow • For most startups – especially those that have yet to start generating earnings – the bulk of the value rests on future potential. • DCF involves forecasting how much cash flow the company will produce in the future and using an expected ROI to calculate how much that cash flow is worth. Startups get higher discount rate to account for high risk company fail to generate sustainable cash flows • Problem: depends on the analyst's ability to forecast future market conditions and make good assumptions about long term growth rates http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

  8. Valuation by stage • “Rule of thumb" values are typically set by the investors, depending on the venture's stage of commercial development. • The further the company has progressed along the development pathway, the lower the company's risk and the higher its value. http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

  9. Valuation by stage • Many private equity firms will utilize an approach whereby they provide additional funding when the firm reaches a given milestone. • For example, the initial round of financing may be targeted toward providing wages for employees to develop a product. Once the product is proved to be successful, a subsequent round of funding is provided to mass produce and market the invention.  http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

  10. Valuation by stage examples http://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

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