Venture Valuation AG: The Genedata Assignment

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Question 1

The main problem is valuing the early stage companies is that it

does not have any past record therefore, the whole valuation is

based on the future assumptions and operations of the company.

There are several issues that arise when assessing the financial

value of early-stage, high potential companies.

The issue of future equity contributions is confronted all around

by valuation experts in directing early stage company valuations.

Typical issuers of compensatory share options are early stage

technology or life sciences companies.

Such companies discover investment opportunities appealing

because of their desire to conserve limited cash resources and to

adjust an employee's close to personal inspirations with that of

the organization. While the timeline to development and an

extreme liquidity occasion can shift fundamentally, early stage

organizations by and large oblige different rounds of value

(and/or debt) financing until their business model matures.

The several main issues that arise when valuing the companies at

its early stage is as follows.

Firstly, the need to determine the likely additional financing in

the future that the subject company would need. Apart from just

the requirement of capital, it is also necessary to estimate the

time that capital would be needed by the company. The rate of

return may vary from time to time and so thus the interest rate

in case the company raise finance through debt obligations.

Secondly, the issue what in what form the finance would be raise

by the company. It could be either, debt or equity or some type

of hybrid debt/equity security. It is necessary to evaluate all

the options that are available to the company. These companies

usually look for the cheaper source of finance which is commonly

the raise of funds through the debt obligation for example, the

bank loan.

Further, it is also vital to determine that if the future

financing would be dilutive to existing shareholders or nor, at a

fair value. The main issue to consider is that whether the shares

would enhance existing shareholder value or not. This would also

include that what would the future financing terms be known or

unknown.

Moreover, the issue arise is that is there any condition where

the future funding can be looked over in a valuation method. And

addition to this, what is the more applicable way to model a

future funding based on facts and conditions, and the definite

valuation methods being applied.

Much energy has been spent deciding systems for esteeming

intellectual property, technology, or products. All accessible

approaches oblige distinctive measures of information and fill

different purposes (restrictions are intrinsic regardless of the

approach taken).

The valuation of technology base industry has a tendency to be

very complex, since the task of valuation includes deciding the

present value against a future technology or product. Different

techniques have been produced that utilize more or lesser

measures of financial economic theory. At last, as the quality

will generally be a negotiated figure, what is most essential is

to discover a system that both sides concur will deliver a value

they can accept.

The greatest component that influences valuation of technology

companies is risk: technology risk; market risk; and management

risk. A investor is taking a look at how to minimize these risks:

does the technology meet a genuine unmet require or tackle a

genuine issue or is it a technology searching for an issue to

tackle; is the innovation protectable and does it present

defensible competitive advantage or would it be able to be

effectively re-designed; is the management up to the test, would

they be able to work with investors, would they be able to

develop with the business.

Question 2

Corporations use a range of approaches to innovation, comprising

internal R&D, development of new companies, and strategic

investments and associations. Many are underlining a strategy of

“open innovation” to bring outer sources of innovation into the

organization. Given the achievement of venture capital in making

new entrepreneurial companies and technologies, firms have also

observed to that model as yet alternative approach to innovation.

Corporate venture capital (CVC) may be defined as series in

established companies that make investments in entrepreneurial

companies.

Usually, a CVC makes a financial investment—just as autonomous

venture capital does—and obtains a minority equity stake in the

entrepreneurial company. A CVC may also ease investment of in-

kind and further resources into the portfolio firm. In return,

the company gains a window on both new technologies and

strategically opposite companies that may become strategic

partners.

While the only objective of independent venture capital is

financial profit, CVCs usually have a strategic objective as

well. That goal may include leveraging outer sources of

innovation, getting new ideas and technologies into the company,

or taking “real options” on business models and technologies (by

spending in a wider array of technologies or firm directions than

the company can trail itself).

Corporate venture capital may be seen in the broader framework of

corporate venturing, with both internal and external venturing.

Internal venturing programs “go inside” the company and generate

entrepreneurial ventures from within the company. Entrepreneurial

teams are granted freedom and resources to innovate and establish

new business ventures. External venturing programs “go outside”

the company and tap external foundations of innovation, whether

through research alliances with universities, strategic alliances

with other companies, or partnerships with entrepreneurial

companies.

Often the company’s internal and external venturing attempts are

closely linked and relate with each other. CVC programs in

recognized corporations aim to build contacts with the

entrepreneurial venture community. They study about technology

and business instructions of strategic interest, and then put

investments that create new strategic chances for the firm. By

cooperating with the company’s R&D and business operating units,

CVC programs classify the operating units’ interests and

significances. CVCs support the company’s existing businesses by

merging new technologies and partnerships to its operational

groups.

At the same time, CVCs aid identify technologies and chances that

fall between or beyond the company’s existing businesses, which

could then procedure the basis for new business guidelines.

Organizations looking for development seek after an assortment of

"corporate wandering" exercises that go past or outside the

customary ways to deal with R&D and business advancement.

Corporate funding may be seen in this more extensive connection

of corporate wandering, which incorporates inside wandering

endeavors and in addition outside corporate funding.

While outer CVC projects mean to recognize and access outside

wellsprings of entrepreneurial advancement, inward wandering

projects try to encourage enterprise and entrepreneurial

advancement from inside the organization. Inward wandering

projects furnish entrepreneurial workers with assets and chance

to make new pursuits: for instance, seed subsidizing for R&D, or

hatching assets to make another business.

New inner endeavors that get to be fruitful may in the long run

be fused into a current business of the company, or made as a new

specialty unit, or spun-out as a free organization. Partnerships

may take an assortment of distinctive ways to deal with inner and

outside wandering all in the meantime. Different CVCs may exist

inside the same firm, for instance, to concentrate on distinctive

innovation ranges or serve diverse specialty unit intrigues. CVCs

may be implanted in more extensive corporate wandering endeavors

and collaborate with other inward wander projects.

Not at all like free funding, which has a solitary target of

expanding money related quantifiable profit, most CVCs have a

blend of key and budgetary targets. For CVCs, surveying money

related execution of speculations is generally clear on a

fundamental level, however practically speaking, it might be

risky since numerous CVCs don't have a sufficiently long

reputation of contributing to survey money related returns.

Surveying the key esteem the CVC adds to the more extensive

partnership is maybe more troublesome.

CVCs mean to shape associations with the outer wander group,

recognize new innovation and business bearings that may be of key

enthusiasm to the partnership, and make vital choices for the

company by making interests in entrepreneurial organizations. A

CVC's vital worth could be measured in various ways, including:

the amount furthermore, nature of data gave both to top

administration and to the partnership's working units; the

noteworthiness of referrals, presentations, outside contacts, and

connections encouraged by the CVC; and the vital effect of joint

efforts and organizations that create from CVC interests in

portfolio organizations. While a few parts of CVC execution may

be specifically measured (e.g., the quantity of speculations

made), a CVC's vital worth depends in extensive part on the

subjective judgment of CVC "partners."

'Activity Metrics' and 'Output metrics' are most effectively

measured, yet relate just in a roundabout way to extreme results

for the guardian organization regarding money related or key

effect. Organization particular benchmarks and general portfolio

monetary execution are measurements that an autonomous investment

trust would use to survey and deal with its venture portfolio.

The CVC's worth added commitment to the association may

incorporate innovation bits of knowledge what's more, briefings

introduced to R&D and specialties units, referrals and

acquaintances with outside contacts to aid R&D and specialties

units, and coordinated efforts and associations framed as a after

effect of CVC ventures. Throughout the years, numerous CVCs have

observed that keeping up top administration support for the CVC

is troublesome.

As rises in the funding venture cycle, numerous organizations are

drawn into framing CVCs, yet then rapidly forsake the exertion

when the funding cycle rotates toward the ground. A few

enterprises, notwithstanding, have demonstrated a supported

responsibility to corporate investment over the long haul,

keeping up financing backing through the good and bad times of

the investment cycle.

The source of capital for a CVC may be the corporate level of the

parent company, specialties units inside the guardian

organization, or even perhaps outer venture accomplices. Most

usually, CVCs are financed by corporate base camp. Frequently,

specialties units might additionally contribute financing,

particularly when the CVC mission is nearly adjusted to a

particular specialty unit. Sometimes, a CVC may have constrained

accomplice venture associations with one or more outside free

investment reserves.

Question 3

The valuation process of the company mainly involve three methods

of valuations based on the projections given in the case. The

three methods under consideration are Discounted Cash Flow (DCF)

valuation, Venture Capital Methodology and Market Comparable

Analysis. These methods will help in analyzing the value of the

company by giving different estimates based on their relevant

assumptions.

Discounted Cash Flow Valuation

Discounted cash flow (DCF) valuation method uses future free cash

flow forecasts and discounts them (using the weighted average

cost of capital) to calculate a present value, which is used to

evaluate the value of the business.

Firstly, the stage of business is determined according to the

market, management and science and technology. The stage of

development is determined as second stage, as per table provided

in exhibit 2, which is the accelerating growth rate. In this

relation the discount rate for the valuation of the company is

assumed to be 30%. While the growth of the company is assumed to

be 20%.

The discounted cash flow is carried out on the basis of data

provided in the excel sheet. The earnings are adjusted for tax

and depreciation allowances which are then adjusted for the

working capital requirements and the capital expenditure

requirements for each year. The resulting profits are regarded as

the Free Cash Flows (FCFs) that the company will be able to

generate through its future operations.

The Free Cash flows are increasing at a high rate, which are

discounted using the discount rate of 30% as assumed in the

previous stage of calculation. These discounted cash flows are

summed up to accumulate the value of these cash flows over the

time period, shown as present values of FCFs.

Moreover, the terminal value of the FCFs are then calculated

using the formula for terminal value which is calculated to be $

203,304. The terminal value shows the value of the FCFs occurring

in perpetuity with the incorporation of given growth rate,

assumed to be constant. Finally, the total value is calculated as

the sum of present values of future cash flows and terminal value

which is calculated to be $ 220,389.

Venture Capital Methodology

Venture capital methodology is another method of valuing the

company. This determines the projected earnings of the company

and the last year of projection after which the terminal values

will be estimated using the formula, as shown in the excel sheet.

This method utilizes the PE multiple ion order of estimate the

value of the company.

In this case, the annual earnings of Genedata are taken as $

18300, that is, earnings in the year 2004. The PE multiple is

estimated to be 3.9 times, taken as the average PE multiple of

the industry. The required rate of return is taken as the

discount rate of the company that is 30%, as assumed in DCF

valuation.

The present value of the free cash flows are assumed to be same

as calculated in the DCF valuation whereas the terminal value is

calculated using this new method. The terminal values are

calculated to be $ 25,054. The total value of the company is then

accumulated to be $ 42,136. This is quite lower than that of DCF

valuation which might be due to nature of the company having

different values due to intangible assets of the company.

Comparable Company Analysis

The comparable company analysis is another technique that can be

used to value the company. The comparable company analysis

determines the average of the comparable companies showing

industry average.

The earnings of the company are then estimated for the value of

the company on the basis of this estimated comparable. In this

case, the comparable used is EV/EBIT multiple of the industry.

The earnings of Genedata are then multiplied with this multiple

to determine the value of the company. The value of the company

is therefore calculated to be $278,974.

Question 4

I would suggest to the customers that they ought not to invest

into the early start-up organization as the risk connected with

the already established business is relatively higher when

contrasted with the adult organization. The risk connected with

the early new company is higher in this manner, the customers

ought to put investment into bond securities through which they

can get the fixed return and the risk connected with the bond

securities are lower when contrasted with encouraging start-up

organizations.

In the event that the customers need to put investment into the

pharmaceutical business in this manner, they ought to put

investment into the listed organization instead of early new

business. The monetary valuation of early start-up organization

is not perfectly assessed on the grounds that in right on time

new businesses, past financial performance is used because of

which evaluation is evaluated on the basic of future assumption

and it is evident that future presumption is not genuine, and it

can change. Along these, the cost related expense of early start-

up organizations is not so much assessed, and it can mislead the

investors.

Bibliography

Technological Development In Industry: A Business-Economic Survey and Analysis, op.

cit.

"Industrial Technology". Education Portal. Retrieved 15

December 2012

McMillan, I., Roberts, E., Livada, V., Wang, A. (2008). Corporate

venture capital: Seeking innovation and corporate growth.

National Institute for Standards and Technology, US Department of

Commerce

Appendices:

DCF ValuationStage of Developm ent Second stage: Accelrating Growth

Discount Rate 30%Growth Rate 20%

2000 2001 2002 2003 2004

6,200 11,000 18,000 29,000 45,0001,400 2,000 2,500 3,500 4,5002,250 4,000 8,000 11,000 16,000

2,550 5,000 7,500 14,500 24,500637.5 1250 1875 3625 6125

517 500 583 917 133380 100 100 100 100

1,316 3,150 4,942 9,858 16,9421 0.769 0.592 0.455 0.350

1315.5 2423.1 2924.3 4487.0 5931.9

Norm alized FCF 20,330

PV of FCFs 17082Term inal Value 203304

Com pnay value ($ Thousand) 220386

Years

Discounted Cash Flows

SalesR&D ExpensesOther CostsEBITDATax @ 25%W C requirem entsInvestm entsFCF'sDiscount Rate

Venture Capital M ethodology

$18,300.00 last year date4 laste year date

3.950%

$14,134.68

PV of FCFs $17,082Term inal Value $14,135Total Firm Value $31,216

PE RatioM arket Cap Earnings PE Ratio

Lion 65988 -47588 -1.4Com pugen 38604 -15144 -2.5InforM ax 16928 -27459 -0.6Tripos 64315 3185 20.2Average 3.9

Value of firm

Discount the Term inal Value to Present Value

Annual Earnings(Projected NI)In YearPE(m ultiple)Required Rate of Return

M arket Com parablesM arket Com parables: Financial Aggregates

in $ thousand M arket. Cap. (P) NFD Enterprise Value

Sales EBIT Earnings Em ployee R&D EV/EBIT

Lion 65,988 -32,791 33197. 35139. -50,766 -47,588 520 46,945 -0.65392Com pugen 38,604 -32,347 6,257 11,360 -19,019 -15,144 176 15,976 -0.32899InforM ax 16,928 -50,956 -34,028 18,528 -27,632 -27632. 223 10,192 1.231471Tripos 64315. -16,010 48305. 52,331 1,062 3,185 267 9406. 45.48493

11.43

EV/EBIT (Avg) 11.43EBIT (Genedata) 24,400Enterprise Value 278974