BU121 Study Guide - Final Guide: Income Approach, Human Capital, Social Capital

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7 Mar 2019
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BU 121
Final Notes
BU 121 Exam Notes
Entrepreneurial Finance
Financing through the Venture Life Cycle
Venture Valuation
Approaches to valuation…
Income approach
-Based on assumption that value of business equals the sum of the present
values of any expected future benefits - income stream and/or liquidity
event
Market approach
-Value is determined based on comparisons to similar companies for which
values are known
-“Market multiple”
Cost approach
-Value determined as measure of net cost of assets, original amount invested
or “cost-to-duplicate”
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BU 121
Final Notes
But…
-No hard and fast rules for valuations early stage companies (too many
unknowns)
-Valuation professionals need 3 things to value any asset
An income stream
A growth rate
A discount rate
-In early stage companies at least 2 of the 3 is subject to substantial
uncertainty
*Considerations in applying the income approach…
-Because the development of projections depends on specific outcomes and
milestones, one scenario of cash flow is inadequate
-The risk of failure is likely higher than the present value discount rate (venture
capitalists consider portfolios of investments)
-If losses are forecast in the first few years, it is likely they that they will occur and
even greater ones
-Valuations are driven by subjective factors (3 Ms)…
Market — Value proposition industry sector
Management — Experience and quality add value, social capital - trust
Moat — Intellectual property, time to market, path to profitability and
deal structure
*Most external capital is raised through the issuance of preferred stock with provisions
to provide protection for he investor…
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BU 121
Final Notes
Growth Strategies
-Risk/reward tradeoff
-Intensive Growth Strategies…
-Market penetration
Sell more of your current product to current customers
-Market development
Sell your current product in new markets
-Alternative channels
Pursuing customers through a different distribution channel
-Product development
Develop new products to sell to existing customers as well as new ones
-Horizontal integration
Acquire/merge with a competitor
-Backward Vertical Integration
Acquire/merge with a supplier
-Forward Vertical Integration
Acquire/merge with a distributor
-Diversification — acquire/merge with a company that is unrelated to your business
Harvest and Exit Strategies
-The method the entrepreneur and investor use to reap the value of their
investment
-For entrepreneur — personal as well as financial considerations
Set up to operate without you = Saleable
-For investor — often commitment to capital will be tied to harvest options
Want to know “how much”, “when” and “how”
Want to convert their investment into more liquid form = liquidity event
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