Start up valuationValuations are quantitative and we rely heavily on financial and other numerical inputs.  Not only that valuations get better the more financial information is available.

This is why start-ups and early stage businesses can be difficult to value.  For a valuer there’s a death-zone somewhere between seed funding and the emergence of sustainable financial performance.   As anyone doing business in and around Cambridge will tell you most start-ups have a spell when there’s few reliable numbers to work with.  So how can we value businesses when they’re in the data death-zone?

Comparable Transactions: Of course no two companies are identical but acquisitions of “somewhat” comparable start-ups can provide useful reference points.  Without usable financials we can compare based other metrics – for example IP portfolios, number of subscribers or drug pipelines.  It may feel like horse trading and exact matches are rare, but a couple of close comparables can support a relatively accurate valuation.

Cost Approach:  While some entrepreneurs might not agree, until a company passes a meaningful proof-of-concept milestone, a start-up is valued on a time and materials basis, if that. A potential purchaser might add a premium for timing and the cost of trial-and-error, but will mostly view early stage technology as something they could recreate internally.

Transactions in Start-up’s Own Shares: This is a bit like calculating the market cap of public companies; start-up valuation can be derived from the value of its individual shares. To use this approach one has to assume that the transaction was fairly negotiated at arm’s length and by a professional investor. Not all equity shares are equal and simple multiplication, while widely used, won’t often work. But a well-negotiated funding round can provide a usable value indicator.

Rules of Thumb can sometimes be used, but this is best left for corroboration of other methods.  For example the Berkus Method (invented by US business Angel Dave Berkus) seeks to “price” different qualitative stages of a start up’s development such as having a sound idea, a prototype, or a decent team and ascribing a fixed $500k value to each step.    One could defend this slightly arbitrary approach because if enough business angels use.

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Cambridge and East Anglia Businesses asked to think strategically about growth

Flyer_front_cover_Cambs_Oct15With the Cambridge and the East of England economy continuing to perform strongly we're hosting a free educational morning seminar targeted at local small and medium size business owners (in the £1m-£100m turnover band).

Alongside our own corporate finance, and tax specialists we have speakers from our joint event hosts Barclays and Business Growth Fund who will give insights into raising debt and equity finance.   The whole event is designed to give business owners practical ideas on developing a strategy for growth.

Any acquisition should have a sound strategy underpinning it.   And it should look not only at the why and how, but also at the long term implications – when will you see benefits? Will it make your business more attractive to buyers?”

As well as giving advice on acquisition, we'll cover using strategic growth to maximise the value of a business.  The event is going to be comprehensive, guiding attendees from growth right through to succession or trade sale.

The seminar will run from 8.30am to 12.30pm at The Trinity Centre in Cambridge on 22 October. Registration is free; for more details or to book, please visit

Private equity funding for worlds first IVF clinic

I'm pleased to say that PEM Corporate Finance has advised on the recently completed private equtiy funding for Bourn Bioscience Ltd, the parent company of Bourn Hall Clinic.   They raised equity finance from Mobeus Equity Partners to support their plans for geographic expansion. An initial £3.5 million investment for a minority shareholding is supplemented by a commitment to invest significant follow-on finance.

Bourn Hall LogoThe first IVF clinic in the world, Bourn Hall Clinic was founded in 1980 by Robert Edwards and Patrick Steptoe - the IVF pioneers whose work led to the birth of the first test-tube baby in 1978. Since its founding, this internationally renowned clinic has helped to make over 15,000 births possible.

Today the company boasts three full service IVF clinics, based in Cambridge, Colchester and Norwich and supported by a number of satellite units. With 120 staff and the delivery of over 2,500 IVF cycles per annum, Bourn Hall Clinic is the largest independent fertility services provider in the East of England.

The UK market for fertility services has grown considerably in recent years, driven by increasing awareness and acceptance of IVF procedures, favourable demographics and improved success rates. Bourn Hall Clinic is looking to continue its geographic expansion, leveraging its strong brand and reputation.

We have worked with Mike Macnamee and his team at Bourn Hall before, advising on their original management buyout from Serono and later on their acquisition of ISIS Fertility.  Hopefully with this warchest there will be more deals to come.    More detail on this on our webpage


Sale of Suffolk based Payday Lender

We finished 2010 with a completion on 29th December with the sale of Fortress Group (UK) Ltd to Texas based Think  Finance Inc . 

Office picture Fortress, which is based in Bury St Edmunds, was founded in 2007 and has grown rapidly  to become a leading UK payday lending business.   It's an entirely online businses trading as "1 Month Loan" and "Mayday Payday".  

Think Finance is one of the US's fastest growing private companies with three year revenue growth of over 70%.  It is privately held and backed by some of Silicon valley's most respected venture capital firms, including Seqoia Capital and Technology Crossover Partners. 

Think will provide capital to accelearate Fortress's expansion - Kieran Moulden, CEO of Fortress said that as a result of the new funding the company aimed to increase its business ten-fold.

Iphonemockup1 We were pleased to work with Kieran and his co-director Stuart Carter over the last year to prepare the company for sale and to market the company internationally.    They have achieved a huge amount in building Fortress to such a strong position in a short period of time.

This is a market which is developing rapidly in the UK.   In contrast it is a mature market in the United States with allegedly more payday lending outlets than branches of McDonalds.   This is not the only US acquiror active in the UK - NASDAQ quoted Dollar Financial Corp is to acquire Purpose UK Holdings the largest UK payday lender for £124M

More Potential Buyers than Willing Sellers - M&A Activity set to increase in 2010

Can one plus one ever equal three?  Yes it can.  If you are selling your business - find a strategic buyer which will enjoy synergies from combining the businesses and which knows it is in competition to buy and you can maximise value and share in the marriage value. 

One plus one equals three What are the chances of pulling this off in the current climate?  Most recent surveys of corporate opinion show that firms are far more likely to engage in M&A activity over the coming year.  E&Y found 57% were more likely to make an acquisition while within BDO’s rather more “gung-ho” sample 80% felt the same.  Regardless of numbers it’s quite clear that there is a much greater appetite for deals this year.

Deals will be concluded by strong businesses with clear strategic intent, although some of those surveyed did admit to opportunism as a motivator and to being on the look out for bargains.  The biggest hurdle is likely to be discrepancies between buyer and seller valuation expectations – however as the market improves, and the volume of transactions increases, this is likely to even out.

There is evidence that strategic acquirers who have been deferring M&A activity while profitability recovers are now sitting on their largest cash reserves in recent years.  Add to this Private Equity investors who also have cash to burn before the time expiry of funds with a finite end date and you have a much better prognosis for those seeking to sell their business than for many months.  The return of strategic buyers and increased competition should drive an increase in activity and valuations.

The ability of purchasers to fund deals from their own cash resources is still a key factor – for example Corpfin found that the majority of UK deals in April 2010 were funded by buyers existing cash resources.  However they also found that the second largest source of funding for such deals was bank debt.  So liquidity is once again available for the right deals.

Owner managers who have been planning an exit but have had to put their plans on hold during the financial crisis can now start planning for exit.  Now is the time to consider grooming the business for sale in the short or medium term.  Now is the time to give consideration to the preparation of an exit strategy – which should cover the following issues:

· What are the personal or corporate objectives of the owners?

· What’s the business worth now?

· At what valuation would the owners be prepared to sell?

· What are the prospects for the business?

· What drives value in the business?

· What will a likely potential buyer for the business look like?

· How must the business look to maximise sale value in the future?

· What could get in the way of an exit or reduce future value?

At PEM Corporate Finance we have seen a marked increase in the number of enquiries from businesses planning for exit.  And there is also plenty of appetite from local businesses to make acquisitions – we have recently advised the purchaser in transactions such as the purchase of ISIS Fertility by Bourn Hall Clinic, the acquisition of Elmy Landscapes by Flora-tec and the MBO from Stratech Scientific of Molecular Dimensions.   

If you are exit planning it’s worth getting an outside opinion on the valuation of the business, and on opportunities to groom it in order to increase exit value.  Grooming is aimed at closing the gap between the current value of the business and the target exit valuation.  It should avoid the risk of a sale at undervalue.

The Chinese Soda Analogy

Helping businesses to raise finance from Venture Capital Funds or Business Angels we spend a lot of time with management working out how best to get the message across, and how to get that WOW factor into the executive summary which will hopefully catch the attention of the VCs.    Then perhaps they'll read the business plan.   Assuming they read their emails or answer the phone once in a while.

Just as imChinese_sodaportant is what not to say.    Never say "All we have to do is get 1% of the market".

Guy Kawasaki puts this well calling it the Chinese soda analogy.  "If a company can get just 1% of the people in China to drink its soda, it'll be selling a ton of soda. This is true. At the same time, it glosses over the difficulty of getting 1% of any market to use a particular product".

He also points out that investors really want to back companies to get a significant, and therefore defensible and valuable share of a market.  99% would be good, but even 30 -50% builds real value.  1% just looks threatened.

57 Varieties of VC

While on the investing side of the venture capital fence at 3i I often came across the equity panic button as we referred to it – managers who were afraid, almost beyond rationality of selling – or giving away as they would have it – equity.

These days I more often come across people who while prepared to sell equity - often still referred to as “giving away equity” - who are more concerned about the relationship with a Venture Capital firm. I wonder if this is due to the publicity surrounding very big private equity deals which are often in the press.  For example  the speculation around Vodafone as a private equity target.

Last week I interacted with four venture capital firms and private equity houses which reminded me that there are many different flavours of VC house.

  • Funding a management buyout we have been dealing with two mainstream venture capital houses – interested in exits in the short to mid term, but quite hands off re management.
  • I had a meeting with a privately funded VC, interested in active input to management, but with a more relaxed view on yield and exits as it is their own fund they are investing.
  • We met a clearing bank equity division interested in yielding deals, but with a relaxed view on exit as they were investing “their own money”.  They are also quite hands off re management but will introduce a non-executive director to most deals.

That’s just in one week – plenty of variety in styles.

So I think that if you have a good proposition you should be able to get some choice of venture capital investor or private equity house.  If so the VC should be chosen to match your own aspirations as to exit and relationship style.  There might not be quite 57 varieties but most managers ought to be able to find someone to suit.  The British Venture Capital Association website has a good overview on how you might narrow down the choice.  And of course speaking to an adviser who actually knows some of the folk in the VC houses can short cut the process; but you'd expect me to say that!

The art of saying NO

Sorry this is going to be a bit of a rant.  Why is it that so many Venture Capital investors who are astute business people have failed to go on the training course on the fine art of saying no with style.  I have been VC fund raising for a couple of clients recently,  and as you would expect have had some declines along the way.

Here are some of the generic styles (no names to protect the innocent and not so innocent) .

  1. The "doesn't fit our investment criteria" decline.  Delivered by email usually so there is absolutely no idea why not.  Still no arguing with that.
  2. The email with various reasons for decline, none of which make any sense in the context of the proposal you have sent them....this guy hasn't read it.
  3. The "Doesn't even bother to decline or acknowledge until someone chases you"  decline.
  4. The VC who calls you, thanks you for letting him see the proposal, but explains why it's not for them.   This guy has been to the VC charm school and is worth getting to know.

Not every proposal gets funded of course, but we'd love them all the more if they could respond with Decline Style 4 or at a pinch Style 1.   

As for the long periods in between when one hears nothing............"your proposal is held in a queue and may or may not be looked at eventually"..........maybe I lack the patience for this game, but we are all quite ready to complain about being held in a queue as consumers, why should the interaction with the Venture Capital community be any different?

Liquidation Preferences

Ian Grove-Stephensen of Chalkface Project asked me for my take on liquidation preference.  Well at one level they are not that far removed from some of the preferential share rights that 3i was taking back when I was an Investment Manager there.  We always used CCPPOs - Cumulative Convertable Participating Preferred Ordinary Shares.  Which of course were exactly the same as management Ords - apart from the Cumulation rights, the Conversion rights, the Participating dividend rights, and the prior ranking rights!! The argument being that as minority shareholders we needed some protections.  Of course in some tech fundings the Venture Capital investors will be the controlling shareholders so that doesn't wash. 

In some ways this just comes down to price, if the equity pricing is helped by having them then should the entrepreneur be concerned?  Well consider three scenarios, a stonking success - do we care? No.  A dismal failure - do we care? No.  A business that continues to trade but disappoints against original expectations - do we care?  A little yes but its not our biggest regret.

I guess I can see this from a number of perspectives having been a venture capital investor, but also an adviser, and FD in a VC backed business - of course the detail of the terms matters loads (and there are lots more to worry about) but ultimately the nature of your bedfellows and the price at which you get into bed with them matters loads more. 

VC Process

I've come across a good short paper on VC Process from White & Lee a West Coast US boutique corporate law firm.  It is from a US perspective but useful all the same.    Amongst other things it covers liquidation preferences, a topic of some discussion at the recent Cambridge Enterprise Conference with Andy Allars (ex Prelude) expressing some distaste for what has become a pretty standard element of the VC term sheet.