the venture capital method for conducting valuation · •blockbuster potential •intangible...

IstanbulOctober 18, 2019

The Venture Capital Method for Conducting Valuation

Guillem Laporta, CFAPrincipal, Ysios Capital

2Ysios Capital

Disclaimer

This presentation has been prepared by YSIOS Capital Partners, S.G.E.I.C., S.A.U. (“YSIOS).

This presentation is only provided for information purposes. This presentation does not

constitute a public offer or marketing in accordance with the Spanish legislation in force,

neither is part of the legal documentation of the Fund.

This presentation does not constitute investment advice, so the recipient of this presentation

should form their own assessment and take consequences and risks of doing so in the light

of his/her or its personal circumstances. Neither YSIOS nor any third party or entity will

accept any liability regarding the accuracy of the information contained in this presentation.

The information and/or opinions are subject to change without notice.

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Initial Remarks

Guillem Laporta, CFA

Experience

2018-Currently

Principal, Ysios Capital (Barcelona, Spain)

2013-2018

Associate, Edmond de Rothschild (Paris, France)

2011-2013

Analyst, Caixa Capital Risc (Barcelona, Spain)

Education

Chartered Financial Analyst (CFA)

BSc, MSc, Biotechnology, Universitat Autònoma de Barcelona

BA, MA, Business Administration, Universitat Pompeu Fabra

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Introduction to Venture Capital

Venture Capital Is an Alternative Form of Investment with High Risk and High Reward Potential

Venture Capital (VC)

Type of alternative investment whereby

financing is provided by funds to small, early-

stage, emerging firms in exchange for a

portion of their capital

General Characteristics

• Lack of liquidity

• High risk, difficult to estimate

• Low/No revenues

• Growth through subsequent funding

• Weak asset base

• Low leverage

• New team

• But…High potential reward

Investable Markets

Source: Own Analysis

Public Equities

Fixed Income

AlternativeInvestments

Real EstatePrivate EquityVenture CapitalCommoditiesDerivativesDistressed Assets…

Bonds (Corporate, Government)Money MarketsAsset Backed Securities…

Corporate StocksIndices…

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Risk

Retu

rn

Risk-Reward Line



“No Hay Duros a Cuatro Pesetas”

In efficient markets, all investments

are in the risk/reward line

Time and arbitrage eliminate outlier

opportunities

Hence it is very difficult to

consistently obtain outsized risk-

adjusted returns

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Risk

Retu

rn

FixedIncome

PublicEquities

VC

VCBiotech

Assets on the Risk-Reward Line


Biotech VC Characteristics

• Binary outcomes (safety, efficacy…)

• High scientific specialization

• Blockbuster potential

• Intangible assets (R&D)

• Dealing with animal & human lives (positive

externalities, but also costs/regulations)


Venture Capital in Biotech Involves Very High Risk Investments with Block Buster Potential

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VCs Mitigate Risk by Investing in a Handful of Companies

Example of Portfolio Performance


Company 1

5x

Company 2

0x

Company 3

3x

Company 4

2x

Company 5

1x

Company 6

10x

Company 7

2x

Company 8

0x

Company 9

1x

Company 10

6x

Company 11

0x

Company 12

5x

Company 13

8x

Company 14

2x

Company 15

0x

Company 16

4x

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Discounted CF Method

The Price of an Asset Depends on the Future Cash Flows It Can Generate

The price of an asset can be determined by

the “utility” it will provide in the future

If such utility can be measured in cashflows

(CF), then a price can be established TODAY

The translation of future utility to current price

needs to account for at least 1) the passing

of time, 2) the risk involved in the realization

of the CFs

Asset Pricing: Discounted CFs Method (dCF)


ALERT!

There’s no such thing as an “objective price”.

All we can do is calculate a “rational price”

based on assumptions, which will always

involve a degree of subjectivity

ASSET 1

t=0

ASSET 1

t=n

CF 1 CF 2 CF n

Future Cash Flowsplus

Future Asset Value

Price Today

Account for passing of time and risk

“discount”

“Rational” Price Today

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Discounted CF Method

The Problem of Assets in R&D Stage Is That CFs Are Difficult to Estimate

Asset Pricing: Discounted CFs Method (dCF)


ASSET 1

t=0

ASSET 1

t=n

CF 1 CF 2 CF n

Future Cash Flowsplus

Future Asset Value

Price Today

Account for passing of time and risk

“Rational” Price Today

? ? ? ?

?

When CFs are difficult to measure, dCF can

still be used, but many more assumptions will

need to be made, leading to a worse price

estimate

When can be CFs difficult to measure?

• CFs occur far in the future

• CF amounts are not easily predictable

• Risk cannot be estimated

Then What?

dCF is still a useful method. It is a powerful

tool used in corporate negotiations

Alternative methods based on the same

concept: Venture Capital Method

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Pre-Money Valuation

Value given to the company before the investment

Post-Money Valuation

Value given to the company after the investment. It equals the pre-money plus the amount invested

VC Valuation Concepts

Pre-Money and Post-Money

+ = Post-Money Valuation

“new value”

Pre-money

Value of the Company

Total Amount Invested

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Post-Money Determines the Ownership


Individual Amount Invested=% in a Company

20 (pre-money) + 30 (total investment)

5 (individual investment)

= 10% ownership

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Ownership Determines Return on Investment

10%

20%

30%

40%

Ownership

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Ownership Must Be Considered on a Fully-Diluted Basis


Instruments that affect capital structure

• Employee Stock Options (ESOP)

• Warrants

• Convertible Loans

• Convertible Interest

• Discounts to Conversion


Individual Amount Invested% in a Company

10% 6%

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Ownership Must Be Considered on a Fully-Diluted Basis


Pre-Money

$20M

Investment

$30M

IndividualInvestment

$10M

ESOP

10%

Convertible Loan

$10M

+

+

$10MNon Diluted % =

$20M + $30M= 20%

$10MFully Diluted % =

$20M + $10M + $30M

x 90% = 15%

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3 Steps

The VC Method

Define Risk and Target Return

Determine Exit Values by Comparables

Calculate Pre-Money to Achieve Target Return

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The Venture Capital Method

The VC Method

(1) Risk/Return AssessmentGiven the risk of an investment, we

determine the minimum return by

which that investment is worth doing

(2) ComparablesWe analyze the values at which similar

companies have been acquired

(3) Determine the Pre-Money and

Post-MoneyWe determine the pre-money valuation

that yields a multiple of 8x given the

amount of our investment and

assuming that Company A will be

acquired for $400 M

Ex: Company A is very risky, we need a

multiple of 8x to compensate the risk

Ex: Company A is very similar to

company B, which was recently

acquired for $400 M

Ex: If we invest $30 M in Company A, we need $240 M in proceeds at

exit ($30 M x 8x), which means we need to own 60% of the company

($240 M / $400 M)

Pre-money + $30M (we are the only investors)

$30M (example individual investment)60% =

Pre-money = €20M

Post-money = €50M

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Pre-Moneys Increase as Assets Risk Decerases

The VC Method

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Practical Example: Chase Pharmaceuticals

Donepezil Is the Standard-of-Care Treatment for Alzheimers’ Disease

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High Doses of Donepezil Help Slow Down the Disease, But This Comes with Side Effects

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Innovation: Combination of Donepezil with a Peripheral Cholinergic Blocker

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05 Practical Example: Chase Pharmaceuticals

SWOT Is a Useful Tool to Assess Risk

Strengths Weaknesses

• Simple and robust scientific and medical concept

• Abbreviated and less costly regulatory development

• First time working with the team

• Company’s headquarters notclose

Opportunities Threats

• Unmet medical need and huge market opportunity

• Potential for a slowdown in disease progression

• Concept can be extended to other combinations of AChEIs and antidotes

• Perceived risk of generic challenge at exit

• Disappointing clinical results

• New CEO may not fit in thecompany’s athmosphere

Source: Own Analysis Based on Non-confidential Data from Andera Partners

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Comparables Help Assess Return Potential

Average = $150 M

Upfront

Source: Andera Partners

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Returns Analysis Based on Potential Upfront Values

Upfront Value $50 M $125 M $150 M $200 M $250 M $300 M

Multiple 1.9x 4.6x 5.6x 7.4x 9.3x 11.1x

Source: Own Analysis. The figures above are just an example for explanatory purposes only. They do not correspond to the actual analysis for this investment

Base Case

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Chase Pharmaceuticals Was Acquired by Allergan in Nov 2016 for up to $1 Billion

Source: PharmaLive

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PotentialRealized


Realized and Potential Returns after Transaction

Upfront Value $50 M $125 M $150 M $200 M $250 M $1000 M

Multiple 1.9x 4.6x 5.6x 7.4x 9.3x 37.0x

Source: Own Analysis. The figures above are just an example for explanatory purposes only. They do not correspond to the actual analysis for this investment

Base Case

the venture capital method for conducting valuation · •blockbuster potential •intangible...

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