[PPT] - The Venture Capital Method for Conducting Valuation Guillem PowerPoint Presentation

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Istanbul October 18, 2019

The Venture Capital Method for Conducting Valuation

Guillem Laporta, CFA Principal, Ysios Capital

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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

f 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 Alternative Investments Real Estate Private Equity Venture Capital Commodities Derivatives Distressed Assets … Bonds (Corporate, Government) Money Markets Asset Backed Securities … Corporate Stocks Indices …

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Risk Return

Risk-Reward Line

Source: Own Analysis

Introduction to Venture Capital

“No Hay Duros a Cuatro Pesetas” In efficient markets, all investments are in the risk/reward line Time and arbitrage eliminate outlier

pportunities

Hence it is very difficult to consistently obtain outsized risk- adjusted returns

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Risk Return

Fixed Income Public Equities VC VC Biotech

Assets on the Risk-Reward Line

Source: Own Analysis

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)

Introduction to Venture Capital

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

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Introduction to Venture Capital

VCs Mitigate Risk by Investing in a Handful of Companies Example of Portfolio Performance

Source: Own Analysis

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

f time, 2) the risk involved in the realization
f the CFs

Asset Pricing: Discounted CFs Method (dCF)

Source: Own Analysis

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 Flows plus 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)

Source: Own Analysis

ASSET 1 t=0 ASSET 1 t=n CF 1 CF 2 CF n

Future Cash Flows plus 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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VC Valuation Concepts

Post-Money Determines the Ownership

Post-Money Valuation Individual Amount Invested = % in a Company 20 (pre-money) + 30 (total investment) 5 (individual investment) = 10% ownership

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VC Valuation Concepts

Ownership Determines Return on Investment

10% 20% 30% 40%

Ownership

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Ownership Must Be Considered on a Fully-Diluted Basis

VC Valuation Concepts

Instruments that affect capital structure

Employee Stock Options (ESOP)
Warrants
Convertible Loans
Convertible Interest
Discounts to Conversion

Post-Money Valuation Individual Amount Invested % in a Company

10% 6%

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Ownership Must Be Considered on a Fully-Diluted Basis

VC Valuation Concepts

Pre-Money $20M Investment $30M

Individual Investment $10M

ESOP 10% Convertible Loan $10M

+ +

$10M Non Diluted % = $20M + $30M

=

20% $10M Fully 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 Assessment

Given the risk of an investment, we determine the minimum return by which that investment is worth doing

(2) Comparables

We analyze the values at which similar companies have been acquired

(3) Determine the Pre-Money and Post-Money

We 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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Practical Example: Chase Pharmaceuticals

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

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Practical Example: Chase Pharmaceuticals

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 not

close

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 the

company’s athmosphere

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

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Practical Example: Chase Pharmaceuticals

Comparables Help Assess Return Potential

Average = $150 M Upfront

Source: Andera Partners

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Practical Example: Chase Pharmaceuticals

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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Practical Example: Chase Pharmaceuticals

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

Source: PharmaLive

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Potential Realized

Practical Example: Chase Pharmaceuticals

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