Value is not the price that’s paid

Posted on May 31, 2011 by Andy Warren

I recently heard someone quote the old adage that the real value of a company is the price that someone is willing to pay to buy it. I’ve also used this myself. However, what that doesn’t say is that the price that is actually paid is the really value. The key is in the word “willing”. Whilst a buyer may go into a negotiation with a maximum price in mind, there are all sorts of elements, rational and emotional, that come into play during the negotiation phase.

We often see value defined as the present value of future expected cash flows. If you’re investing in or buying a company then logically, if you just pay the price that matches discounted future expected cash flows, you could put your money into any investment that has an equal balance of risk and reward. In reality, as an investor or buyer, you are hoping (forecasting;estimating;calculating) that the actual future flows will be higher than expected (and the risk lower) and that someone else will be willing to buy the ongoing future at a higher price when you want to sell.

This means that the canny buyer or investor will have a price or value in mind that they don’t want to go above. Of course in the heat of the moment (or IPO excitement) they might go over this emotionally and justify it later with retrospective logic. What they really want to do is to negotiate (not really an option on an IPO but plenty of scope in VC investments and M&A) and get their acquisition or investment at the lowest price possible to maximise their return.

There’s been quite a lot written about the way VCs use the option pool as a tool for price negotiation and Simon Acland explains very clearly in his book, Angels, Dragons and Vultures, how VCs will use many other techniques to get a better price which means a lower valuation for the owners. Trade buyers are the same, as they will also be seeking to get the best price below their calculated maximum worth.

So, is the real value what someone is willing to pay? Yes, but that’s not the same as what they actually pay and certainly not the same as what they offer.

Posted in negotiation, The Value Formula, valuation | Tagged , , , , | Leave a comment

Discounted Cashflow for Startups

Posted on May 28, 2011 by Andy Warren

Nic Brisbourne has a timely post on The Equity Kicker today discussing the view that Discounted Cashflow (DCF) is not appropriate for Startups.  This seems to be an area of quite some contention and there are many who still swear by the DCF method and others that say it’s outdated and inappropriate.

In reality, they’re all right to some degree.  I believe that all valuation methods really stem back to a DCF type approach, and there is little disagreement about value being equal to the sum of the present (i.e. discounted) value of future expected cashflows.  The real difference comes in the way that people get there and the methods they use.  The methods vary because there will always be different circumstances and inputs.  There will also be different perspectives on what’s important and what’s not and different propensities to risk (which determines any discount).

It also depends on whether you are valuing on the basis of buying the business to use (trade sale) or investing in the business to sell (VC market and Investors).

Although DCF is not always used by name, all the profit and revenue multiplier methods are really shorthand versions of the fuller DCF model.  If you take (Free Cash Flow) FCF out of the DCF progression sum shown in your article as a common factor (which over time will be similar to profit) then all the rest (which includes tacit growth assumptions, risk expectations and the ability of the company to sustain it) are lumped together and called a multiplier.  On profits if they exist and are not too small or on revenues if the company is currently or expected to remain loss making in the short term.  The multiple is then sense checked against other Market examples, where available, and justified (a form of crowd verification).

DCF can only ever be a theoretical model based on some broad assumptions because nobody can accurately predict the future.  Similarly, all the other forward looking valuation methods use their own assumptions with the odd piece of verifiable logic thrown in for justification but come down to a risk determined discounted view of the future expected cash flows that they can either generate or persuade someone else to acquire ( for VCs it invariably the latter).

Whatever the valuation methodology there is one thing that is guaranteed.  The answer will be wrong.  There are so many variables and unknowns that a future valution simply cannot be absolute.  The key with any valuation is more about whether there is an increasing progression in the value of the business.  That’s where the focus really needs to be.

 

 

Posted in Corporate Finance, DCF, M&A, The Value Formula, valuation, Venture Capital | Tagged , , , , , , | Leave a comment

Superfast Broadband in the UK

Posted on May 18, 2011 by Andy Warren
Superfast Fibre
Into the Blue

In today’s Times there’s a piece by David Davis on the UK’s need for Superfast Broadband to put us on a par with South Korea.  It has to be said that with a GNP of just under half the UK  and our GNP per Capita not running that far ahead there may be something in that.

Whether there is a direct economic impact or not, there is certainly a need and desire for increased bandwidth.  The challenge, as Davis points out, is that the main providers would only look to take around 60% of the population with them.  BT always used to struggle with it’s Universal Service Obligation (USO) which meant it needed to provide a comparative service to the whole country (including remote rural areas) rather than just cherry picking the concentrated urban areas.  There also used to be a self defeating argument over fibre to the kerb (or house) which went along the lines of “we only think a small number of people would want it, so we’d have to charge them tens of thousands of pounds each to justify it”  which always destroyed the business case, instead of assuming a high take up, and hence a lower cost per installation which had the chance to be a self-fulfilling success.  When I was at BT, we managed to convince the powers that be on this argument for the initial ADSL Broadband roll out which could be deemed quite a success given the take-up and the fact that this has subsequently driven and supported much of the UK internet business.

Luckily, we also now have the 21C Network (which grew out of the Data Strategy that we put together in 1997/98 and is only just coming to fruition now) with more and more fibre being rolled out.  It’s testament to the tenacity of many of the execs at BT who have been pushing this through since the late 90s.  The challenge is that it still feels too slow, in roll out and speed.

I’m now using BT Infinity (or a variant of it) which should give me up to 16Mb but is actually delivering around 2Mb as it’s still relying on copper from the cabinet up the road.  We’ve come a long way since dialup (although on occasion I feel like we’re still there) but it would be so much better in our increasingly technological and bandwidth hungry world to have fibre right to my front door.

Davis goes on to propose that the ranks of the unemployed are engaged to dig and lay the fibre network needed to avoid the £25bn estimated cost.  You can draw your own conclusions on that.  It’s an interesting alternative to the National Service argument.

Would a Superfast Broadband network make a real difference to the country’s economy?  Or would it just mean it’s far easier to spend all day downloading torrents of data from Netflix, Youtube and iPlayer and swopping increasingly large sized photos and videos on Facebook and other social networks.  The reality is that if you provide the platform the business will come along to use it, as has happened with Broadband.  We predicted some of the take-up and usage of Broadband but the uses have gone way beyond what we could foresee back then.  All we need is the opportunity.

Posted in Broadband, fibre, internet, social networks, Technology | Tagged , , , , , , , | Leave a comment

LinkedIn’s soaring IPO valuation

Posted on May 9, 2011 by Andy Warren

The value for LinkedIn’s IPO is now being set at between $3.02bn and $3.35bn, giving $600m to founder Reid Hoffman.

Revenues have more than doubled for the first three months of this year compared to last, from $44.7m to $93.9m indicating strong growth with more potential. Multiples on revenue are clearly huge here, and with profit at $2.1m for the quarter the profit multiples are astronomical. Clearly there’s a market expectation of significant growth in future cashflows and profits but with no real limit on the scaleability and a high value customer base in many of the professionals using the site this is not untenable.

LinkedIn is obviously growing in the strength and breadth of it’s network, and users will be reticent to shift away and lose their contacts. However, there are many new players trying to break into the market with some success but the connected network is only as useful and valuable as the connections within it and many users may be reluctant to simultaneously run multiple networks with plaxo, naymz, ecademy etc.

It’s certainly possible to see LinkedIn becoming a tool for communication between trusted professional contacts outside of the traditional email systems in the same way as Facebook.

Reid Hoffman and Jeffrey Weiner will clearly be seen as contributing significant value given their experience, backgrounds and reputations.

There’s clear momentum here, which will provide a strong element of sustainability and obvious growth. The risk can be mitigated as long as the systems operate effectively and they don’t introduce too many silly obstacles to use or intrusive elements. This type of network is based significantly on trust and any abuse of that would rapidly undermine it’s value.

Posted in social networks, The Value Formula, valuation | Tagged , , , , , | Leave a comment

Yahoo buys IntoNow for $20m to $30m

Posted on April 27, 2011 by Andy Warren

This week saw the announcement that Yahoo is buying the Social Networking spinout IntoNow.  The deal price was undisclosed but is rumoured to be in the $20m to $30m range.  IntoNow is an offshoot of Auditude, the online video ad company, and has some smart IP that appears to work in a similar way to Shazam.  It’s a set of matching algorithms which will pick up on the music/dialogue in the TV program being watched and match it to the stored database.  The idea being that people watching the same program can share their experience with others.  This is already happening with Twitter and every Thursday night you’ll see the hashtag of #bbcqt leading a healthy debate about BBC Question Time.

What Yahoo have latched onto is the scope for identifying a community or tribe of watchers who all have the same TV preferences and consequently may share common buying preferences.  They are also likely to have certain buying patterns that align to the TV program they are watching (which may be as broad as Doctor Who fans liking gadgets or as specific as Derren Brown fans being open to obscure texts about sceances, magic and hypnotism).  This gathering of data, allowing the grouping of a community data set, forms a valuable part of the burgeoning Customer Data Hub market.

The fascinating thing about IntoNow is that the period between its launch and its acquisition has only been twelve weeks, showing how fast the market can move for the right deal.

Where’s the Value and how does The Value Formula apply in this case?  Well, there’s clearly IP value in the technology and that could be applied to other sectors.  If it’s been properly protected then the value’s enhanced even more.  It’s also a nice simple product concept that can be easily understood and used immediately.

There’s clearly value in the data of customer usage and the database of historic TV shows.

For Yahoo, it creates another distribution channel for its advertising when its own real estate is on the wane.  Imagine the value of having access to whoever is watching the Superbowl or any other major event and being able to target them with ads that would normally cost significant amounts to present via TV.  And as viewing habits involve watching TV whilst simultaneously using the iPad, iPhone or other device, there’s huge scope for product placement.

Some additional value will be driven by the team and leadership behind it, having the smarts to breakout of an existing company and develop and use the algorithms in this way whilst getting some decent promotion behind it means there’s some quality talent in there.

Expect a glut of copycat Apps knocking at the door soon.  Someone somewhere is building a database of different dog barks and birdsongs as we speak.

Posted in algorithm, entrepreneur, Internet Marketing, M&A, social networks, Technology, The Value Formula, valuation, Value Drivers | Tagged , , , , , , , , , | Leave a comment

Tesco buy into Blinkbox

Posted on April 21, 2011 by Andy Warren

On Wednesday Tesco bought an 80% stake in Blinkbox (a video streaming company) from Eden Ventures and Nordic Venture Partners.

This extends Tesco’s reach further along the chain of home entertainment and sets them competitively against Sky Anytime+ (currently all over the Sky network), Lovefilm, BT Vision and Virgin.

With more and more TVs being internet enabled (and Tesco no doubt selling them alongside the package) this will consolidate two lines of business for Tesco,  The ever dwindling DVD shelves will get smaller and smaller (going the way of Zavvi) and if they can deliver films to an iPad or other tablet then there’s a whole new market to explore.  Especially as BT and Sky expand their unlimited broadband services and remove the download limits.

Blinkbox has had rapid growth, with 2 million visits every month, and can be forgiven for having a site that looks similar to the iTunes store (just hopefully more user friendly).

As a Freemium model, it will be interesting to see whether it follows Spotify in the reduction of the free element.  And will the ads be Tesco led for the future (admittedly that still leaves plenty of scope given the product range and aligned placement).

For Tesco it’s another chance to increase their ever growing Customer Data Hubs  and doubtless Dunnhumby will be all over it.  Huge value in aligning ads with film choices and coordinating releases with branded product placement.

Tesco get access to some high profile business smarts in Michael Cornish and Adrian Letts which could have strong benefits elsewhere in the business, especially if they fill some of the gap left by Laura Wade-Gery’s departure to M&S.

There’ll be some decent IP in there but this looks to be more about footprint at this stage.  And with a “no subscription” model there will still be work to be done to keep the customers coming back.  But if that’s through decent new deals, fast, exclusive and timely releases and the use of Tesco’s legendary purchasing power then there’s good potential.

There’s no real inhibitor to growth here, unless they’ve not configured their delivery properly but at this stage the technology should be mature enough to handle the demand.

Overall, it certainly looks a better buy than Blockuster.  And another nice deal for the guys at Eden.

Posted in Business, customers, M&A, Management, Technology, The Value Formula, Uncategorized, valuation, Value Drivers, web 2.0 | Tagged , , , , , , , , , , , , , , , , , , , | Leave a comment

Tweet Deal for Tweetdeck

Posted on April 21, 2011 by Andy Warren

This week saw the news that Twitter are interested in buying Tweetdeck for a proposed $50m.  This is after they turned down an offer of $30m from Ubermedia earlier this year.

So what’s driving the value on this front end browser that around 10% of Twitter users use to access their accounts?

It’s certainly been growing fast, and according to Techcrunch has around 13% of tweets (twitter traffic).  It’s customers are also fiercely loyal and keen referrers.  And Tweetdeck have drilled in the system of notifying other users on Twitter of the fact that Tweetdeck was used (good positioning for the brand, especially when high profile users can be seen attaching their name to it).

The product is clear and the proposition (allowing the use of multiple accounts and ease of use) is valuable to”customers”.

It’s easy to signup and there’s significant value in Tweetdeck holding the access path to Twitter for the users.  Of course the users can switch relatively easily to another browser (or maintain multiple alternatives) but as long as they don’t upset the user base most people will stick with it rather than go through the hassle and pain of change.  As shown recently by the problems experienced by UberTwitter (now UberSocial) being blocked by Twitter but the users stuck with it.

There are clearly some smart people running Tweetdeck and Twitter could do a lot worse than getting access to them and their ideas.  There’s also an obvious opportunity to simply make Tweekdeck the primary (and only) access route to Twitter (which in turn may kill off the competition).  Of course that could also kill off Twitter but such are the considerations of high risk strategies in a competitive world.

Ultimately someone, somewhere, sees Tweetdeck as being a route to income for Twitter (or a way of defending Twitter’s own income strategies, direct or indirect).

Peter Osborn, a very smart guy who works with Chord Capital, recently observed that there are two reasons for being bought.  You’re either Valuable or Awkward.  In this case I think Tweetdeck have a little of both for Twitter.

Posted in growth, M&A, social networks, Technology, The Value Formula, valuation, web 2.0 | Tagged , , , , , , , , , , , , , , , | Leave a comment

Companies Act 2006 – Online Annual Return

Posted on October 26, 2009 by Andy Warren

If you have yet to attempt to complete an online Annual Return for Companies house then you may need to set aside a good chunk of time and have a few painkillers to hand.

If you have a business that is a simple private company with just a few shareholders and only one issue of shares all at the same price then you shouldn’t have too much trouble.  However, anything more than that and you could find yourself facing some serious frustration.

With good reason, Companies House is encouraging companies to submit their Annual Returns online and the cost for doing so is half that of a paper submission.  And, to their credit, some good changes have been made such as allowing more that 99 shareholders to be added (a limit not made explicit until you tried to manually enter the 100th and found you just couldn’t any further and then needed to repeat the process on paper) or the inability to handle low nominal values for shares (compounded by an inability to understand this was an issue) which has now been fixed.  However, I’m also hearing of instances where paper forms are being rejected because online ones have been started and this means the online version has to be useable and practical.

Where are the major issues now?

Firstly the requirement to update your directors details with the Country/State of Residence.  Not too complex in itself but it feels like repetitive information which is already included in the address.  When you select the country then you are prompted for a “date of change” which is not abundantly clear as most of your directors will not have had any change.  The answer here, according to Companies House, is to put the date of the Annual Return.  Also, although there seems to be an implication that you will also have to complete a 288c for this change, I’m assured that this is not necessary (as there’s been no change!)

The next challenge comes by way of the “Amount paid up on each share:” which has clear notes stating “The amount should include the share premium.”  Unfortunately, if you are a company, as many are, which has had more than one issue of the same class of share at different prices (multiple financing rounds either up or down) then the single box allowed for the submission of this data seems woefully inadequate.  Now, admittedly there is a later note which says “Multiple amount paid and unpaid details within the same class of share.  This form is not currently able to capture multiple paid or unpaid amounts for the same class of share. This information can currently only be provided using the Software Filing service or by submitting the paper version of the form.”  and they seem to be adding this sentiment liberally across the site, so it is obviously causing some consternation. 

The main issue here is that it smacks of a set up that has not been fully thought through.  Unfortunately, it seems it’s also not been communicated clearly to the help desks at Companies House.  I’ve had two separate calls today where I was told “just put the paid up share premium” and when I enquired how I should handle multiple values I was told “just put the current one”; then “put the total share premium”; then “just put in what’s needed to pay it off”; then “I’m not sure I understand this” then “sorry the technical department is busy” and finally “we can’t give you guidance on this and you’ll have to take your own legal advice”.  Our lawyers have confirmed this is a complex issue.

A little more digging has confirmed that the BIS (Business Ideas and Skills department) of BERR (which once upon a time was the DTI) have identified this as an issue.  This link BIS Paid Up Capital explains a little more and they are referring people to ICSA ICSA Guidance for more guidance.  The ICSA essentially say do what you can to provide information but if it’s too complex then ultimately just dividing the total share premium account by all shares should do the trick. 

I understand Company Lawyers are currently advising clients to go the paper submission route and submit all relevant details.  Ultimately it looks as if there is a realisation that this aspect of the Companies Act 2006 needs a little more work and there is talk of a change being made.  If you’re stuck with the online (which you will be if you’ve selected the “Proof” option then you’ll probably need to follow the ICSA guidance.

The next challenge to be faced is the Prescribed particulars (of rights attached to shares) which provides a relatively small box for a whole lot of potential information. 

Here the challenge may come for small companies, where they only have Articles of Association and no Shareholders Agreement and they will have to pick their way through understanding what’s relevant and ensure they don’t include information relating to Directors instead of shareholders.  For companies with more complex structures and detailed Shareholders Agreements as well as Articles, it’s unfortunately not possible to just write “as detailed in the Articles”.  You have to go to through and select all the relevant information and cut and paste it into the boxes in some coherent format. 

I’ve seen indications that there might be a limit on the amount of data that can be input but I haven’t found out whether that is actually the case.

There have been some interesting questions as to the objective of this particular request, as excerpts from Articles and Shareholders Agreement will never tell the whole story and for any potential or existing shareholders they would be better off getting hold of the complete documents.  So for small and medium private companies this does seem an extra burden that serves no real purpose.

 The details that have to be extracted for each class of shares are as follows :-

(a) particulars of any voting rights, including rights that arise only in certain circumstances;
(b) particulars of any rights, as respects dividends, to participate in a distribution;
(c) particulars of any rights, as respects capital, to participate in a distribution (including on winding up); and;
(d) whether the shares are to be redeemed or are liable to be redeemed at the option of the company or the shareholder and any terms or conditions relating to redemption of these shares.

There are a lot of beneficial changes coming out of the Companies Act 2006 but there is still a need to make sure companies can operate and continue without being overburdened by bureaucracy.  For many SMEs it feels like government departments assume you have as many administrative staff as they do.  There’s still a real need to reduce these burdens on hard pressed SMEs, even more so at a time of cost reduction when many are doing their best to get by and keep their staff employed. 

The new Companies Act is a decent step forward in many areas and it’s helping to simplify matters but at the same time its brought in some extra demands that do need more consideration as to how appropriate they are for certain types of companies, especially when it comes to SMEs.

Posted in Business, Companies Act, finance director, Uncategorized | Tagged , , , , , , , , , , , , | Leave a comment

Survivors

Posted on September 16, 2009 by Andy Warren

It’s a year since Lehman’s collapsed and threw the financial markets into turmoil.  And the last year has been an incredibly challenging period for many companies.  Whilst large corporates have been able to survive through budget freezes and cost reductions, although even this wasn’t enough for some, the SME sector has had even more challenges to face with the banks freezing access to finance, large customers pulling back their business, and cost cutting endeavours slicing to the bone.

There’s a big difference between a company of 10,000 cutting 10% of the workforce and losing 1,000 people.  It sounds a lot and can be distressing for all involved but it still leaves the company with 9,000 staff which can be plenty enough to take up the slack.  For an SME, there’s much more of a challenge.  The cuts have to be deeper to make a difference and for a company to reduce from 50 heads to 25, it means resources are stretched really thinly.  Sometimes to breaking point.

Any company who has lived through the last year or two and survived intact has something to be very proud of.  The challenges are by no means over yet but there are signs the worst may be over.

Building a business can be a challenge at any time but if you’ve survived through the current economic climate then it’s a a real sign that you have what it takes to succeed.  The key lesson is to remember what you learned through this period.  Actually companies can survive with tough decisions and the most useful asset in a business is not it’s resources but the resourcefulness of the management.

It’s also worth bearing in mind that there can still be more danger as we return to growth, especially if you don’t have a good understanding and control of the finances. 

So, if you’ve survived so far, well done.  If you didn’t quite make it, there’ll be other opportunities.  Whichever it is, make sure you look back and take some good lessons from the experience.

 

 

Posted in Business, Credit Crunch, entrepreneur, Finance, growth, recession | Tagged | Leave a comment

When the time is right

Posted on February 9, 2009 by Andy Warren

We’ve recently closed a funding round of just under £2m for a client and it struck me that with all the negative press around it’s easy to assume that all the positive growth stories have dried up. This tends to lead people to think that the time is not right to take action and consequently they put their head down and hope all the nasty stuff goes away. In their minds they tell themselves that they’ll start taking more action when the time is right.

It’s true that many more businesses are becoming insolvent and going into Administration. And many more may be trading insolvently (a criminal offence with personal liabilities) without even knowing it. It’s also true that there are many more people going into personal bankruptcy or IVA (Individual Voluntary Arrangements) in the false belief that after 2 years this will be wiped from the records (check any mortgage application for the question that says (have you ever been made bankrupt or entered into an IVA) to see that your credit record may never fully recover.

However, amongst all this there are still some companies that are raising money, expanding and growing as fast as ever. Admittedly it’s not easy and has the potential to get harder in the coming year but with the right guidance and the right business plan there’s still a huge amount of opportunity in the market.

The investment community is still sitting on considerable cash reserves and there’s more demand than ever for the right deals. This is balanced by an even higher level of paranoia and focus on cashflow that requires the investors to have a huge amount of faith in the abilities and plans of the management team but a strong team and a coherent plan can win through and the extra focus is on the right things.

Even the banks are willing to help those businesses who can clearly show they know what they are doing, keep the bank fully informed and manage their finances tightly.

Any business owner in this market has to make some tough decisions right now. You must know where they stand financially right now and for the foreseable future. If you don’t know that then you’re treading a very dangerous path that could lead to losing everything you have, including your personal assets.

Next, you need to decide where you want the business to go. Are you going to just knuckle down and tough out the the current market conditions or are you going to look at whether there are changes to be made to the business and strategy that could take you into new markets and consolidate and strengthen your current customer base?

Whichever direction you choose you will have to take some action. The most essential factor you’ll have to manage right now is your cash and that may mean some hard decisions such as reducing costs. You’ll also have to look at your business critically and understand what is working and what’s not. The absolute worst thing to do right now is to freeze like a rabbit in the headlights and wait to get run into the road.

This has turned into more of a motivational rant than I was planning but it would be really sad to see even more companies fail because they were waiting for when the time is right. Because, frankly, the time is right now.

Posted in administration, Business, Corporate Finance, decisions, Finance, growth, insolvency, insolvent | Leave a comment