15. Investment Calculations Part 1

Overview

In this lesson, we calculate the value of TrackerTime when the business is projected to be sold in 2021. We use both EV / EBITDA and EV / Revenue as our valuation multiples.

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Summary

  1. Lesson Goal (00:04)

    The goal of this lesson is to calculate the exit value of each party’s stake in TrackerTime.

  2. Calculating Initial Multiples (00:19)

    The best way to value a startup is using multiples. In our case, we use Enterprise Value / EBITDA and Enterprise Value / Revenue to value TrackerTime. We want to calculate the value of these multiples before the venture capital investment. We calculate the Enterprise Value of the company by taking the equity value, which is the pre-money valuation, then adding debt and subtracting cash from the Balance Sheet.

    After calculating the Enterprise Value, we can easily calculate the EV / Revenue and EV / EBITDA multiples before the investment. Revenue and EBITDA are both found in the Income Statement. In our case, we need to calculate EBITDA by adding the Depreciation and Amortization expense to EBIT.

  3. Analyzing the Initial Multiples (01:50)

    In our case, the multiples for EV / Revenue and EV / EBITDA are both very high. This is often the case for a startup that is growing rapidly. It’s generally unrealistic to assume that these multiples can be maintained over time, so we assume that the exit multiple for EV / Revenue and EV / EBITDA will be lower than their current values. We can identify appropriate values by considering the values for more established competitor companies.

  4. Calculating Exit Valuations (03:07)

    Once we’ve determined appropriate exit multiples, we can calculate the enterprise value and equity value of the company in the exit year. To calculate the exit enterprise value, we multiply the exit multiple by either revenue or EBITDA, depending on which multiple we’re using. In our model, we perform all our calculations separately for both multiples. To calculate the exit equity value, we add cash and subtract debt from the enterprise value. These calculations tell us the equity value and enterprise value of the whole company at the end of the investment.

  5. Valuations for Each Investor (04:14)

    In order to calculate the return to each investor (SeedCo and Ventura in our example), we want to calculate the equity value of their stake at the end of the investment. To do this, we multiply the exit equity value of the whole company by the percentage of the company that the investor holds. This gives us the cashflow the investor can expect when the company is sold.

    In our case, SeedCo has a more valuable stake than Ventura, even though they invested less money in the business. This is because SeedCo invested earlier, and took on more risk in doing so. As a result, their higher stake is a reward for accepting greater risk.

Transcript

In the previous lesson, we calculated the ownership stakes in the company before and after the transaction. However, now we need to calculate the potential returns for each shareholder assuming the company sells in 2021. We're going to use two different multiples to perform this evaluation, enterprise value all over EBITDA and enterprise value all over revenue. Let's start by calculating the enterprise value. To calculate the enterprise value, I take the equity value, add debt, and subtract cash. However, I have no debt in the company. All I need to do is subtract cash, and I'll do that from the balance sheet.

Now I can calculate EV all over EBITDA and EV all over revenue. Let's start with EV all over revenue.

So I'll take EV and divide by revenue.

I actually haven't calculated EBITDA yet, so let's skip down in the income statement and do so. And to do so, I'll scroll down to the bottom take EBIT, and simply add back depreciation and amortization. Because depreciation and amortization is pretty small, there won't be a very big difference between EBITDA and EBIT for Tracker Time.

Let's now scroll up and calculate EV all over EBITDA.

There's EV.

Here's EBITDA.

As you can see from our multiples, our revenue multiple of almost 15 times is incredibly high. At this price, investors will need to see rapid growth in Tracker Time over the next five years to achieve a similar multiple on exit.

More likely is that the EV all over revenue multiple will drop as Tracker Time grows as a business, because the bigger you are, the harder it is to continue to grow at a very fast rate. And indeed, the market multiple for companies that Tracker Time aims to be the same size as in 2021 is about 9x.

For EV all over EBITDA, the story is the same. The current multiple is incredibly high because the company is investing its profits back into growing the business and so is declaring very low earnings. As a result, the EV all over EBITDA multiple is very high. This is also likely to fall by 2021, and by looking at comparables in the market we think that a 30x multiple is more likely. I've also included here a switch that allows the analyst to switch between EBITDA multiple or the revenue multiple.

We'll use this later. To calculate our returns on exit, we're going to skip down to the bottom of the model. Off camera, I've entered the investment dates for SeedCo and for Ventura, and I've included them twice because I'm going to calculate the IR-OR and money and money multiple for both the revenue multiple and the EBITDA multiple. Let's start by calculating the enterprise value under the revenue multiple. And to do this, I'll simply take the multiple, multiply by revenue in 2021. To calculate the equity value, I'll simply take this number and add cash.

And I don't need to subtract debt because there is no debt in the company.

I'll do the same for the EBITDA multiple.

And again, add cash.

As you can see, if the company can gain an exit based on a 9x revenue multiple, all the investors will make a higher return than if the company is trading at a 30x EBITDA multiple. Let's now isolate the returns for SeedCo and for Ventura under both of these scenarios. To do this, I simply take the equity value of the whole company, which is the value of all of the outstanding shares, and multiply it by the stake that SeedCo holds. So I'll skip up to the top, and take SeedCo's holding.

And I'll do the same for EBITDA.

And now for Ventura, and its stake is in cell L6, so I can simply enter it here.

And as you can see, SeedCo will actually gain more money than Ventura on exit because it holds a higher stake, even though it invested less money. This can be explained by the fact that SeedCo invested earlier than Ventura, and as a result took on a lot more risk. SeedCo is rewarded for taking that risk with higher returns and a higher stake in the business. In the next lesson, we'll calculate the internal rate of return and the money and money multiple for both investors. And we'll find the cash that Mary is due to receive as well.