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Print_outs_-_2._Entrepreneurs___users_of_PE1.pdf-Summary: Entrepreneurs / Users of Private
##### Page 8
Example
r
lnvestor
has five
year
investment.
*
CAPM
rate
is
10%
>
Expects
10%
return
afterfailure.
-
For
each
\$1,
investor
needs
(1.10)5
=
1.61X
in 5
years.
-
Now,
assume
that there
is
only
a25o/o
chance
that
the
investment
succeeds
and
a75%
chance
it is
a
0.
*
The
investor
must
get
4
x
1.61
or
6.44
in
the
success
scenario.
>
1.e.,
investor.expects_to
get
6.44 inthe21o/o
chance
it
succeeds,
qqd.to
get
0
in
the75o/o
chance
it
fails, for an
expected
value
of
1.61.
-
lf
the
investor
looks
at
forecasts
of the
success
scenario
o16.44,
investor
must
discountby
45%
to
get
an
NPV
of
1.
)
(6.44)(1/5)
-
1=
45%
Enlrcprcrcurial
Fimrce
and
Private
F4uity
Stovon
N.
Kâplan
Cash
Flows
/
Financial
Forecasfs
r
Detailed
financial
statements.
*
lncome
Statement
-
Balance
Sheet
-
Cash
Flow
Statement
(most
important)
r
How
do
you
build
the
plan
/
projections?
r
Begin from
ground
zero
/
bottom-up.
*
Monthly
over first
two
years.
*
General
and
costs.
>
Office
space
and
equipment
>
Salaries
r
Employee
by
employee.
*
Capital
expenditures,
>>
How
much
will
it
cost
to
build
it?
Entreprcreu¡ial
Fim@
atrd
Privåte
Eq[¡ty
l6
Stewn
N,

##### Page 9
Financial
Forecasfs
-
2
*
How
much
marketing
and
-
How many
salespeople?
*
How many
customers
per
salesperson?
>
How
many
calls
Per
salesPerson?
>
How many
calls
to
get
a customer?
*
How
much
revenue
Per
customer?
>
What
is
the
revenue
model?
*The
end
result
is
cash flow
statement
/
income
statement.
r
With bottom-up
numbers,
then
look top-down.
-
Do
the
numbers
make
sense
in
terms
of market
shares,
competition,
etc.
*
1,e,,
a
problem
if
bottom-up
to
90%
market
share.
EntrcpreneüriâlFimrceildPdvateEquity
17
Steven
N,
Kåplan
Financial
Forecasfs
-
3
r
For start-ups:
-
Generate
different
scenarios.
o
Expect
substantial
non-linearities.
(1.e.,
0
or
1.)
*
Assign
probabilities
to
the
different
scenarios.
-
Value company
as
expected
value
of ditferent
scenarios.
r
For existing
companies:
-
OK
to
generate
different
scenarios.
-
However,
one
set
of
expected
cash
flows
often
represent
expected
value
of different scenarios.
-
Less
likely
to
have
non-linearities
/
options.
Enrreprcreùial
Fi¡@e
andPrivâreE4u¡ty
18
Stewn
N
Kaplan

##### Page 10
Should
the
forecasfs
be
optimistic?
r
Do
not exaggerate
/
make
up
numbers.
*
investors
will
get
to
real
numbers
anyway.
*
Will
consider
exaggerated
numbers
a
sign
of
weakness.
>
Duplicitous?
>
Stupid?
¡
That
said,
present
a
case
in
which
things
go
well.
-
1.e.,
the
forecasts
should
be
the
success
scenario.
-
But
they
need
to
be a
plausible
success
scenario.
:
And
remember:
forecasts
will
become
the
operating
plan
that
investors
will
hold
you
to
once
you
get
funded
Enlreprcßuriål
Fimme
ild
Priråte Eqùity
Slewn
N
Keplên
r
DCF:
-
,
Can
be explicit
cash flows.
-
,
Discount
rate
is not
market-based.
o
Use
"sensible"
CAPM-based
analysis
as
starting
point.
r
Multiple-based:
-
,
Market-based
-
r
No
company
is
truly
comparable.
¡
Useful
to
look
at both
methods.
-
Try
to
calibrate
discount
rate
to
market
values.
Entrcprcmurial
Fimrcc
rd
P¡ivete Eqùity
20
Slewn
N

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Leland P.
Santa Clara University
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