Beijing, China (AHN) – Wal-Mart, the world’s leading retailer, is investing into 360buy.com, an online retail company in China. The founder and chief executive of the Chinese firm based in Beijing said aside from Wal-Mart, there are five other companies that will buy a stake in the online company.

The executive said the six firms will invest a total of $500 million into one of the fastest-growing online retailers in China. 360buy.com is expected to end 2010 with $1.5 billion online sales, up from $200 million in 2008.

The fast-paced growth of 360buy.com’s sales reflects how ecommerce has caught up with Chinese consumers. Online commerce in China is estimated to hit $75 billion sales this year from $8.5 billion three years ago.

Because of China’s more than one billion population, the South Asian nation once closed to the outside world, attracts many foreign investors because of its large consumer market. Other multinational retailers such as clothing brand Gap are expanding rapidly their China operations.

A few weeks back, Youku.com, one of China’s largest online video website, raised over $200 million in a U.S. initial public offering.

Wal-Mart declined to confirm the report of its new China investment. Wal-Mart has been in China since 1996 and has 304 stores there.

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The higher the value of your business, the less stock you have to sell to get your business funding.

But, how do you determine the value of your business when it doesn’t have a history of cash flow, a book of customers or any other criteria that are typically used to establish value?

Valuing an emerging business for purposes of venture capital financing or angel investors is based on two factors:

1.) The rate of return required to compensate for the risk of investing in the enterprise; and

2.) The expected enterprise value at the time of the “exit event.”

The first factor depends on the general investment climate and the fact that investing in a start-up is extremely risky.

Today, professional investors would expect at least 10X return on investment over a 5 year period. This is much higher than it was a few years ago because the risks of investing have increased.

As a result, for each $1.00 of investment, you’ll be expected to return $10.00 to the investor in the fifth year. The money to pay the investor is generated by an exit event.

There are three types of exit events: liquidation, initial public offering (i.e. “going public”), and sale of the enterprise.

Liquidation is usually a bad outcome. The company’s assets are sold, creditors paid and the remainder is distributed to the shareholders. Goodwill – the portion of value that makes the company worth more than the sum of its tangible assets – is usually lost.

Since 2002 going public hasn’t been a viable exit strategy for most growing companies either. Because of changes to federal laws, the process has become too burdensome for most emerging enterprises. And, given the economic situation in the United States today, there is little appetite for relatively small public companies.

Therefore, the only exit event available today is the sale of the enterprise to a larger enterprise.

Sometimes entrepreneurs erroneously believe that they can buy out their investors at some point in the future. However, because, as you’ll see below, the enterprise value is based on cash flow and that cash flow would be the way to pay an investor, it’s almost never feasible to buy out an investor.

For this reason, you should view all potential investors as true financial partners – you’re getting married economically to them.

This also means that, by bringing on financial partners, you’re agreeing to sell the enterprise in about five years.

Enterprise value for a sale exit event is generally based on a multiple of the EBITDA (earnings before interest, taxes, depreciation and amortization).

EBITDA is essentially your business’ cash flow. And the multiple is similar to a P/E (price to earnings) ratio in the public market, although a multiple is usually much lower than P/E for various reasons.

So there are two values that must be “determined” to arrive at enterprise value at the time of the exit: EBITDA in the fifth year and the appropriate multiple to be used.

This is where the emerging business valuation game is played in the investment capital world.

Your EBITDA estimate for year 5 is based on the financial projections (guesses) and assumptions in your business plan. There are always points of contention that will make the investor’s opinion of EBITDA in the exit year different from your opinion. But, your assumptions must be reasonable and must be specifically stated so your projection can be properly evaluated and defended.

Likewise with multiples. Multiples are a reflection of the risk of the enterprise going forward: a higher multiple means less risk. Multiples vary quite a bit by industry. You can increase the multiple (and the value of your company) by eliminating risk, such as, for example, by having paying customers or proving that your technology is commercially viable.

Putting it all together, let’s say, for example, you’re looking to raise $1MM. Your business plan financial projections show an anticipated EBITDA in year five of $5MM. Based on your research you believe that private companies in your industry area typically are valued using a multiple of 6. And you know that your investor will typically look to received $10MM in year 5 through the exit.

Based on your EBITDA and multiple estimates, the enterprise value in the fifth year should be $30MM. This means that, in order to receive $10MM of the $30MM sale price, your investor would have to hold 1/3 of the equity interests to achieve the desired return.

Therefore, you would expect to sell 33% of the common equity interest of the company for $1MM in the current year and the post-money valuation is $3MM.

Of course, this isn’t a science and opinions as to EBITDA and multiples will vary. To be taken seriously, you have to make an informed and reasoned valuation case.

Furthermore, professional investors will also include downside protection so that, if things don’t work out, they’re first in line to recoup their investment. As a result, they’ll purchase a preferred stock that provides these and other protections over and above the common stockholders.

So what happens if you don’t have sufficient cash flow to justify an investment? This just means that your business probably isn’t a candidate for venture funding or that you have to consider a different business model.

An accurate basis for valuing your emerging company will ensure you sell stock at a fair market price and don’t give up more equity than necessary to raise capital and it will tell you if your company is qualified to secured venture funding.

The above is provided solely as general information. It is NOT provided as legal, financial or other professional advice and should NOT be construed as such. DO NOT rely on the information in any way. You should NOT take any action or refrain from taking any action based on the above information. Rather, you should consult an appropriately licensed business lawyer for your particular situation.

Author: Edward Alexander
Article Source: EzineArticles.com
Provided by: Digital Camera News

photo credit: Jazz Defo

Many would-be entrepreneurs who are long on vision but short on capital think that “angel” investors are the way to go for start-up capital, and they very well may be. Before approaching them, here are 10.5 things you should know:

* 1) Angel investors generally participate in the early stages of a company’s growth; they will plan an exit strategy to recoup the capital they have invested within 3-5 years. At that point they expect their companies to have enough of a track record to be able to attract capital from sources that can invest a greater amount but are more risk-averse; for example, though a sale of the company. This may be through a public offering of shares (an Initial Public Offering, or IPO). Angel investors will typically sell their shares in your company at that point.
* 2) They want to make money and will cull over many proposals to find companies that they feel will be successful. Even so, they are realistic enough to know that not all of their angel investments will succeed. The success rate is typically around 30-50%. Therefore, they try to balance long shot investments with those that are more likely to succeed.
* 3) Unlike venture capitalists, they are often motivated not only by the prospect of making money but also by the desire to be involved in the operations of their companies as advisors or mentors. Often angel investors are people with management expertise themselves; they may want to nurture the growth of their companies by participating in such management activities as strategic planning or marketing.
* 4) They will want to know a lot of things about you and your proposed venture, foremost among them whether you have put your own money into it: have you, or are you willing to, take out a second mortgage on your house to fund it? Have your friends and family invested in it? In the language of angel investors, this is known as “having skin in the game.” If you can’t answer yes to these questions, they will probably conclude that you don’t have enough confidence that your idea will succeed in the marketplace to put yourself on the line. Why, then, should they have enough confidence to invest in your venture?
* 5) To a certain extent, they will expect you to understand the limits of their knowledge: what they know and don’t know, and to present your proposal accordingly. One of the things they will probably not know is the extent to which your idea is unique and protectable – particularly if it involves intellectual property, as many new companies do today. Speak to these issues without prompting.
* 6) They look for certain personal characteristics. Have you shown that you have integrity? Do you communicate clearly? Listening, which is perhaps better called “hearing,” is both a necessary and rare skill. And express yourself in a lucid fashion; this includes speaking English to them rather than the language or jargon of your field or its technical details.
* 7) Demonstrate both flexibility and agility. You may have the world’s best idea and the world’s best business plan – today. Conditions change rapidly, and you may have to be quite nimble in order to keep up with tomorrow’s market.
* Know that everything is negotiable, and be prepared to negotiate with them and everyone else. The skills noted above are key to win-win negotiation. Aim to create win-win situations.
* 9) In the end, as with most other decisions, gut feel is often the determining factor in angel investors’ decisions. In the end, their decisions are based on emotion, as most decisions are. But they need facts to justify their instincts.
* 10) They tend to run in packs – not herds, but packs. That is, individual angel investors may form groups interested in businesses in the same general area such as technology or biotechnology or in the amount of risk that they are prepared to assume. It is perfectly acceptable for you to ask, if you are turned down by one or a group of investors, if they know anyone else who might be interested. They often know each other and will happily recommend other people for you to contact – provided that they feel good about you and your idea.

10.5 They will not descend from the heavens on gossamer wings carrying bags of money. If by some chance they do, they’re not just simply going to hand those bags over to you.

In short, there is nothing supernatural about angel investors. If your first attempts don’t pan out, persevere; if your strategy is good, change your tactics. Keep on keeping on. Above all, stay out of your own way. The tips above should help you to do that. Eventually you will either find an investor or decide to give up. But don’t give up too fast.

Jeanette T. Wallace, Ph.D.
jeanette@leadership-works.com

http://www.leadership-works.com

314.772.7727

Jeanette Wallace, Ph.D., the president of Leadership Works LLC, is an organizational psychologist based in St. Louis, Missouri. Briefly stated, her firm’s mission is to help people and organizations get out of their own way as they move towards achieving goals. She has both individual and/or corporate coaching practices, all aimed at getting improved results both personally and organizationally.

She takes a process approach in her work and appreciates the strengths that clients can leverage in turning potential into performance and helps clients recognize and use them. She offers processes specifically focused on leadership, strategic planning, customer loyalty and both individual and organizational assessments.

Jeanette is an expert facilitator. She has practiced organization development for 25 years as both an internal and an external consultant to executives and managers of companies in a variety of industries. Clients in transition find her services particularly valuable.