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Politics : Ask Michael Burke
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To: Knighty Tin who wrote (94434)2/10/2002 11:28:11 AM
From: Freedom Fighter  Read Replies (1) of 132070
 
KT,

I realize this is a complicated question.

What I'm trying to get at is the factors that go into the analysis and valuation of start up companies when it comes to restructurings and additional funding.

Here's an example:

Suppose a start up company is funded via VC (all equity) under the assumption that there will be many years of losses prior to eventually earning an adequate risk adjusted return on invested capital. Call it 250 million of funding.

Now let's say that after several years of losses (100 million) it comes public and raises 500 million more. 300M of debt and 200M of equity. Assume it has remained on plan etc... but is still losing money and is not even EBITDA positive yet.

As time passes, the losses continue to pile up, there's some depreciation etc... so the equity (book value) slowly shrinks towards zero. 750 million has been raised - 450M of equity and 300M of debt so far.

Assume that our company essentially remains on schedule, but is not fully funded, and has a net worth that is approaching zero.

How does something like this get valued?

We know the replacement cost is equal to 750M.

We know that the net worth is approaching zero.

We know that the early losses and shrinking equity value were assumed to begin with.

I've been looking at some of the restructurings that have been taking place. It seems to me that there is no consistent rationale to what it has taken to get additional funding.

In some cases, it took a total wipe out of the original equity holders even though the replacement cost (clearly) and GAAP book values were still positive.

In some cases, the GAAP book value was actually negative yet bondholders were willing to accept some equity and pennies on the dollar in cash for their bonds and former shareholders kept something too. ????

In some cases both equity and bondholders were practically wiped out.

If you look at the net worth and stage of development (cash burn, EBITDA etc..) there really doesn't seem to be huge differences, yet the outcomes are very far apart.

Any insight?

Wayne
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