Quantitative evaluation of Team value

Whether we are valuation or enterprise decision-making, in the actual operation must have the concept of statistics and the idea of probability, to carry out reasonable reasoning. For example, DR.2 's partner once said to someone, "I'm the most knowledgeable person in economics and finance he's ever seen." So the following two facts can be inferred: first, the partner encountered too few doctors, not high knowledge, leading to statistical nonsense. Second, dr.2 this devil, in addition to the business, everything, is not a good doctor, and this is obviously a big probability event.

To get to the point, the Enterprise management team has been an important factor in the valuation of many venture capital organizations. Aside from the attractiveness of the project itself, the preferred factors considered by VCs are often leaders and teams (because leaders are part of the team, so they are articulated as teams), followed by project growth and ROI. The growth of the project and the target ROI can generally be estimated by discounted cash flow and comparison method. Although air-to-air, but how much can be partly quantified, but for the "team" value of the evaluation, there seems to be few quantitative models, most of the people to assess the subjective feelings or the word of the person's "Shenzhou line, I see the line" To cover the verdict.

Then if the investment success, many organizations and teams will deliberately dilute the complexity of the investigation and negotiation, and will highlight the "perfect Match" and "Love at First sight", like the interpretation of fairy tales, what a minute to impress people, elevator door opened a close, a star enterprise was born and so on. Because this is also the needs of both marketing, with a fashionable words, you have to seriously you lose, modifiable is business, but each other to expand the influence, in order to facilitate the work carried out later. So is the value of the team really only by patting the head, playing feeling, and not a quantitative assessment?

Let's review the corporate value formula we learned in the "Fun Multiples": Enterprise value =noplat*[1-(g/roic)]/(WACC-G)

Because:

1. Free cash flow + new investment = Noplat
2. New investment = amount of capital invested T+1-invested capital T

So: Let's regroup the formula

Enterprise value = (Free cash flow + new investment) * [G/roic)]/(WACC-G)

From the above formula, we can deduce a conclusion that free cash flow, new investment, growth rate and return on investment (ROIC) are proportional to the value of the enterprise. WACC is the risk cost of the venture capital, so the WACC is inversely related to the value of the enterprise, the lower the WACC, the higher the enterprise value. The above 5 variables are the core drive of enterprise value.

Usually venture capitalists have only two choices, and it's a question to cast or not cast in a Shakespeare's line: "to" or "not". Through the initial contact with the enterprise, to the back of due diligence, has probably understood the product project competitiveness and market prospects. But a good project is just a question of whether it's worth doing, but an assessment of the management team is the answer to the question. Good project to match the appropriate management team, only worthy of investment.

So what is the relationship between the suitability of the business management team and the valuation? Dr 2 thinks it depends on whether the management team can pry the 5 variables that affect the value of the enterprise. That is, the factors that investors need to find out about the management team are the increase in free cash flow, new investment, growth rate and return on investment;

We know that enterprises are through investment, generate future cash flow to calculate value, of course, the return on investment must be greater than the cost of capital.

According to the principle of value conservation (any action that does not increase future cash flows cannot create value). When an enterprise's management team is deemed incapable of changing the total cash flow of an enterprise, or generates a return on investment (ROIC) that does not meet the minimum rate of return required by the investor (WACC), the investor thinks that the management team does not match the project. According to the concept of total or no, most investors will choose not to vote.

The following matrix can basically reflect the decision choice of venture capitalists. Please pay attention to the middle yellow part of the question mark, when the investor's choice is very difficult, then the need to judge the suitability of the management team accounted for the entire investment decision weight.

It is also worth noting that I use the management team's suitability or matching degree to replace the word quality is a reason. The quality of the jobs team is high, but it may only be suitable to manage Apple, and if you manage Coca-Cola, it may not be a good manager. First, Jobs wanted to do something to change the world rather than sell sugar syrup for the rest of his life. Second, the whole Coca-Cola operation model may not be competent for the team. This is like, take the scalpel operation is not good shave knife, build atomic bomb not necessarily boiled good eggs, people have their own strengths, it is not difficult to understand. Tang Taihua, Zhang in the first issue of the "Economic Issues" 2002 "venture capital evaluation decision making method", the Enterprise management team's assessment is divided into the following points:

(1) Entrepreneurial quality: can be from the following aspects of the focus of investigation, one is integrity and honesty; Second, the body is healthy, the spirit is good; Third, motivation and responsibility; Four is the analytical ability. (Dr.2 that: If you are married, consider family harmony and love Support)

(2) Management skills: First, the members in the industry experience and background. Second, management team's business philosophy; Third, the management ability of leaders; Four is the ability of each member's expertise.

(3) Financial skills: first, the financial analysis and forecasting ability of the enterprise; the second is the rationality of the financial plan of the start-up company.

(4) Marketing Ability: Have no good marketing plan and excellent marketing talent.

Are the points listed above equally important to the value of creating an enterprise? For example, can you say that the quality of an entrepreneur is more important than the financial skills of a management team? Dr 2 believes it is not possible. Because the quality of the entrepreneur and the financial skills of each of the main points of the value of the contribution of different weights, so the above list is qualitative research, can only be used to comb ideas, to understand the management team on the impact of enterprise value, you can try to quantitative analysis. Let's look at the impact of the business management team on free cash flow first. So what does free cash flow consist of?

Free Cash flow =ebit– operating tax-net investment

which: EBIT = Net profit + Income tax + interest

Therefore, the influence of the management team on the free cash flow mainly concentrates on the net profit. Net profit depends on two factors, one is total profit, the other is income tax rate. If the management team, through its own efforts, such as the leading venture capital fund, the state-encouraged returnee entrepreneurship and thousand-person program, etc.) and through the High-tech enterprises or "double soft" certification, thus obtaining a relatively low income tax rate and various subsidies, it is clear that the creation of a unique value, must be given a premium. And the total profit mainly examines how the enterprise management team increases the operating income, how reduces the operating cost and the various expense ability.

As for the impact of the business management team on free cash flow, let's take a virtual example (weights are also artificially set, opinions differ), such as the following list:

We assume that the weighted score of 100 is divided into median, this is the quality of enterprise management team to meet the minimum expectations of investors, it can generate free cash flow for a, when the management team weighted into 215, the free cash flow can be generated: A * (215/100) = 2.15A.

We can analogy the same method to the growth rate. However, since ROIC =noplat/has invested capital, it has been considered in the analysis of free cash flow, so it cannot be calculated repeatedly, so the weighted score will not be calculated. The new investment is limited by many factors and cannot grow indefinitely.

It is important to note that the value of the enterprise is inversely proportional to the WACC. Therefore, when calculating the impact of the management team on WACC, division should be used. Let us recall the previous calculation of WACC in the "NPV" method:

WACC = (d/v) _rd * (1-t) + (e/v) _re

which：

RD = Liability cost, RE = equity cost, T = Corporate income tax, D = present value of liabilities, E = present value of equity, V =d+e

The equity cost is generally calculated using the Capital Asset Valuation Model (CAPM): RE = rf + beta* (RM-RF).

It can be seen from the above formula that the Enterprise management team can exert influence only on the liability cost, the market risk premium and the proportion of equity and creditor's rights (capital structure). Usually the lower the liability cost and the market risk premium, the lower the WACC. On the impact of the management team on WACC, we also cite a virtual example and set the weight value, see the following list:

We also assume that the weighted score of 100 is divided into median, which is the quality of the enterprise management team to meet the minimum expectations of investors, which can produce a WACC of B, when the management team's weighting is divided into 115, that is, the enterprise management team has sufficient capacity to reduce debt costs and market risk premium. The resulting WACC should be: b/(115/100) = 0.87B

The same approach can also be used to test the impact of the business management team on the profit growth rate, which is no longer discussed here. So in an enterprise's lifecycle, it experiences different best managers. Every manager will take different actions to create value for the enterprise. This concept Dr.2 has been elaborated in the article "Market capitalization Management Law" in detail. However, through the above two virtual examples, we can probably know that the organization can still try to do some quantitative analysis of the management team, but in fact, because of the different investment style, each organization has its own focus and unique methods.

It is noteworthy that the above attempts to quantify the method, which is essentially based on the discounted cash flow model for the deduction, usually have historical data of the enterprise more appropriate, because the discounted cash flow to the company's forecast has taken into account its future growth. But for startups, there is no historical data to refer to, but the evaluation project in the table can still be universal, we can adjust the initial quantified value (that is, the investor's feeling or subjective judgment), balance the team with the project "fit" and the team's "growth".

The valuation of the start-up team is often for financing, so does financing make the business grow? In the next chapter we analyze a real case: financing death.

To be Continued ...