For those of you who’ve not had the pleasure, Innovation Bay’s Angel Dinners bring together angels and entrepreneurs. To date, the organisation has assisted entrepreneurs raise over $10 million in seed investment as a result of these dinners. (Heard of Spreets? Yup? Innovation Bay kick started the group buying behemoths capital raising endeavours.)

Are you an entrepreneur in the high-tech space? Fancy a bit of funding? Then you may well be interested in pitching at this event, held at Table for 20 in Surry Hills, Sydney.

Here’s what you need to do before 5pm, Feb 10:

• Submit a 90-second video in any format – don’t exceed the time limit – to info@innovationbay.com
• Spill the deets on your business and why Innovation Bay should select you to take part in the next Angels Dinner
• Explain your value proposition in a strong and punchy format. Why are you poised to succeed and why would someone want to invest in your business?

Here are some tips:

• Business overview – who you are, what you do, your experience, your team
• What problem you are solving and do you offer a different solution
• The market – size and opportunity
• Investment – how much, what do you need it for, why should someone invest

The four pitches to receive the highest votes from Innovation Bay members will be invited to present at the Angel Dinner.

Talking Business is a podcast review of the Australian economy, presented by seasoned business journalists Leon Gettler and Garry Barker, produced in association with the RMIT College of Business. It features interviews with prominent business leaders and expert analysis from RMIT academics.

Start-ups and venture capital: a roundtable discussion

How great of a challenge do Australian entrepreneurs face in trying to set up their own businesses? Successful start-ups depend on venture capital to grow and thrive, yet many innovative idea-smiths fail to impress investors with an inadequate understanding of the commercial side of their businesses. In this new year, is there a disconnect growing between business founders and funds?

You won’t want to miss this special edition podcast, featuring eight (count ‘em, eight!) influential investors and start-up specialists and their insights on promoting a healthy venture capital industry in Australia.

The featured guests are:

• Vern Bowles, founder of Hatchtech
• Darren Kelly, CFO of Fibre-Tech
• Grant McLachlan, CEO of Neuprotect
• Chris Nave, co-founder of Brandon Capital Partners
• Michael Panaccio, Investment Principal at Starfish Ventures
• Brigitte Smith, Managing Director of GBS Venture Partners
• Stuart Snell, Communications Manager of AVCAL
• Katherine Woodthorpe, CEO of AVCAL

Press play to listen.

Talking Business Podcasts on iTunes

Garry Barker and Leon Gettler both have established careers with The Age newspaper, where Garry Barker is its Technology Editor, and Leon Gettler is a Senior Business Journalist. Gettler also works freelance on a number of other publications.

Independent game development studio Bubble Gum Interactive (BGI) is no exception. The Australian start-up’s tales of capital raising include near-hypothermia, an encounter with Interpol, and a handwriting analysis test (that they passed and scored $100k.)

Given that the company is due to launch it’s very own virtual world in late-2011 – a social, multiplayer online game for children called Little Space Heroes – all the trials and tribulations have paid off.

But what advice do the founders have for other newbie companies looking to raise moola for their entrepreneurial endeavours?

“We worked a lot before we sought funding… as we knew it was better to have a prototype that we could demonstrate rather than just show ideas or thoughts,” BGI founder Phil Mason says.

“The founders contributed the seed funding ourselves. [Then] we started our round one capital raise September last year, and only recently closed the round in August.”

“So it was a long raise, but we made it.”

VCs behaving badly…

BGI’s capital raising efforts also came with a big ole dollop of the aforementioned crazy.

“One of our VC investors chipped in their share based almost entirely on us doing a handwriting test. After reading our proposal, they asked us to write 100 impromptu words on any topic we like so that they could analyse our handwriting,” Mason says.

“The key team did this and the writing was sent away for analysis – to where and by whom we have no idea.”

“The VCs didn’t want to go through detailed due diligence or crunch our numbers – they called us one day and said we’d passed and we secured their investment. Next thing we know there was $100k in our bank!”

And…

“Another VC made us present to them outside, in the middle of winter on a freezing day. The VC was very rugged up and warm but we’d kind of expected to be pitching indoors in a meeting room.”

“Needless to say we were shivering away as we pitched. We’re still a little suspicious as to whether that was a test, to see how we could cope under a tough situation. When we went back for the next meeting we made sure to rug up!”

But wait, there’s more [and this one’s a doozy…]

“Surprisingly the online investment networks are prone to various scammers. It’s not really the network’s fault, and after being approached by our fair share of these, it seems very difficult to police,” according to Mason.

“Generally the scam is that they try and charge you money for insurance and legal expenses related to setting up a loan for you. During one of our reference checks, the consulate in question ended up warning us that the person’s investment company and their passport were completely illegitimate, referring us and the matter to Interpol.”

“It was pretty wild, but also really disappointing — you are already so financially vulnerable as a start-up, it’s sad how many scammers are out there trying to fleece entrepreneurs.”

Sweat equity and dodgy take-out

According to BGI director of marketing and community management, Paul Gray, the company’s journey has otherwise been similar to many start-ups – a lot of long hours and stodgy take-out.

“The team put in a huge amount of work in true start-up fashion – working on nights and weekends to pull together the plans to build the business from an idea into something real.”

“We all contributed a lot of sweat equity and ate a lot of pizza!”

Initially the company focused its capital raising efforts locally, tapping into existing networks for ideas and advice. After which, BGI started reaching out to the Australian VC and Angel community.

“Their proximity and ability to provide advice and support as well as funding was attractive, and so it made sense to raise locally,” Mason says.

While BGI went on to secure funding from international sources, including a Singapore-based VC and international Angels, the majority of their investment stems from local sources.

“We’re really grateful to the Australian Angel community; it’s inspiring to see the investment culture growth here and support for entrepreneurs, particularly in early stage where the risks are higher. It wasn’t like that ten years ago.”

The silver lining…

BGI found that good contacts could be made even out of less-than-stellar pitches.

“We had a disastrous day on our pitch to the Sydney Angels when we couldn’t show a demonstration of our game or even a video.”

“We had to wing it and were fortunate enough that one of the Angels present reached out to us in the coming days to arrange time for another demo and discussion.”

“Their participation got the ball rolling and really inspired others in the Sydney Angel network.”

“I think any entrepreneur who makes it through their selection process and receives funding should count themselves really lucky.”

For other companies intending to approach Angels and VCs, cap in hand, BGI advises first being able to clearly articulate the market opportunity and capitalisation path.

“You need to show that you understand where the market is, where it’s going and what it is that customers want. You have to explain why the customers you’re focused on would want to consider and then buy or use your product,” Gray says.

“Entrepreneurs will also need to show that they have a very real and clear plan on how to execute on their strategy.”

“On top of all that, my last word of advice would be to stick with it. You will inevitably get many more rejections than positive outcomes, but every successful business today would have had the same experience. Stay positive, stay focused, learn from your mistakes, nurture your team, and work hard to achieve your goals.”

Little Space Heroes teaser trailer

In this exclusive podcast for Anthill, 99designs co-founder Mark Harbottle speaks with James Tuckerman about the deal and what it means for the three year-old Melbourne company and its 26 employees.

Accel Partners invests in 99designs

The design crowdsourcing company was founded in Melbourne in February 2008, when co-founders Mark Harbottle and Matt Mickiewicz — the entrepreneurs behind sitepoint.com, Flippa.com and Learnable.com — spun it out of the SitePointForums.

99designs, which employs 26 staff in Melbourne and San Francisco, was bootstrapped and is profitable, and has enjoyed 120 percent year-on-year growth since launch.

According to the organisation’s website:

• 99designs has over 100,000 designers in 192 countries.
• The company has paid out over $19 million to designers to date.
• 99designs has hosted 75,000 projects, resulting in a new design uploaded every six seconds.
• There are more than 10,000 logos available for customization and sale in their logo store.

99designs is Accel Partners’ third investment in Australia, including Atlassian Software and OzForex. According to a media statement, the new capital will be invested in international expansion, platform development, community initiatives like design scholarships, and aggressive hiring in San Francisco and Melbourne.

Accel Partners has a history of investing in game-changing online businesses, such as Facebook and Groupon. When asked why it chose this particular company as an attractive investment, Accel partner Andrew Braccia explains, “99designs has quickly become a global market leader in its category, providing an invaluable service to its customers and their global community of design professionals.”

Michael Dearing, whose private investments include Admob (Google), Heroku (Salesforce.com) and Mix Labs (Twitter) will join 99designs’ advisory board, alongside investment heavy-hitters Dave Goldberg (Survey Monkey), Stewart Butterfield (Flickr, Tiny Speck), and Anthony Casalena (Squarespace).

“99designs caught my attention when I realised that nearly every one of the early stage companies and entrepreneurs I work with was turning to them to get great design work done,” said Dearing in a media statement.

“The team has created a marketplace that is easy for companies to get onboard with, and is also a boon for designers who can go after any of the hundreds of jobs open at any one time.”

A new index,  born of a partnership between AVCAL (The Australian Private Equity & Venture Capital Association), the association promoting the interests of the PE and VC industry in Australia, and Cambridge Associates, a provider of independent research and investment advice, concludes that Australian PE and VC deals have generated attractive returns when compared with the S&P/ASX 300 Index and the S&P/ASX Small Ordinances Index over the five year period ending June 2010.

According to the Index, Australia PE and VC have generated returns on the original investment at a ratio of 15.6 in one year and 6.3 in five years when compared to the 13.1 and 4.5 the S&P/ASX 300 and the 11.2 and 2.7 the S&P/ASX Small Ordinaries returned in one and five years.

“We are very pleased to see the data reflecting how Australian private equity as a whole has performed very well despite challenging market conditions,” said the Chief Executive of AVCAL Katherine Woodthorpe in a media statement.

“Nevertheless, while investments have picked up pace, and growth funds in particular have been active despite the global financial crisis, conditions in the fundraising, debt and exit markets remain challenging. However, as the exit market improves over time we should expect to see continued attractive returns to fund investors in general.”

AVCAL and Cambridge Associates will release performance data every three months and, as the industry grows, additional data will be published.

According to another index, the 2011 Global Venture Capital and Private Equity Country Attractiveness Index, Australia ranks as the 7^th most attractive country for investors in VC and PE.

Read the AVCAL and Cambridge Associate report here. Read Australia’s VC and PE country attractiveness profile here.

Photo by InfoMofo

Acquisitions, Capital Raising & Exits

This full day workshop, facilitated by Domenic Carosa, will provide you with the opportunity to learn all about Capital Raising, Acquiring Businesses and Exiting for maximum value.

Learn how to…

• Raise capital for your venture
• Acquire businesses using investor capital for funding
• Fund an acquisition
• Make money with acquisitions by arbitrating
• Merge to build significant value
• Set your business up so that it can be acquired for the maximum price
• Approach, negotiate and close a deal

Learn the benefits of growing a business using acquisitions as a strategy, and the processes involved in approaching, negotiating, closing and integrating acquisitions or mergers to build significant value into a business.

Places strictly limited to only 20 people per Masterclass.

Who should attend?

This program is specifically designed for entrepreneurs, business owners and their directors, business advisers and the senior management team who want to accelerate business growth by learning capital raising, acquisitions and exit strategies.

This Masterclass provides an opportunity to assess how sale ready your business is and what you can do to de-risk and build value, so you can grow through capital and acquisitions and exit for the highest possible price. And remember….

• This Masterclass is NOT for spectators
• It’s about making a difference to YOUR business.
• It is a PRACTICAL hands-on course.
• It is about getting RESULTS.

At this Masterclass, you will be provided with valuable information, in a structured format. You will be given personalised guidance. This event is for people with a desire to roll up their sleeves and focus on achieving their own commercial goals.

Work as a team. Bring a colleague Learn to do more with less

Who is Domenic Carosa?

Domenic Carosa, at age 35, is already a widely respected veteran of entrepreneurship and investment in Australia. In 10 years, he has completed over 50 acquisitions and exits. At age 25, he listed his first company, Destra Limited, on the Australian Stock Exchange.

At the time, he was the youngest CEO of a public-listed company in Australia. The company grew to revenues over $100m per annum and in 2008 and included Lachlan Murdoch and Paul Ramsay as shareholders.

Today, he is the founder and CEO of investment group Dominet and venture capital PDF the Future Capital Development Fund, investing specifically in internet ‘upstarts’.

Domenic Carosa Interview on Sky Business Channel

When is the Masterclass?

To find out whether this event is happening in your capital city or help Anthill bring this event to your neck of the woods, click here and follow the prompts.

Bring this event to your capital city.

Each topic is priceless. Get the full day for one low rate.

How much is the Masterclass?

Before you pull out your credit card, we must warn you, this event is NOT for spectators.

It’s a practical hands-on course. It is about getting results. You will be provided with valuable information, in a structured format, over a full day, in a workshop limited to 20 attendees. You will be given personalised guidance. It’s about being proactive. You will be working with others.

Testimonials

“Just wanted to say thanks for a great event last Friday. I really enjoyed the way Dominic presented using real life examples from his dealings. It was refreshing to have a presenter who was willing to detour off his notes for the benefit of the audience… Let me know if Brisbane get’s off the ground as I would be interested in attending again and I know at least one guy who’s a definite.”
Dave Hulsman – Managing Director, ucango.com.au (1 March 2011)

“It was great to learn alongside other business builders. Dom was able to focus on lessons of importance to the group — and the group was able to learn from the experiences of each other.”
James Tuckerman – Publisher, Anthill Magazine (1 March 2011)

Richard, Enable HR (25 February 2011)

Ross and John, Locomote (25 February 2011)

Work as a team. Bring a colleague Learn to do more with less

Speakers will include Tan Yinglan, head of projects for the National Research Foundation at the prime minister’s office in Singapore.

Yinglan is author of “The Way of the VC — Top Venture Capitalists on Your Board” and “Chinnovation — How Chinese Innovators are Changing the World.”

He will share his views about how Asia, Australia and the U.S. Silicon Valley can work together to create innovative, influential companies.

Another key speaker will be Mark Carnegie, who after enjoying a successful career in private equity is setting up a venture capital fund. He will talk about why he turned his energy to the venture capital industry and why he see it as the way forward.

For a full list of speakers and a program guide, visit avcjmivcc.com

What: Melbourne International Venture Capital Conference
Where: Park Hyatt Melbourne, 1 Parliament Square, East Melbourne
When: Tuesday, 8 March

Image by respres

Last week, we kicked off our 2011 calender in Melbourne, as the first of many events planned for throughout the year.

At the end of last week’s pitching session, I came away with the following five lessons and observations:

1. There is definite value in pitching unprepared.

One of the pitchers on the night had not pitched before. You could tell he was hungry to get in front of the crowd and tell his story.

This is because few of us ever get the opportunity to have our ideas challenged.

We sit in the dark trying to iterate and obliterate the risk.

But until we gather the courage to bounce our ideas off someone else, who doesn’t know us, our objectives and plans are rarely realistic.

2. Entrepreneurs sometimes misunderstand questions from an investor.

The investor’s question normally relates to return potential, and risk.

In most cases, and again on Thursday night, entrepreneurs respond by talking up the product features.

Features do not offset risk, and say nothing about the potential return.

3. It’s a great idea to form a support group.

Mothers have them, who give birth to babies. Why don’t entrepreneurs, who give birth to ideas?

A weekly or fortnightly get together with a group of people who you trust and can share your journey with is a great idea, even over skype if necessary.

There’s safety in numbers, yes?

4. Investors don’t do debt.

I am always amazed that aspiring entrepreneurs so often offer to take someone’s money in return for interest only and no equity.

That is what a bank does, or a loan shark. Investors want an upside in case you make it big.

5. In a startup with two or more founders, keep it simple.

For nascent ventures, 50/50 is simple and best.

Anything else is naïve and ill considered and forces you to value something that really has no value. It also creates animosity and distrust.

Place any investment by the founders into the business as a convertible note (debt that can become equity). Have some faith in yourself, and trust those you have chosen to go on the journey with.

Don’t get paranoid, have fun and don’t forget what’s important, health, family, friendship… stuff like that!

See yaz all in Hobart, March the 17th!

Peter Christo is a serial entrepreneur who has started over six businesses in an array of industries, including technology, consulting and hospitality. He also holds a Bachelor degree in Economics and Marketing and a Masters of Entrepreneurship and Innovation. He lectures at RMIT University. www.pitchclub.com.

“As alternative sources of funding (like Venture Capital) continue to decline, the importance of the Angel community to the commercialisation of Australian innovations grows in importance,” John Mactaggart, Chairman of the AAAI, said to the gathering of angel investors from Angel associations in China, Chile, Scotland, New Zealand, USA, India, Wales and Singapore.

An Angel investor is a person who provides capital for a business start-up, usually in exchange for ownership equity. Entrepreneurs looking to grow their early stage ventures usually turn to high-net worth individuals or Angels to assist with the growth of the business.

The conference, in its fourth year, was created as a forum for Australian angels to network, learn and showcase industry best-practice. The AAAI was launched in 2007 by serial angels Mactaggart and Jordan Green in response to a need for a national association able to provide research, policy guidance and education to Angel investors around Australia.

Day one provided three education workshops: The first, an introduction to Angel investing lead by Mactaggart, an experienced investor who is the founder of Brisbane Angels and includes Technology One (ASX:TNE) as one of his successes. Mactaggart was joined by co-presenter Chris Twiss from the New Zealand Seed Co-Investment Fund.

The second workshop, run by Jordan Green, founder of Melbourne Angels, was an advanced workshop taking an in-depth look into term sheets. The third workshop, run by Andrew Loch chairman of Gold Coast Angels, explored the process of conducting detailed and thorough due diligence.

“Angels represent a key link in the virtuous cycle of economic growth for our nation. Building on the success they have in their own careers, Angels bring their expertise, experience and networks together as the intellectual capital they invest alongside their financial capital,” Jordan Green said, in his capacity as Deputy Chairman of the AAAI.

Neville Sawyer, AM, Chairman of the local organising committee and Chair of the Hunter Founders Forum welcomed the 170 delegates to the conference at a reception held at the Newcastle Maritime Museum at the Wharf. Neville reminded delegates that Newcastle was the first trading port in Australia and has, as a result, been at the heart of commerce in Australia.

The welcoming dinner saw Stewart Craine from Anthill Cool Company winner Barefoot Power introduce its rechargeable solar LED lamp. The solar lamp provides a cheaper light source for families in developing nations. Many of the guests were so impressed by the device they purchased one for their own use.

The State and Federal Government together with a host of local Newcastle businesses were recognised for their assistance to the conference. The NSW Department of Industry & Investment through Regional Development Australia (Hunter Region) is the Platinum Sponsor of the conference.’

Image by metropilot

The announcement came barely a week after the revelation that another Australian group-buying business, Spreets, was acquired by Yahoo!7 for $40 million.

The purchase made waves on three fronts — it may have been the most profitable website flip in Australian history, Spreets managed this despite launching only 10 months earlier, and the deal was seen as the first big move in what is expected to be a consolidation of the nation’s group-buying market.

With the expected infusion of overseas capital, OfferMe said in its statement that it hopes to emerge as a major player in that consolidation.

“A number of overseas investors, including U.S.-based private equity and venture capital fund firms Insight Venture Partners and Bessemer Venture Partners, have approached OfferMe in the past year,” said OfferMe marketing manager Bekim Ahmedi. “We are happy to find the backing of the strategic investors who support OfferMe’s vision.”

The group-buying site explosion

Group-buying sites have proliferated in Australia over the past year following the explosive success of Chicago-based Groupon, which turned down a reported $6 billion acquisition offer from Google in December.

OfferMe is no johnny-come-lately. It was launched in August 2008, when the phrase “eCommerce 2.0″ had a fresh cachet.

The platform acts like a virtual trading floor, with registered users expressing an interests for certain products and sellers offering a price quote. OfferMe has attracted more than 500 Australian business to its deep-discount platform.

Sunny Sun, the chief architect of the OfferMe platform, previously oversaw the development of the E-Trade Japan portal.

Ahmedi said the company was not ready to disclose details, such the amount of funding, until the agreements were finalised. However, he added, “we continue to be confident that OfferMe will consistently deliver double-digit month-to-month growth.”

Why make the announcement now?

The reasons why private equity firms such as Insight Venture Partners and Bessemer Venture Partners might be interested in sites of this nature are clear.

While traditional media channels struggle to monetise their audiences, sites like Groupon are turning over hundreds of millions per annum ($800 million, according to Mashable) and are building extremely large databases, extremely quickly, in the process. (Spreets built an Australian database of 500,000 in 10 months.)

Furthermore, every private equity investor is looking for an exit. So, when Google offered Groupon $6 billion to come hang at the Googleplex, the private equity world sat up (and then promptly began writing cheques).

However, what is not so clear is why OfferMe might be making this announcement now?

While the mainstream media was quick to cover the media release (here, as one of the better reviews of the collection-buying ‘boom’), most failed to ask why a business might announce that it is on the ‘verge’ of a big deal?

Heck, Anthill’s sales staff are always on the ‘verge’ of a big deal. Every entrepreneur I have ever met is on the ‘verge’ of a big deal. But being on the ‘verge’ of a big deal is, indeed, not a big deal (and possibly not even news).

So, why would an organisation produce a media release and court the media’s attention about a deal not done?

We suspect that the more interesting story is more likely to be found in the motivation for the announcement, rather than in the announcement itself.

Why do you think OfferMe is inviting the media to tell the world it is on the ‘verge’ of a deal? Why would you distribute a media release about a deal not done?

More than a decade ago, he co-founded Destra, a groundbreaking media and entertainment company. It listed on the Australian Stock Exchange when he was just 25. One week after Destra’s prospectus cleared, the worldwide dot.com crash struck. Carosa successfully steered his company through the roiling waters that followed.

In 2008, Carosa and Destra were rocked by the collapse of Opes Prime, a broking firm that managed millions of shares of Destra stock. Carosa lost a controlling stake in the company and parted ways with Destra that same year.

Carosa got right back into the game with Dominet, a digital investment and consulting firm.

He then kicked his interests in venture capitalism up a notch with the co-founding of the Future Capital Development Fund. The fund has already invested in eight internet minnows that Carosa likes to call upstarts, as compared to startups. The difference: The former has been around for 12-plus months, developed some revenue and clients, and revved up its business model; the latter isn’t far removed from an idea on paper.

In an interview with Antill Editor-in-Chief James Tuckerman, Carosa expands on what he looks for in an upstart company, how he sizes up the people behind a would-be piece of Future Capital’s portfolio, and how Future Capital maps out the eventual sale of an acquisition.

Oh, and keep an eye out for a Special Guest Appearance at 5:23. Woof.

Anthill interviews Domenic Carosa

Not only did the online event registration and ticketing platform score an Honourable Mention in this year’s Cool Company Awards but the site has raised funding from Domenic Carosa’s Future Capital Development Fund (FCDF), Australia’s only internet-focused Pooled Development Fund.

Founded by web-developers Scott Handsaker and Andrew Edwards in November 2009, the business has turned over AUS$4million in transactions in the past 13 months. That’s approximately $300,000 per month.

Becoming quickly revenue positive has proven to be an important factor for Carosa when picking investments for FCDF. When the former Destra CEO announced plans to start the fund in March 2009, he spoke to Anthill about the process (How to launch your own venture capital fund).

In Carosa’s words, “FDCF invests in young but established internet companies, known as Upstarts, which have customers and transactional revenue and do not rely on advertising revenue.”

Since then, he has raised several millions dollars to invest into early stage online businesses and has plans to list the fund in late 2011 or early 2012. Hi portfolio includes  SMS Central, CheapHotels.com.au, OurWishingWell, MyGuestList.com.au, Domain Folio 1 and, also announced this month, Imorial.

Imorial.com is a site where memorials can be created at no cost for people and pets. Imorial.com has been operating for over two years and has a growing share of what the FCDF describes as a “significant market”. As well as a consumer focus, it has a business to business model currently establishing business relationships with funeral homes.

Valuation based on the physical assets of the business

Valuation based on the assets of the company is relatively straightforward.

This method is the “tried and true” method: objective, proven and certain.

However, it is also prone to significant understatement. As intangible assets become the dominant driver of value in the business, the valuation method based solely on assets will be less likely to be relied upon by buyers and sellers.

So why do Banks still use this method? Security! Banks are very risk averse and they can seldom sell an intangible if called upon to do so as a result of business closure.

Book Value

Book value represents the application of traditional accounting concepts. The term refers to the purchase or acquisition cost of an asset less any accumulated depreciation for that asset.

However when attempting to determine business value, “Book Value” is expanded to include all assets, less their accumulated depreciation and also less any liabilities. The short hand version is as follows:\

Assets less Liabilities equals Owners Equity [A – L = OE].

This is also referred to as “Equity”.

Benefits of using Book Value or Equity

1. Simple to calculate.
2. Tangible assets can be touched, sold, used.

Disadvantages

1. The assumption that the assets of a company are actually worth the cash that was spent on them can be wildly inaccurate. That’s one reason why we deduct accumulated depreciation.
2. We know that the value of the assets owned or held by a company does not reflect true value.

Where this knowledge is useful

Analysts refer to equity when forming comparative views. Examples are financial and value ratios.

Adjusted Book Value

There are many valid reasons to argue that book value does not reflect actual or even the realisable value of the assets in question, and consequently the book value should be “adjusted” up or down.

For example, property (generally but not exclusively) appreciates in value over time. As a consequence, making allowance for the changes in value (increases and decreases) can be justified in certain circumstances.

Another way of “adjusting” the book value of assets is to reflect the value of “intangibles” such as Goodwill, value of the company brand or patents and copyrights.

A third way of determining adjusted value is to consider what the market may pay at a “salvage” auction. Generally this is much less than even market value – everybody wants a bargain. This method is also known to many as “Fire Sale” price.

Benefits

When consistently applied over time, adjustments help business owners determine with greater certainty true “realisable value” for assets or classes of assets.

Adjustments can be made for changes in value over time (both appreciation and depreciation). A practical example of these “adjustments” is the willingness of accountants (normally very conservative professionals) to systematically adjust the books to recognise changes in risk, technology, value of the dollar, or for changes in wear and tear of assets.

Disadvantages

Due to the fact that any “adjusting” is based upon opinion, this method is always going to be open to debate and will rarely be accepted by opposing parties.

Valuation based on cash flow

The second category of valuation methods are made with reference to valuations based upon the profit-making potential of the business – sometimes referred to as cash flow methods.

Multiple of Earnings or Income Approach

This method is by far the most well known and easiest method to understand. It is used by real estate agents and accountants as a “rule of thumb” method for providing guidance.

The starting point is to ascertain the profit before tax for a twelve-month trading period. The method then multiplies that figure by anything from two times to nine times and even higher.

Example: let’s say a small sandwich bar and lunchtime coffee shop returned a profit of $30,000 for a year. If we used a multiplier of say three times (3 x $30,000) the value of the shop would be $90,000.

Benefits

This method is simple and straightforward. The debate occurs when owners who want the best sale price attempt to bump up the multiplier to 4, 5 or more. Or alternatively attempt to add back their wages, or interest, or even suggest that they take most of the money out in cash or consumables so the profit figure should be inflated by these sums.

Disadvantages

1. The “rule of thumb” is debatable, seldom being accepted without encouragement to take into consideration (once again) the intangibles like location, access to clients, newness, etc.
2. Vagueness in interpretation.

When dealing with investors who are active in the stock market, this phrase (earnings multiples) has a different meaning, so it is important to be clear on what you mean when you use this expression.

Discounted Future Earnings

This method approaches valuation by assuming the business will continue to operate, and will year after year make profits (and sometimes losses). Secondly, that these future profits or earnings must reasonably be converted into today’s monetary equivalent to arrive at a true value.

By adding up or summing all future period profit (loss) and applying a discount rate to convert the future into today’s equivalent dollar value, business value can be determined.

Benefits

The method takes into consideration the “time value of money”; i.e. any business investor would prefer to have the money today, rather than at some future time. The calculation “compensates” the investor for the time span involved.

The method permits the incorporation of a “risk premium”. For example, as an investor looks further and further into the future there is an increasing risk that the planned future earnings will not happen. The discount rate allows for this uncertainty (or risk) to be built into the valuation.

Disadvantages

The risk premium is a balance of opinion and fact and can be hotly disputed by opposing sides.

Discounted cash flow

As with discounted future earnings, pure (actual) cash flows are estimated to continue to occur in the future, and when converted into today’s cash equivalent, can assist in estimating the value of a business.

Benefits

This valuation method is generally used when attempting to value new businesses. A company that is presently selling product or services has some accounting evidence to provide certainty in respect of revenue, costs and net profit. A new business however has significant uncertainty in respect for the assumptions made leading up to “profit”. Therefore using only cash flow, some of the uncertain assumptions are eliminated.

Disadvantages

As with Discounted future earnings, the method is based on opinion, and risk. Significant debate can and does occur between parties on exactly how much to “discount” the numbers provided within the cash flow forecasts.

Capitalised Earnings

Using the “Capitalised Earnings” approach is the most difficult to use, and to explain.

Firstly it is necessary to work out the rate of return (interest rate) that will be used to reflect the business owner’s risk. Then the earnings are divided by that capitalised rate. The difficulties arrive in explaining the variety of mathematical formulas used for determining the rate, and then the earnings.

The more risky the business, the industry and even the broader economy, the higher is the required rate of return that should be used.

Similarly the calculation of the “true” income and costs can become quite complex. For example income can be adjusted to reflect “free” cash flow, profit before tax, after tax, or before dividends or after dividends.

The true carrying value of the assets being used to actually earn the revenue is also open for debate. What should or should not be included is dependent upon the bias of the “expert” providing the opinions.

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Now that you know the most practical valuation methods and the caveats of using each, we can touch upon the last requirements of the assessment process. In the final instalment, we’ll focus on the key financial ratios and explain their importance to a business valuation.

Kevin Lovewell is the owner of Corporate Solutions (Aust) Pty Ltd, a Fellow of the Institute for Independent Business and a CMT accredited Master Mentor.

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Seven highly innovative companies pitched for the prestige, accolades and enormous novelty cheque awarded to the overall winner (along with $100,000 in real Australian currency, of course).

Finalists included a wheelchair technology that can be steered by thought, a knee tissue transplant alternative, a vaccine patch, an online management tool for the medical profession and that’s just to whet your appetite. To check out the full seven, watch the videos below.

However, as Christopher Lambert once said, there can be only one.

In its 10th year, the Enterprize Business Plan Competition, a national program conducted by the University of Queensland Business School, awarded its top prize to Southern Innovation, a startup company commercialising an industry changing technology that will dramatically improve the performance of radiation detectors. You might find the name familiar. Southern Innovation was recognised as a Finalist in Anthill’s 2009 Cool Company Awards.

Does this company deserve $100k in seed funding? Heck, yeah! Now watch the clip.

Southern Innovation, Winner, Enterprize Business Plan Competition 2010

Southern Innovations core technology SI-Toro®, the subject of more than ten years of research and development and aims to improve the performance of radiation detectors.

Vaxxas, Finalist, Enterprize Business Plan Competition 2010 (Women in Technology, Audience Choice Award)

Vaxxas is developing a needle free vaccine delivery solution, the Nanopatch, which, in work to date, has demonstrated unprecedented performance in amplifying vaccine efficacy by 150-fold.

ReadCloud, Finalist, Enterprize Business Plan Competition 2010

ReadCloud turns existing laptops and mobile devices into ebook readers.

MiniGen, Finalist, Enterprize Business Plan Competition 2010

MeniGen is commercialising Actiform Meniscal Replacement Product for the repair of damaged and torn menisci in the knee.

SpecialistLink, Finalist, Enterprize Business Plan Competition 2010

Bringing eHealth to the Underserved $4.1B Allied Health Profession. SpecialistLink is Australia’s first e-health service targeting the $4.1B Australian allied health profession, enabling electronic health records and communications and remote pre-diagnosis.

Aviator, Finalist, Enterprize Business Plan Competition 2010

Aviator is commercialising the development of hands-free control systems for devices, allowing the user to harness the freedom of their mind.

Lachesis , Finalist, Enterprize Business Plan Competition 2010

Lachesis is a start-up venture to commercialise a cuffless, compact, wearable device that can monitor Heart Rate, Blood Oxygen Levels, Mean Arterial Blood Pressure, Systolic Blood Pressure and Diastolic Blood Pressure simultaneously.

UQ Business School’s Enterprize Competition is open to all Australian entrepreneurs with a business idea that is ready to launch. Now in its 10th year Enterprize provides seed capital to promising start-up companies and gives participants the opportunity to have their business plan reviewed by potential investors. To find out more about the awards (and start getting your business plan ready for next year), visit: http://enterprize.uq.edu.au/.

The ASSOB, the National Stock Exchange’s largest capital-raising platform for showcasing unlisted companies for investors, posted a $186,000 profit for the fiscal year ended June 30.

Sure, it doesn’t sound like much. But compared to last fiscal year’s loss of $4.8 million… well… Yow!

That’s $14,000 shy of a $5 million turnaround.

To be precise, the fiscal 2010 profit was $121,000 after taxes, after including non-recurring legal expenses of $183,000.

Paul Niederer, the board’s CEO, said there has been a big upswing in recent months in small- and medium-size enterprises seeking to use the board’s capital-raising platform.

“It’s refreshing that a number of new business listing on the ASSOB platform have already raised around $600,000 to $1 million before going live,” Niederer said.

“We see this and other indicators that the SME market is really starting to get back to business and are looking for ways to fund growth,” Niederer said.

To date, almost $120 million of equity capital has been raised, using a network of “accredited ASSOB sponsors” and more than 15,000 subscriber investors from numerous industries.

ASSOB: www.assob.com.au

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