FIn this fourth installment of the series, we delve into how the EIC Fund evaluates projects for equity investment within the Revised EIC: Methods and Strategies.
The Valuation Methods
Valuation methods may vary depending on the business models, markets and sectors, technology and other aspects to consider.
While no standard practice exists, investors commonly employ certain methods, as outlined in the official documents, listed below:
Multiples of Earnings: for a start-up, it is usually considered a Times Revenue Method(sometimes applied on an expected value). It indicates a business’s maximum worth by assigning a multiplier to its current revenue; multiplier benchmarks vary according to industry, economic climate, and other factors.
Fair Market Value: It determines a company’s value by comparing it to similar sold businesses or stock-listed peer companies.
Book Value: The calculation considers the business’s equity value. It accounts for market value of assets and intangible assets. Subtract liabilities, potentially adjusting for significant changes in debt costs.
Price of recent investment: It considers a recent investment’s valuation in the company. It estimates the current valuation from that reference point’s value creation.
Discounted Cash Flow: it values a business based on its projected cash flow discounted by a factor (usually the average cost of capital); the result is present value. It is more often applied to companies in growth or mature stage as cash flow generation is needed.
Other asset-Based methods, such as among several other asset-based approaches there is the “liquidation value”.
Please note that these methods are market references for valuation purposes and tools for companies in their negotiations with potential investors.
Often, these negotiations are time consuming and interfered by intangible factors such as bargaining power, which will significantly influence the valuation.
Equity/Equity-Type Investments
An emerging business may use different types of instruments to funds its growth.
The financial instruments used by the EIC Fund will take the form of equity or quasi-equity investments. In this case, standard equity and quasi-equity instruments are outlined in the official document as follows:
Common shares: represent an ownership interest in a corporation, including an interest in earnings and dividends. They could have either voting or non-voting rights and could be classified with distinct voting privileges for each class. In the VC market, founders and management team usually hold common shares.
Preferred shares: represent a hybrid in the sense that it is an equity interest with debt-type features such as seniority at dividend payments and liquidation proceeds. VC funds usually hold preferred shares.
Convertible instruments: Investors use instruments like convertible loans/bonds/notes, participation rights, SAFEs, etc. These have a convertibility feature tied to a debt instrument. Companies find them attractive as they delay dilution until the next equity funding round. Such instruments provide flexibility, allowing investors to shift risks and rewards to a future point after the initial investment.
Other equity-type instruments appropriate to achieve the objectives of the EIC Accelerator
The EIC Fund’s investment is patient capital. It has a long average return perspective (7-10 years), up to 15 years case-dependent.
The exit strategy is determined individually, considering business plan specifics, industry, holding period, as well as development compared to initial milestones. Exit routes may include either IPOs, management buyouts, secondary sales or liquidations.
It is implicit that the EIC Fund’s main objective is “impact investment” rather than maximizing return on the investment.
Further information…
Here you can find a list of some of the beneficiary companies for Equity Investments. As mentioned on the website, external experts conduct a comprehensive evaluation, the EIC Fund Investment Committee oversees due diligence, meanwhile the EIC Fund Board of Directors makes the final decision
Overall, the changes have lead the revised EIC methods and strategies to greatly change.
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