Master

Thesis

Startup Valuation

Authors:
Aleix Roig, Grande École – Major in Finance
Carlos Vicén, Grande École – Major in Finance


Under the supervision of:
Prof. Patrick Legland, Affiliate Professor – Finance Department

May 2020


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 Acknowledgements

This research paper would not have been possible without the help of many
people that collaborated directly or indirectly on its realization. Hence, through
these lines, we would like to express our gratitude to them, letting them know how
important have been to us not only during the thesis realization process, but also
throughout all our master’s experience.

First, we would like to thank our thesis supervisor Mr. Patrick Legland for his
invaluable contribution in this thesis, giving us important and detailed guidelines,
orientation, and material, and helping us tremendously during the realization of this
research paper.

We would also like to thank our unique friends and colleagues from HEC for
always giving us their view on our thesis discussions and showing us their best both
professionally and, more especially, personally.

Finally, we want to thank our families for giving us the opportunity to be part
of HEC Paris, an experience that goes well beyond the academic aspect, becoming
one of the greatest milestones in our professional and personal lives.

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Table of Contents

LIST OF FIGURES ................................................................................................................... 7

1. INTRODUCTION ............................................................................................................ 9

2. STARTUPS ..................................................................................................................... 10

2.1. DEFINITION ............................................................................................................................. 10

2.2. ECOSYSTEM ............................................................................................................................. 11
2.3. MATURITY STAGES ............................................................................................................... 15
2.3.1. Pre-Seed Stage ................................................................................................................... 15
2.3.2. Seed Stage ............................................................................................................................ 16
2.3.3. Early Stage .......................................................................................................................... 16
2.3.4. Growth Stage ...................................................................................................................... 17
2.3.5. Expansion Stage ................................................................................................................ 17
2.3.6. Exit Stage ............................................................................................................................. 17
2.4. FINANCING .............................................................................................................................. 18
2.4.1. Equity ..................................................................................................................................... 18
2.4.1.1. Pre-Seed .................................................................................................................. 18
2.4.1.2. Seed Round ............................................................................................................. 19
2.4.1.3. Series A .................................................................................................................... 19
2.4.1.4. Series B .................................................................................................................... 19
2.4.1.5. Series C and More ................................................................................................ 20
2.4.2. Debt ......................................................................................................................................... 20
2.4.2.1. Venture Debt ......................................................................................................... 21
2.4.2.2. Working Capital Line of Credit ...................................................................... 21

3. STARTUP VALUATION .............................................................................................. 22

3.1. TRADITIONAL VALUATION METHODS .............................................................................. 24

3.1.1. Discounted Cash Flow ..................................................................................................... 24
3.1.2. Comparable Companies ................................................................................................. 31
3.1.3. Precedent Transactions ................................................................................................. 32
3.1.4. Real Options ........................................................................................................................ 33
3.1.5. Book Value ........................................................................................................................... 38

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 3.1.6. Liquidation Valuation ..................................................................................................... 39
3.2. NON-TRADITIONAL VALUATION METHODS .................................................................... 40
3.2.1. Venture Capital .................................................................................................................. 40
3.2.2. Berkus .................................................................................................................................... 42
3.2.3. Scorecard ............................................................................................................................. 44
3.2.4. First Chicago ....................................................................................................................... 46
3.2.5. Risk Factor Summation .................................................................................................. 49
3.2.6. Cost-to-Duplicate .............................................................................................................. 50

4. CASE STUDY: HELLO FRESH .................................................................................... 51

4.1. MAIN GOALS OF THE CASE STUDY ....................................................................................... 51

4.2. COMPANY INTRODUCTION ................................................................................................... 51
4.2.1. General information ........................................................................................................ 51
4.2.2. Business Activities ............................................................................................................ 53
4.2.3. Company’s Facts and Figures ...................................................................................... 55
4.2.4. Company risks .................................................................................................................... 59
4.3. INDUSTRY OVERVIEW ........................................................................................................... 60
4.3.1. Industry’s Facts and Figures ........................................................................................ 60
4.3.2. Competitive Landscape .................................................................................................. 62
4.3.2.1. Meal-kit providers ............................................................................................... 63
4.3.2.2. Supermarket Chains ........................................................................................... 63
4.4. COMPANY VALUATION ......................................................................................................... 64
4.4.1. Discounted Cash Flows ................................................................................................... 65
4.4.2. Comparable Companies ................................................................................................. 70
4.4.3. Real Options ........................................................................................................................ 74
4.4.4. Book Value ........................................................................................................................... 76
4.4.5. Venture Capital .................................................................................................................. 77
4.4.6. First Chicago ....................................................................................................................... 78
4.4.7. Risk Factor Summation .................................................................................................. 79
4.4.8. Valuation Football Field ................................................................................................ 81

5. CONCLUSIONS .............................................................................................................. 85

APPENDIX .............................................................................................................................. 87

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 1. HELLOFRESH INCOME STATEMENT ........................................................................................ 87
1.1. Weighted Average HelloFresh Income Statement ............................................. 87
1.2. JP Morgan HelloFresh Income Statement – Optimistic Scenario ................ 87
1.3. Morgan Stanley HelloFresh Income Statement – Neutral Scenario ........... 88
1.4. Barclays HelloFresh Income Statement – Pessimistic Scenario ................... 88
2. HELLOFRESH BALANCE SHEET ............................................................................................... 89
2.1. Weighted Average HelloFresh Balance Sheet ...................................................... 89
2.2. JP Morgan HelloFresh Balance Sheet – Optimistic Scenario ......................... 89
2.3. Morgan Stanley HelloFresh Balance Sheet – Neutral Scenario ................... 90
2.4. Barclays HelloFresh Balance Sheet – Pessimistic Scenario ............................ 90
3. HELLOFRESH CASH FLOW STATEMENT ................................................................................ 91
3.1. Weighted Average HelloFresh Cash Flow Statement ........................................ 91
3.2. JP Morgan HelloFresh Cash Flow Statement – Optimistic Scenario ........... 91
3.3. Morgan Stanley HelloFresh Cash Flow Statement – Neutral Scenario ..... 92
3.4. Barclays HelloFresh Cash Flow Statement – Pessimistic Scenario ............. 92

BIBLIOGRAPHY .................................................................................................................... 93

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List of Figures

FIGURE 1: VOLUME AND NUMBER OF STARTUP EXITS WORLDWIDE (2011-2018) ....................... 12

FIGURE 2: WORLDWIDE DISTRIBUTION OF STARTUPS BY INDUSTRY (2017) .................................. 13
FIGURE 3: STARTUP MATURITY STAGES ................................................................................................. 15
FIGURE 4: TYPE OF VALUATION METHODS USUALLY USED REGARDING STARTUP MATURITY STAGE .. 23
FIGURE 5: STARTUP VALUATION METHODS COMPARISON ....................................................................... 23
FIGURE 6: BETA ADJUSTMENT SCHEME FOR TECH STARTUPS ............................................................. 29
FIGURE 7: REAL OPTIONS DECISION TREE EXAMPLE ............................................................................... 34
FIGURE 8: BINOMIAL REPRESENTATION FOR BONDS, STOCKS AND CALL OPTIONS ............................... 35
FIGURE 9: SCORECARD COMPARISON FACTORS AND RESPECTIVE RANGE .............................................. 45
FIGURE 10: SAHLMAN, SCHERLIS FIRST CHICAGO METHOD SCENARIO PROBABILITIES ...................... 48
FIGURE 11: HELLOFRESH LOCATIONS ...................................................................................................... 52
FIGURE 12: HELLOFRESH PRODUCT ......................................................................................................... 54
FIGURE 13: HELLOFRESH REVENUE EVOLUTION (2014-2021) .......................................................... 55
FIGURE 14: HELLOFRESH MARGINS EVOLUTION (2014-2021) .......................................................... 56
FIGURE 15: HELLOFRESH COSTS BREAKDOWN (2017) ......................................................................... 57
FIGURE 16: HELLOFRESH COSTS AS A PERCENTAGE OF SALES EVOLUTION (2015-2021) ................ 57
FIGURE 17: HELLOFRESH ECONOMIC BALANCE SHEET (2015-2021) .............................................. 58
FIGURE 18: HELLOFRESH CAPITAL RAISING (2012-2016) .................................................................. 58
FIGURE 19: HELLOFRESH PRE-IPO NON-DILUTED SHAREHOLDER STRUCTURE (2017) ................... 59
FIGURE 20: FOOD AND MEAL-KIT INDUSTRY VOLUMES [2016 AND 2021] ........................................ 61
FIGURE 21: HELLOFRESH WEIGHTED AVERAGE SCENARIO INCOME STATEMENT ................................ 66
FIGURE 22: HELLOFRESH FREE CASH FLOWS CALCULATION .................................................................. 67
FIGURE 23: HELLOFRESH DISCOUNT RATE CALCULATION ..................................................................... 67
FIGURE 24: HELLOFRESH TERMINAL VALUE CALCULATION ................................................................... 68
FIGURE 25: HELLOFRESH DCF VALUATION MODEL ............................................................................... 68
FIGURE 26: HELLOFRESH DCF IMPLIED VALUATION ............................................................................. 69
FIGURE 27: HELLOFRESH ENTERPRISE VALUE (EURM) SENSITIVITY TABLE ..................................... 69
FIGURE 28: HELLOFRESH SHARE VALUE (EUR) SENSITIVITY TABLE .................................................. 70
FIGURE 29: CORRELATION BETWEEN CAGR FY16-19 AND EV/SALES MULTIPLE ........................... 72
FIGURE 30: HELLOFRESH COMPARABLE COMPANIES ANALYSIS ............................................................ 72
FIGURE 31: PUBLIC COMPS VALUATION MODEL ...................................................................................... 73

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FIGURE 32: HELLOFRESH PEERS’ EV/SALES MULTIPLES ...................................................................... 73
FIGURE 33: REAL OPTIONS SHARE PRICE COMPUTATION UNDER UP-STATE AND DOWN-STATE ...... 74
FIGURE 34: REAL OPTIONS CURRENT SHARE PRICE COMPUTATION ...................................................... 75
FIGURE 35: REAL OPTIONS VALUATION MODEL ...................................................................................... 76
FIGURE 36: BOOK VALUE VALUATION MODEL ......................................................................................... 77
FIGURE 37: VENTURE CAPITAL VALUATION MODEL ............................................................................... 78
FIGURE 38: FIRST CHICAGO SCENARIOS DEFINITION .............................................................................. 78
FIGURE 39: FIRST CHICAGO VALUATION MODEL ..................................................................................... 79
FIGURE 40: RISK FACTOR SUMMATION RISK ASSESSMENT .................................................................... 80
FIGURE 41: RISK FACTOR SUMMATION VALUATION MODEL .................................................................. 80
FIGURE 42: SUMMARY TABLE OF HELLOFRESH ENTERPRISE VALUE FOOTBALL FIELD ANALYSIS ..... 81
FIGURE 43: HELLOFRESH ENTERPRISE VALUE FOOTBALL FIELD GRAPH ............................................. 82
FIGURE 44: ACCURACY OF EACH METHOD ANALYSIS FOR ENTERPRISE VALUE .................................... 83
FIGURE 45: SUMMARY TABLE OF THE HELLOFRESH SHARE VALUE FOOTBALL FIELD ANALYSIS ....... 83
FIGURE 46: HELLOFRESH SHARE VALUE FOOTBALL FIELD GRAPH ....................................................... 84
FIGURE 47: ACCURACY OF EACH METHOD ANALYSIS FOR SHARE VALUE .............................................. 84
FIGURE 48: HELLOFRESH SHARE PRICE EVOLUTION .............................................................................. 86

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1. Introduction

Startups represent one of the most iconic business sectors of our time, always
present from the news to the universities. Many of the most valuable companies,
either in financial terms or regarding their impact and presence in the society, have
made their way from startups to global leaders, completely reshaping industries and
changing our daily life and, and why not to say it, the life of their founders, making
them more than rich.

From the investors point of view, this niche has increasingly been a hot market
with extremely good opportunities for wise –and lucky– investors to capture
massive returns, making the venture capital industry one of the most renown in
finance and one of the most desirable places to work in for many finance lovers.

The need to raise capital to fuel the growth and expansion of the startups and
the need to invest the capital that venture capital firms collect from their investors
connect these two groups. However, in either case they must face a challenge to
culminate this symbiotic relationship: the two parts need to agree on the fair value
of the company.

This is a crucial point for both startups and venture capitalists and it can be
managed through a correct company valuation using different methodologies
adapted to the startup ecosystem. Hence, the principal goal of this research paper is
to understand how to value a startup and which are the most common
methodologies to do so. Anyone interested in finance is aware of the typical
valuations methods to try to come up with the fair value of a company, however the
particularities that the startup ecosystem presents makes this process especially
difficult and challenging in this industry.

So, we aim to firstly understand what are the specificities that startups entail,
and how they translate into the different valuation methods that can be used in
order to overcome the issues that one has to face to proceed with the valuation of a
startup. Moreover, we will test this process with our own experience by carrying out
the valuation of HelloFresh, a startup that went public in 2017.

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2. Startups

2.1. Definition

Nowadays, startup is a word widely and mainstream used. However, the

concept behind this word is usually vague or not very clear. Many people use the
terminology startup to refer to young companies founded by one or more
entrepreneurs, which have experienced very high growth trends, and operate in any
technological field.

Nevertheless, there are many companies with simple and genuine ideas
operating in different sectors that objectively and rationally should be considered
as startups, but they fall out of this category by most of the people. This is because
these companies do not match the criteria stated above since, for instance, they do
not involve technology in their operations. Similarly, there are many companies that
fall into this category which should not be considered as such.

In this context, we will start by setting a clear ground for our analysis and
defining precisely what does startup mean to us. According to the concepts seen in
class, there are three main criteria that every company must meet to be considered
a startup: (i) Binary model; (ii) Negative free cash flows; and (iii) Equity financed.

Firstly, it must not be possible to clearly state that the idea that the company
puts in practice through its operation will or will not work, i.e. it has a binary
business model resulting in a binary success.

Secondly, the company must have experienced negative free cash flows and
accumulated losses during its life, i.e. it is not profitable yet.

Thirdly and lastly, the company must be financed with equity. Usually it is only
equity financed, however it is possible that the startup presents a non-significant
amount of debt which may come from, for instance, convertible credits or, in case of
social enterprises, aid from governments or foundations.

Hence, according to the classification criteria stated above, many companies

that are considered startup should not be told as such, since their business models

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are based in a reliable success proved from the experience of other companies with
similar operating methods. Meanwhile, companies operating beyond the
technological sector, which usually are set apart from the startup classification,
should be considered as startup as long as they meet the criteria stated before.

2.2. Ecosystem

Despite the dot com bubble originated at the end of the nineties and its
subsequent downfall, the creation of new and innovative companies has been
occurring during the last 30 years.

While in the olden days it was extremely difficult to create a successful business
without an important amount of capital to face the initial set-up costs, nowadays
startups can be initiated without incurring in large initial expenses. The
technological improvement occurred during the last three decades, combined with
the globalization and the increase of resources such as information access, data
analysis and the increase of customer base, have boosted the creation of new
startups, which provide products and –mostly– services to the emerging needs of
the different societies.

As startups need a certain amount of capital to start their operations, a fact that
proves the upward trend of the startup ecosystem is the increase of the investments
made on startups. Investment in new and innovative companies have recently
become very popular, with an increasing number of investors which recognize the
unique potential fortune to be made by investing or acquiring the right startup. As a
matter of fact, between 2012 and 2017, startup funding across all industries and
regions grew by 50 percent, with special sectors such as artificial intelligence,
robotics and advanced manufacturing that presented important funding increases.

The increase on the creation of new startups can also be identified by the
number of exits of venture-backed startups. Although only 0.2 percent of new
businesses receive venture capital funding, around 50 percent of the recent US IPOs
are venture-backed.

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 Volume and number of startup exits worldwide (2011-2018)
300 4500

250 4000

3500
200
3000
150
2500
100
2000
50 1500

0 1000
2011 2012 2013 2014 2015 2016 2017 2018

Volume of startup exits ($bn) Number of startup exits

Figure 1: Volume and number of startup exits worldwide (2011-2018)

Source: Statista, Global startups – Statistics & Facts

While the technological improvements and digital transformation play an

important role in the direction of how the markets are oriented and operated, these
factors also influence on the types of startups released in the market. In fact, the
appearance of new industries –such as instant video-messaging– is also linked to
the appearance of new startups operating in these sectors to cover new social needs.
But not only startups are created from scratch to cover the new demands of the
evolving society. Also, there are entrepreneurs who seek to optimize existing
business models with the aim to offer new solutions –such as fintech compared to
the traditional banking system– adapting existing business models to the evolving
social requirements and demands of the society.

Regarding the worldwide distribution of startups by industry, according to the

data shown in Figure 2, in 2017 most of the startups were directly or indirectly
linked to technology, being fintech, healthcare and artificial intelligence the sectors
with more operating startups.

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 Worldwide distribution of startups by industry (2017)

Agtech
Cybersecurity
Advanced manufacturing and robotics
Blockchain
Cleantech
Edtech
Adtech
Gaming
Artificial Intelligence
Life sciences and healthcare
Fintech

0% 1% 2% 3% 4% 5% 6% 7% 8%

Figure 2: Worldwide distribution of startups by industry (2017)
Source: Statista, Global startups – Statistics & Facts

Regarding the current Coronavirus crisis in which we are immerse, although it

is too early to extract strong conclusion with actual data, there are some key
consequences that are already possible to note.

In terms of funding, there was a high drop of financing rounds closed in the first
two weeks after the World Health Organization declared the spread of the virus as
a pandemic, the ecosystem was almost frozen. After this initial period things have
started to improve, especially for specific industries that are expected to benefit
from the crisis such as the healthtech and the medtech, and online delivery
industries.

Nevertheless, despite the pick-up and the traction gain of some sectors, overall
the activity has clearly slowed down, with startup investors still looking for
attractive opportunities, but reducing both the number of investments and the
money deployed on them, i.e. fewer rounds with lower valuations. In this sense,
Sander Vonk, Managing Partner at Volta Ventures says that “at Volta Ventures we
expect a steep decline in the number of deals in Q2 with careful recovery in Q3 and
Q4 2020 depending on the duration of the financial impact of the new coronavirus”,
feeling shared by his fellow Romain Lavault, General Partner at Partech, who states
that “most startups should expect a “new normal” with fewer rounds, more
syndicated deals and probably more caution on valuations”. In this regard, a survey

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among venture capital practitioners and professional investors carried out by the
Spanish financial newspaper Expansión, estimates the drop in valuation between
20% and 60%, depending on the industry and stage of the startup.

In addition, according to many other venture capitalists interviewed by EU-

startups magazine, there is a consensus in which early stage startups, especially pre-
seed and seed –explained later in Section 2.3–, are the ones which will clearly
struggle the most for raising funds and to set proper valuations. The progress under
this situation will be slow and it will last at least for the next six months, but it will
not be solved until the confidence returns to stock markets, and they are almost fully
recovered. Obviously, this is because of the addition of a high uncertainty factor to
the already very uncertain business models of these early stage companies.

However, that said, as Oliver Richards, Partner at MMC Ventures, states, “great
entrepreneurs building great businesses will continue to raise capital to grow
throughout the pandemic and after it”. Then, even though the troublesome situation
for the startup ecosystems that the Coronavirus implies, it might also be a great
opportunity to invest against fewer competitors in best-in-class companies, at a
lower valuation than before, with the hope to enter in a normalized situation at the
end of the investment horizon.

All in all, although the appearance of startups can happen in almost every
sector, the vast majority of new startups is concentrated in technological industries,
which, at the same time, happen to be low cost sectors at the early stages, enhancing
the attraction of talented entrepreneurs without the need of large amounts of capital
to set up the business. Regarding the difficult situation in which we are
unfortunately immerse due to the Coronavirus, despite the fact that the startup
ecosystem will clearly suffer in forms of fewer financing rounds closed at lower
valuations, as Warren Buffet often says, to make money you need to buy cheap and
sell expensive, and this might be a good time to buy cheap if you have the required
capital to invest.

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2.3. Maturity Stages

As we previously said in Section 2.1, startups share common criteria which let
us identify and classify them. However, not all startups are in the same state of
maturity, and every one of these maturity stages has its own very different needs,
objectives, and particularities.

Although there is no absolute agreement on startups maturity stages, there

seems to be an accord between practitioners and academics where we can
differentiate six states of maturity, which are shown in Figure 3 and explained
afterwards.

Figure 3: Startup maturity stages
Source: HEC Paris, Startup Valuation course

2.3.1. Pre-Seed Stage

The Pre-Seed stage is the stage of the business idea origination. At this stage,
the company still has not developed any minimum viable product nor a validated
business model. At this time founding and management team is formed, the
Partnership Agreement is signed, and the roadmap to transform the non-developed
idea into a reality is conceived.

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 In short, the company has a raw idea without development, and seeks for the
validation of its idea from its potential future customers. The investors at this stage
use to come from the entrepreneurs through own funds and from their relatives like
family and friends.

2.3.2. Seed Stage

The Seed stage is crucial for the success for the startup since it is conceived as
the point in which the idea comes true. At this point, the main objective is to expand
the idea in an adequate manner and to validate the business model, developing a
minimum viable product which will allow the company to test the product in the
market with real customers.

Hence, we include in this stage startups that have already carried out an MVP
and keep looking for validating both their business model and product with the
market. Seed investments may continue to come from friends and family, however
business angels and seed stage venture capital funds tend to be the most relevant.

2.3.3. Early Stage

The Early stage represents the phase in which the product is improved. At this
stage, the company is able to collect feedback from its customers and to produce
some metrics which will reflect its performance. Using them through an iterative
process, the startup must be able to correct the failures of the product and to
transform the minimum viable product from the previous stage into a tangible
product that is approved by the market and easily scalable. In addition, the company
must establish its first commercial agreements and define the growth strategy that
it will follow during the next stages.

To sum up, Early stage startups own an already developed product and are now
looking for boosting their growth and establishing commercial partners. The typical
investors are business angels and especially venture capital funds.

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2.3.4. Growth Stage

In the Growth stage the company must focus on its growth and improving its
profitability and customer base. At this stage, the startup must already have
developed a market-validated product, recurrent clients and positive metrics, and
the growth strategy must be well defined. Without any doubt, cash flows turn to be
the crucial parameter at this stage –in terms of both size and stability– in order to
ensure the external financing.

So, startups included in the Growth stage have validated their product with
their customers yet, they are massively growing and fuelling this growth with the
expansion of their team and operations. At this stage, the investment is already very
relevant, so venture capital funds are the main players.

2.3.5. Expansion Stage

The Expansion stage is that in which the company seeks to go beyond its
consolidated market and expand its customer base. A simple way of doing so may
be through partnerships or agreements with large companies which operate in
different countries or sectors, however in this stage the uncertainty and the risk is
massive because a bad investment decision can be fatal. To support these
investments, external financing remains crucial to allow the company to expand its
operations and to fuel its growth strategy.

In short, the startups own a validated product and is now focusing in the
international expansion of their operations either organically or inorganically
through agreements or acquisitions. To do so, massive funding injections are
required, usually provided by venture capital funds.

2.3.6. Exit Stage

The Exit stage is that in which the company is sold. Although some startup
founders seek to remain as the owner of their company aiming to create a high-value
and long-run company, usually the last step of successful startups is exiting the
company.

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 This exit may be carried out through Buy-outs or IPOs. The first one refers to
the direct sale of the startup to a big company, may it be because it operates in the
same sector and wants to improve its positioning in the market or because it sees
complementarities in the two business to be exploited. It is also possible for service
providers such as AI or cybersecurity startups that they are acquired to be improved
internal processes of the big player. In the case of the IPO, the company simply goes
public through its sale at the stock market.

2.4. Financing

As we have seen so far, one of the key drivers of success for startups is their
ability to raise funds to fuel their growth and accomplish their growth strategy
milestones. These companies can rise funds through different processes.

2.4.1. Equity

As seen in the first section, these companies usually raise funds through equity
issuances, and we can find different funding rounds depending on the maturity stage
of the startup.

2.4.1.1. Pre-Seed

Pre-Seed is usually the funding round for startups valued between $1m and
$3m, and often it is the first time in which they raise capital.

Since at this point companies do not have proper financial data or performance
metrics to support their project, investments are mainly driven by the founders
themselves and their raw idea.

The initial funding from any startup usually comes from the founders
themselves. Regarding external investors, family and friends are the usual investors
in this round, although business angels are often involved as well. The usual ticket –
amount of capital invested by each of the investors– ranges from $10k to $250k.

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2.4.1.2. Seed Round

Seed round is usually the funding round for startups valued between $3m and
$6m, and it is the first round in which startups raise the needed funds to start
making their idea real. Hence, capital raised tend to be used to develop the product
and test its market fit, to carry out analysis and research, and to increase the team.

The usual investors in this round are business angels, seed Venture Capital
funds and incubators, and the usual ticket ranges from $250k to $2m.

2.4.1.3. Series A

Series A are usually the funding round for startups valued between $10m and
$15m, and they are the rounds in which capital raised is invested in optimizing and
bringing to the next level what has been done so far and making both product and
business model more scalable.

At this point, investors tend to focus on key performance and operating metrics
that reflect the potential growth and success probability of the idea rather than very
precise financial data.

The usual investors in these rounds are Venture Capital funds business angels
–sometimes called “super angels”–, and the usual ticket ranges from $2m to $10m.

2.4.1.4. Series B

Series B are usually the funding round for startups valued between $30m and
$60m, and they are the rounds in which capital raised is invested in fuelling the
expansion strategy of the company –in terms of customer base, markets, team, etc.–
and, more generally, scaling its business.

At this point, the firm tends not to be profitable or, if it is, profits tend to be
scarce. However, investors look at the traction of the startup and try to make sure
that the business model actually works.

The usual investors in these rounds are late-stage Venture Capital funds, and
the usual ticket ranges from $5m to $20m. Since tickets are of very significant

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amounts in these series which translates into large ownerships –33% in average–,
investors need to be chosen carefully from a corporate governance point of view.

2.4.1.5. Series C and More

Series C or more are usually the funding round for startups valued above
$100m, and they are the rounds in which capital raised is invested in boosting
customer base and market share, obtaining best-in-class talent and, depending on
the positioning of the firm, acquiring competitors to grow as well inorganically.

At this point, the startup has proven that its business model works and has
proper financial date to support their decrease in risk profile. Nevertheless,
investors tend to be extremely demanding at this stage –mainly because of the large
investments they are considering–, carrying out intensive due diligence processes.

The usual investors in these rounds are late-stage venture capital funds, private
equity firms, hedge funds and investment banks, and the usual ticket ranges from
$20m to $250m. After these rounds, it is usual that startups go public through IPOs
or get acquired by larger players in the sector.

2.4.2. Debt

Although the most important and habitual way of funding for startups is issuing
equity, some of them also raise capital through debt instruments.

Traditional debtholders try to ensure the recovery of their lending and adjust
the interests charged to the risk of the investment. Hence, the high risk that startups
entail in their early stages makes them impossible to ask for a traditional loan or to
be charged with unbearable interest payments, at least until they reach a mature
stage. That makes debt a more unusual financing option. Nevertheless, debt
financing typically presents some advantages over equity financing, such as the
lower cost and the avoidance of dilution.

Despite debt is by far not as relevant for the ecosystem as equity founding but
it still plays a role in the game, we will briefly mention some of the most typical debt
instruments that startups may use during their early stages.

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2.4.2.1. Venture Debt

Venture debt or venture lending is a financing option only available to startups

backed by venture capital funds. Creditors evaluate the firm’s growth rate, business
plan and investors’ track record, and tend to structure its lending as a 3 to 4-year
term loan, collateralized with company shares.

2.4.2.2. Working Capital Line of Credit

Working capital lines of credit are revolving credit lines used to cover business’
operating costs, such as payroll, inventory, or rent. Startups can withdraw as much
as they want up to a predefine threshold, with the commitment of repaying it in a
specific time frame and with a predefined interest rate, sometimes increasing in line
with the borrowed amount. Once the borrower returns the withdrawn amount it
can benefit again from the initial credited amount.

21
3. Startup Valuation

Valuation is crucial to estimate the fair economic value of an owner’s interest in
a company or business. This valuation should consider the actual market value of
the assets that the company possess, but it should also comprise the future
performance that it will deliver to its equity holders.

In this sense, the most common methods that practitioners in the corporate
finance industry have used to value companies are focused on cash flow generation,
earnings growth, capital structure and other financial metrics that can be forecasted
for a reasonable time period in case of mature companies.

However, if we think of startups, especially in early stage companies, which

have little or directly no past financials to be used to predict its prospects, which are
operating in a binary business model with massive failure rates, and which current
situation –in terms of growth, margins, capital structure, etc.– may extremely differ
from that of what they will have in their optimal mature stage, it seems clear that
alternative valuation methods must be used.

As a result, we have decided to split our analysis into two categories: traditional
methods, that may be used when valuing startups in their latest stages; and non-
traditional methods, that may be useful for early stages. In the first group we
include: (i) Discounted Cash Flow; (ii) Precedent Transactions; (iii) Comparable
Companies; (iv) Real Options; (v) Book Value; and (vi) Liquidation Value. In the last
group we include: (i)Venture Capital; (ii) First Chicago; (iii) Berkus; (iv) Scorecard;
(v) Risk Factor Summation; and (vi) Cost-to-Duplicate. Figure 4 shows when to use
each type of method depending on the stage of the startup, and Figure 5 shows a
comparison in terms of traditionality, frequency of use and complexity between
them.

22

Figure 4: Type of valuation methods usually used regarding startup maturity stage
Note: Multiples refers to Comparable Companies and Precedent Transactions
Source: Roca Salvatella; “Modelos de Valoración de Startups”

Figure 5: Startup valuation methods comparison
Source: Own elaboration

23
3.1. Traditional Valuation Methods

As we previously discussed, we will start by analysing the traditional valuation

methods that can be used for startups in late or mature stages.

3.1.1. Discounted Cash Flow

The Discounted Cash Flow –hereafter DCF– is a common valuation method

widely used to estimate the value of company based on its future cash flows. This
method is specially used to value mature companies with stable cash flow
generation and predictable prospects. Likewise, the DCF method can be also used
for the valuation of late stage startups that have generated revenues, with positive
free cash flows, and whose prospects parameters are acceptably predictable. For
early stage startups, on the other hand, as these companies do not present historic
cash flow data and their prospects are based on a high level of uncertainty, the DCF
is not used.

Regarding the Discounted Cash Flow method itself, it states that the company
or enterprise value is calculated through the present value of the future free cash
flows that the company will generate in the future. These future free cash flows are
discounted to present value using a discount rate, to account for the time value of
money, which reflects the risks and the financing costs of the company.

As the DCF method will result in the enterprise value, the discount rate must
reflect all the creditors of the business, considering then equity holders,
debtholders, and preferred shareholders. Hence, the discount rate should account
for the return that creditors will ask for the risk that they assume by investing in the
company.

Free cash flow estimation

In order to estimate the future free cashflows of a business, we will first

determine a forecast period, which will vary depending on the nature of the
business, the maturity of the company, how stable the company is, and how easy is
to predict its prospects. In this sense, the forecast period for a mature and stable

24
company with stable predicted prospects would range from 5 to 10 years –or even
more depending on the nature of the business–. For a startup, with high levels of
forecasted growth and with an uncertainty on its far projections, the horizon of the
future free cash flows projection will range from 3 to 5 years.

As the company will not stop its activity after the projected period, the terminal
value will then be calculated in order to account for the value of the future free cash
flows generated from the year after the projection period to the long future. This
process will be explained lately in the subsection Terminal Value.

Once the projection period is known, it is time to estimate the Future Free Cash
Flows, which are the after-tax cash flows the company generates on a recurring
basis, after taking into account non-cash charges, changes in Operating Assets and
Liabilities and required Capital Expenditures. Free Cash Flows closely correspond
to the actual cash flow that investors would receive each year if they bought the
entire company.

𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 · (1 − 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒) + 𝐷&𝐴 − ∆𝑁𝑊𝐶 − 𝐶𝐴𝑃𝐸𝑋

Then Free Cash Flows will be estimated for each of the years of the projection
period. For startups, the evaluation of operating margins can be difficult to estimate
due to the lack of past financial data and the historical losses that the company faced
in the beginning of its operations. A possible solution to minimize this problem
would be to focus on similar successful startups in the market and set the expected
profitability. Moreover, considering the required Capital Expenditures, for long
stage startups, these reinvestments will be growth-oriented and estimated to
deliver potential growth to the company.

Discount Rate

In order to account for the time value of money, the future free cash flows
calculated for each of the years within the projection period need to be discounted
by a discount rate to obtain the Present Value of those Free Cash Flows.

The discount rate not only reflects the time value of money, but also the return
that investors –such as debtholders and equity holders– require before they invest

25
in the company. It also reflects the risk of the company since higher potential returns
correspond to higher risk. Thus, the discount rate must reflect, as accurately as
possible, the cost of capital employed by the company.

All else being equal, smaller companies such as startups tend to have higher
Discount Rates than mature companies, since for startup companies, investors
expect that they will grow more and deliver higher returns in the future. At the same
time, startups are also riskier than stable and mature companies.

The most widely used Discount Rate is the Weighted Average Cost of Capital
(WACC), in which each capital component is multiplied by its proportional weight
within the capital structure.

𝐸 𝐷 𝑃
𝑊𝐴𝐶𝐶 = · 𝑘! + · 𝑘" · (1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒) + ·𝑘
𝐸+𝐷+𝑃 𝐸+𝐷+𝑃 𝐸+𝐷+𝑃 #

Where:

E: Market value of equity shares

D: Market value of net debt

P: Market value of preferred shares

kE: Cost of equity

kD: Cost of debt

kP: Cost of Preferred Stock

Knowing that most of the startups are completely financed by equity, in that
case the WACC would equal the cost of equity. Hence, considering that the cost of
equity is very relevant regarding the valuation of a startup using the DCF, it is
important to understand the process to get it.

The most common way to calculate the cost of equity is through the Capital
Asset Pricing Model (CAPM), which proposes that, in equilibrium, the expected
return on any risky asset and its systematic risk are linearly correlated through the
beta coefficient, as it is shown below in the CAPM equation:

26
 𝐸(𝑅$ ) = 𝑅% + 𝛽$ · C𝐸(𝑅& ) − 𝑅% D

Where:

E(Ri): Expected return on the capital for asset i (or cost of equity)

Rf: Risk-free rate (taken from the yield of high-quality bonds)

E(Rm): Expected return of the market

[E(Rm) - Rf]: Expected market risk premium

βi: Beta coefficient for asset i

𝑐𝑜𝑣(𝑅$ , 𝑅& )
𝛽$ =
𝜎 ' (𝑅& )

Where:

cov(Ri,Rm): Covariance between market’s return and asset’s return

σ2(Rm): Variance of the return of the market

Knowing that beta is the sensitivity of the expected excess returns from asset i
to the expected excess market returns, there are different processes that companies
use to estimate the beta in a more straight manner: through past historical beta of
the company, or through the estimation of the company’s own beta from betas of
public comparable companies.

Historical beta suggests using the beta as the correlation between the return of
the asset i and the market return during the last years. The drawback of this
approach for an early stage company, such as a startup, is that historical data is
needed to compute the beta. Hence, as startups lack of past data, this calculation
approach might not be useful.

Regarding the estimation of the beta through the betas of comparable

companies, this approach assumes that the “true” beta of a company is different
from what historical data suggests since the “true” riskiness of the company is more
in-line with how risky similar companies in the market are than to its own historical
track record.

In this method, using a set of formulas, an un-levering and re-levering process

of the comparable companies betas is needed in order to remove the additional risk

27
coming from each of the capital structures of these companies, and adapt the betas
with the capital structure of the company that we are valuing.

Again, there is an important point to consider for startup valuation regarding

the estimation of the beta through the Public Company Comparables. Startups use
to be young and innovative companies with very few similar peers in the market,
and with an even smaller number of comparable companies trading in the public
market, making it very challenging to find similar companies to base the beta
estimation. Thus, especially for early stage startups, it might be challenging to fins
comparable peers.

Considering these drawbacks in the beta estimation, a reduced number of VCs

use the CAPM method to determine the discount rate. Instead, they use deduction
values according to internal return expectations that the company might deliver, as
well as the perceived risk of the company itself and the market in general.

There are different adjustments that can be introduced in the CAPM model in
order to calculate the beta of a startup considering the specific risk of the company,
such as the introduction of a size premium and value premium, which are included
to address the risks related to the size and the value of the company. Moreover, these
adjustments could then be based on different categories within the company’s
structure, such as organizational, financial and technological, among others, leading
to a positive or negative impact on the beta coefficient, depending on their influence
on the company risk. In this sense, Gunter W. Festel, Martin Würmseher and
Giacomo Cattaneo propose in their "Valuation of Early Stage High-Tech Startup
Companies" paper some adjustments that are presented in Figure 6.

28
 Figure 6: Beta adjustment scheme for Tech startups
Source: Festel, Würmseher, Cattaneo; "Valuation of Early Stage High-Tech Start-Up Companies";
International Journal of Business

Terminal Value Estimation

The Terminal Value (TV), which represents the company’s far in the future
value, is an important element of the DCF methodology, since it accounts for a large

29
proportion of the overall enterprise value, having an even bigger impact on the firm
value of young companies.

Although there exist different methodologies to calculate the Terminal Value,

practitioners use 2 main methods: (i) Multiples method and (ii) Gordon Growth
method.

The first method states that the TV can be computed by applying a forecasted
EV multiple, taken from the analysis of comparable peers, to a forecasted EBITDA,
EBIT or any other margin of the company that we are valuating. As the exact multiple
is hard to estimate years in advance, different multiples are used and shown in a
sensitivity table.

On the other hand, the Gordon Growth method assumes that the company’s
future Free Cash Flows keep growing far into the future and that the company keeps
operating forever. However, the present value of the Free Cash Flow each year keeps
shrinking since the Discount Rate is higher than the growth rate of those Free Cash
Flows, which is assumed to be similar to the country’s inflation or GDP growth.

1+𝑔
𝑇𝑉( = 𝐹𝐶𝐹( ·
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 − 𝑔

Where:

TVT: Terminal value at the last forecasted year (t = T)

FCFT: Free cash flow of the last forecasted year (t = T)

Discount rate: Usually the WACC

g: Terminal growth rate (similar to the country’s inflation or GDP growth)

Either if we calculate the Terminal Value using the Multiples method, or the
Gordon Growth Method, or any other method not commented in this paper, as it
represents the value of the company in the last forecasted year, this TV needs to be
discounted to the present value using the discount rate computed as stated before.

30
 Final result

Finally, once the Free Cash Flows have been calculated for the projection period
and the Terminal Value has been computed using the methodologies proposed
above, it is time to discount them to the Present Value, using the discount rate
calculated before, adding afterwards the two together to finally obtain the
Enterprise Value.

(
𝐹𝐶𝐹- 𝑇𝑉(
𝐸𝑉#)*+*,- = M +
(1 + 𝑊𝐴𝐶𝐶)- (1 + 𝑊𝐴𝐶𝐶)(
-./

3.1.2. Comparable Companies

Comparable Companies is a traditional methodology based on the relative

valuation, since it values a company through the comparison to what similar
companies are worth, using multiples. The main idea of this methodology is that
companies with similar characteristics should trade at similar multiples.

This valuation method is mostly used to value mature companies with an

important set of comparable peers with accessible data. Startups located in a growth
or expansion stage can also be valued through this methodology.

To carry out this method, it is important to correctly gather the data from
comparable companies, which is relatively easy to find, especially for listed
companies. These companies are chosen according to the following criteria:

1. Geography – Better chose companies in similar geographies and markets

2. Industry – Companies operating in the same industry group
3. Financials – Similar revenues, margins and expected growth, if possible

Once the peers are selected, different multiples are computed for each of these
comparable companies, such as Revenue, EBITDA or EBIT multiples (although other
multiples can be included depending on the industry), and we finally get a range of
multiples. We then compute the average and median for each of the ranges, and
multiply the outcome by the margin or revenue of the company that we are valuating

31
–i.e. multiply EBITDA to EV/EBITDA ratio– to finally get the Enterprise Value (EV)
of the company which will be expressed in a range of values.

There are special situations, with startups, for instance, that we do not compute
the average and median for each of the ranges. Instead, if we believe that the
company will experience an astonishing growth in the near future compared to the
peers, and that will be able to increase the margins compared to the ones that
currently presents, we could use the 75th percentile of the range, for instance, to
compute the final EV range.

To conclude, since this method uses the securities of other companies, which
are fairly priced assuming that the markets are efficient, it should provide a realistic
range of the firm value, while other methodologies such as the Discounted Cash
Flows are subject to far-in-the-future assumptions. For this reason, Comparable
Companies is one of the most used methods for practitioners.

3.1.3. Precedent Transactions

Precedent Transactions methodology is also a traditional, widely used relative

valuation method based on the price paid on recent acquisitions of comparable
companies. The approach is very similar to Comparable Companies valuation,
although in this case we include an additional criterion to choose the comparable
Precedent Transactions:

4. Time – Transactions occurred close to the current period, since the

markets change over time

Also, it is important to consider the rationale behind the transaction – M&A deal,
LBO deal, etc.–, since synergies play an important role on the premium that
acquirers will be willing to pay.

Once the transactions are chosen according to the specified criteria, we proceed
with the same methodology as per the Comparable Companies. We compute a range
of different multiples such as EV/EBITDA and EV/EBIT, for instance, where the EV

32
represents the transaction value, and we then compute the EV of our company using
the margins and data of the company that we are valuating.

Bear in mind that the enterprise value obtained through this valuation method may
be higher than the values obtained through Comparable Companies or other
methods. The reason is that the transaction value usually considers the premium
paid to control or acquire the underlying company, increasing then the actual
market value of the company.

As per the startup universe, as this methodology requires public data from
comparable transactions, it might be challenging to implement since the number of
precedent transactions of comparable companies might be limited.

3.1.4. Real Options

Different valuation approaches used by academics and practitioners typically

assume that companies will hold the assets passively, whereas the Real Options
method considers the right, but not the obligation, to modify the project by
expanding, contracting, deferring or abandoning it, for a predetermined period of
time and with an implied cost.

So, we define a real option as a choice available to the managers of a firm to

assess the different investment opportunities that a business may or may not take
advantage of realizing. This real option is present in an investment when there exists
a possibility of future action when the outcome of any current uncertainty is known.

In this sense, this method considers that the business decisions can be modified,
impacting the outcome of the project differently depending on the decision chosen.
The more uncertain or unclear the outlook is, the more valuable is this flexibility.
This flexibility is particularly valuable to account for the intrinsic uncertainty of the
startup ecosystem, allowing us to consider different outcomes throughout the
lifetime of the company and introducing different scenarios with the purpose of
understanding its fair valuation.

33
 The main idea is to split the business that we want to value into different
mutually exclusive projects or milestones and to identify what are the main sources
of uncertainty and the respective impact for them, and how they correlate between
each other. Then, we reflect this information in a decision tree introduction option
exercise conditions, i.e. simple effective rules for optimal decisions. An example of
decision tree is presented in Figure 7.

Figure 7: Real Options decision tree example
Source: Teresa Clavería; “El método de valoración por opciones reales”; Repositorio Comillas

Once we have built our startup decision tree, we compute the real option value.
The calculation of the real option value can be carried out mainly through two
approaches: (i) Binomial model; (ii) Black-Scholes model.

34
 Binomial Model

The Binomial model follows an iterative approach in which there are two
possible outcomes for each iteration, an upward move or a downward move in the
decision tree.

Following this idea, this model firstly replicates the cash flows of the option –in
our case a call option– with cash flows from common stock and debt as it is shown
in Figure 8, in order to end up finding the current value of our option.

Bond Stock Call Option

p Rf p S1 U p C1U
1 S0 C0
1-p Rf 1-p S1 D 1-p C1D

Figure 8: Binomial representation for bonds, stocks and call options

Source: HEC Paris, Corporate Valuation course

Where:

p: Probability of up-state happening

Rf: Risk-free rate of return

S0, C0: Current stock and call option value, respectively

S1U, C1U: Future stock and call option value in the up-state, respectively

S1D, C1D: Future stock and call option value in the down-state, respectively

In the case of the bond, the outcome of either the up or down state is obviously
the same and we assume that it delivers the risk-free rate. However, in the case of
both stock and call option logically their outcomes will vary.

For the stock, we define its value in the next period as:

𝑆/0 = 𝑢 · 𝑆1

𝑆/" = 𝑑 · 𝑆1

Where:

35
 u: Factor by which the value of the stock increases in the up-state

d: Factor by which the value of the stock decreases in the down-state

For the call option, we define its value in the next period as:

𝐶/0 = 𝑚𝑎𝑥 {𝑢 · 𝑆1 − 𝐾 , 0}

𝐶/" = 𝑚𝑎𝑥{𝑑 · 𝑆1 − 𝐾 , 0}

Where:

K: Call option strike price

Now, we can replicate the payoffs of the call option by building up a portfolio
made of bonds and stocks. Hence, by equaling these two payoffs we obtain:

𝐶/0 = 𝑎 · 𝑆/0 + 𝑏 · 𝑅% = 𝑎 · [𝑢 · 𝑆1 ] + 𝑏 · 𝑅%

𝐶/" = 𝑎 · 𝑆/" + 𝑏 · 𝑅% = 𝑎 · [𝑑 · 𝑆1 ] + 𝑏 · 𝑅%

Where:

a: Stock portfolio allocation

b: Bond portfolio allocation

Since all the data is known except for the allocations in each asset, we compute
the portfolio composition as:

𝐶/0 − 𝐶/"
𝑎=
(𝑢 − 𝑑) · 𝑆1

𝑢 · 𝐶/0 − 𝑑 · 𝐶/"
𝑏=
(𝑢 − 𝑑) · 𝑅%

Finally, we find the current value of our option as:

𝑢 − 𝑅%
𝑅% − 𝑑 0
𝐶1 = 𝑎 · 𝑆1 + 𝑏 = · 𝐶 + 𝑢 − 𝑑 · 𝐶/"
𝑢−𝑑 / 𝑅%

36
 Black-Scholes Model

The Black-Scholes model is the most well-known mathematical model for

valuing options and assumes geometric Brownian motion in prices with constant
drift and volatility. The development of this formula gave the Nobel Prize in
Economics to Myron Scholes and Robert Merton –Fischer Black, the third developer
passed away two years before– in 1997 after their publishing in 1973.

The Black-Scholes model makes the following assumptions:

§ The option is European and can only be exercised at expiration;

§ No dividends are paid out during the life of the option;
§ Markets are efficient (i.e., market movements cannot be predicted);
§ There are no transaction costs in buying the option;
§ The risk-free rate and volatility of the underlying are known and
constant;
§ The returns on the underlying are normally distributed.

In order to value the option, we just need to input the required data into the
Black-Scholes formula:

𝐶 = 𝑆 · 𝑁(𝑑/ ) − 𝐾 · 𝑒 2)- · 𝑁(𝑑' )

Where:

𝑆 𝜎'
ln 𝐾 + Z𝑟 + 2 \ · 𝑡
𝑑/ =
𝜎 · √𝑡

𝑑' = 𝑑/ − 𝜎 · √𝑡

Where:

C: Call option price

S: Stock price

K: Exercise price: Costs associated with undertaking the project

r: Time value of money: Risk-free rate of return

37
 t: Time to maturity: Max time the investment decision can be deferred

σ: Std. dev. of stock returns: Riskiness of the underlying asset

N: Normal distribution

Regarding the Real Options method, the most valuable advantage that we find
is the flexibility that provides the investor with when valuing a startup. However, it
entails a high level of complexity and knowhow which might not be available for
everyone.

Regarding the two models that we have seen, the Binomial model presents the
clear advantage of being extremely mathematically simple. Nevertheless, this model
can be as complex as the designer of the decision tree wants, since including extra
nodes in multi-period models increases significantly its complexity. In the case of
the Black-Scholes model, the main issue comes not only from the high quantitative
complexity but also from the high dependency on chosen inputs, which at the same
time might be difficult to define.

3.1.5. Book Value

Book Value method is a good way to assess valuations of companies that

account significant assets, such as inventory, receivables, among others, or to value
companies with low profits.

It is an asset-based approach in which Book Value represents total assets minus

total liabilities and is commonly known as net worth. It represents the amount the
company is worth after selling all the assets and paying back all the liabilities,
considering both tangible and intangible assets in the calculation.

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Book Value method is commonly used to cross-test other more common

methods, such as the DCF, Comparable Companies, etc. However, there are some
special situations where this valuation method can be used as a primary valuation
methodology:

38
 • Companies with low or negative profits – In this case, common valuation
methods cannot be used.
• Small companies with powerful customer/supplier relations –
Successful small companies with strong relations with its customers and
suppliers, which are usually noncontractual and non-transferable, are
usually valued at their book value plus a modest premium.

There are some adjustments to be made in the Book Value methodology. Some
sellers will probably want to consider the fact that some assets may have a greater
market value than the value accounted in the balance sheet, such as machinery,
equipment, buildings, etc. On the other hand, buyers might request an assessment
of the assets that are earning money for the business, asking for an adjustment in
the purchase price in case that some assets do not generate any money for the
company.

Regarding the use of this methodology for a startup valuation, since some
startups, specially early stage firms, are more focused on intangible assets such as
R&D, customer base, product development, among others, and the Book Value
method is more focused on the tangible aspects of the company, this method fails to
consider the intrinsic potential success of the business model, being not always
helpful in startup valuation.

3.1.6. Liquidation Valuation

Similar to the Book Value, the Liquidation Valuation is a method in which

company’s assets are assumed to be sold to repay company’s liabilities. Whatever
remains represents the Equity Value of the firm.

The main difference with Book Value is that Liquidation Valuation only
considers the tangible assets of the company, since this valuation method
represents the total worth of a company’s assets if the firm were to go out of
business and its assets sold.

𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

39
 Intangible assets such as goodwill, brand recognition and intellectual
properties are excluded from this calculation since they cannot be sold separately
from the business.

Since this methodology is commonly used in bankruptcy or liquidation

scenarios, sometimes the value of the assets to be sold are at discount or below its
book value, due to the adverse conditions of the sale and the need to collect money
to repay debtholders first and equity holders lately.

All-in-all, most of the time Liquidation Valuation produces lower values

compared to other valuation methodologies, since it excludes intangible assets and
usually the tangible assets considered in the calculation are accounted at discount.
However, companies with low earnings but with substantial hard assets could find
attractive to use this valuation method since it would produce higher values than
the ones obtained through other common valuation methods such as Comparable
Companies or DCF.

3.2. Non-traditional Valuation Methods

After analyzing the options for late stage startups, we will now review what are
the non-traditional alternative valuation methods that may be used for early stage
startups.

3.2.1. Venture Capital

The Venture Capital method was developed by Harvard Business School

Professor Bill Sahlman in 1987 and has been improved by himself several times until
now. This method sets a valuation by considering the expected rate of return of the
investment in the target startup once it is exited. In short, it starts by defining its
expected selling price after the holding period –usually within 3 and 7 years–. From
there, one calculates back to the current post-money valuation. Although it can be
used in post-revenue companies, the Venture Capital method is often used in
valuations of pre-revenue startups where it is easier to estimate a potential exit
value once certain milestones are reached.

40
 As we said, the first step is to determine the expected value of the startup once
the investor exits the company after its holding period. To do so, we need to come
up with an estimation of future metrics that will drive the exit value by applying
multiples from comparable companies and similar precedent transactions from
related businesses. Theoretically, any kind of trustworthy metric relevant for the
business in which the startup operates can be used to forecast the terminal value of
the company, however the most typical ones are forecasted revenues and earnings
–EV/revenue multiple and earnings ratio respectively–.

Once we have the terminal value of the startup at the time of the exit, we need
to discount the exit value back to the present. By doing so we find the post-money
valuation. At this point, an import remark is crucial: this method values the startup
from the investor’s point of view, not the company’s one. In this sense, the
discounting rate to be taken must not be the company’s WACC but the expected
return on the investment (ROI) that the investor is looking for.

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
𝑃𝑜𝑠𝑡– 𝑚𝑜𝑛𝑒𝑦 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑃𝑉(𝐸𝑥𝑖𝑡 𝑉𝑎𝑙𝑢𝑒) =
𝑅𝑂𝐼

Once we have the post-money valuation, we convert it into the pre-money

valuation by simply subtracting the amount of money deployed in the company,
either at the entry time or in later investments.

𝑃𝑟𝑒– 𝑚𝑜𝑛𝑒𝑦 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝑃𝑜𝑠𝑡– 𝑚𝑜𝑛𝑒𝑦 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

One of the main limitations of the Venture Capital method is the fact that it
implicitly assumes that there will be no equity issuances in the startup in the future,
making the ownership of the investor to be the same at the beginning and at the end
of the investment period. This consideration does not seem reasonable since, as we
discussed in Section 2.4, the main way of fundraising to fuel startups growth is
issuing new equity. Nevertheless, there are a few techniques to try to account for
this effect such as estimating the dilution level that can be produced within the
investor’s investment period.

Similarly, the Venture Capital method does not take into account possible
payments made from the startup to the investor within the investment period,

41
which are common, especially when the investor is a venture capital fund –aiming
to minimize its investment risk–.

Another limitation comes from the use of multiples to compute the terminal
value of the startup. As we already discussed in Section 3.1.2 and Section 3.1.3,
multiples always entail a certain level of uncertainty, and even more in the startup
ecosystem if we think of the high rate of failure due to the binary business model,
the uniqueness of some disruptive businesses, and the fluctuations in industry
multiples driven by “hot” periods in which those rise artificially because of irrational
expectations or high concurrency between investors.

Despite the above-mentioned drawbacks, the Venture Capital method is well

reasonably balanced in terms of quantitative analysis and simplicity and seems to
be useful for systematic planning of future rounds of investment.

3.2.2. Berkus

The Berkus method was developed by Dave Berkus during the nineties and
updated by himself 20 years after. From his perspective as a renowned business
angel and venture capitalist, he realized that while there are many ways to project
the value of a company for purposes of pricing an investment, forecasted revenues
are met or achieved by fewer than one in a thousand startups. Then, Berkus came
up with a valuation method that does not rely on financial metrics but rather on
operating risk.

Following this idea, Berkus identified 5 operating risks as the crucial ones in
order to determine whether or not a startup will succeed: (i) Sound idea; (ii)
Prototype; (iii) Quality management team; (iv) Strategic relationships; and (v)
Product rollout or sales.

The first risk is having a Sound idea and aims to reduce the basic value and
product risk. To analyze it, we have to determine whether there exist similar
products in the market. If there are no similar products, the investor should
establish subjectively its own risk valuation. However, if there are products

42
reasonably alike the investor will rate the risk by analyzing their market fit and
market penetration in which they are currently operating.

The second risk is Prototype and aims to reduce the technology risk. To value
this risk it is needed to analyze both the prototype of the startup in which we are
considering to invest and most importantly the market reaction and customer
opinion about it.

The third risk is Quality management team and aims to reduce the execution
risk. Regarding this risk, it is important to understand whether the key people in the
startup work collectively as a cohesive team with aligned objectives. It is also vital
that this team is multidisciplinary and diversely composed, and that each individual
has a differentiated role that matches his expertise field.

The fourth risk is Strategic relationships and aims to reduce the market risk and
competitive risk. This risk refers, on the one hand, to the advisor team the startup is
surrounded by as an indicator of how trustworthy the company is. On the other
hand, it is also relevant to know what investors have already invested and what
financing ways the startup has chosen up to this point.

Finally, the fifth and last risk is Product rollout or sales and aims to reduce the
financial and production risk. To tackle this risk, we need to analyze the traction of
the product once it has been launched and the customer response to it.

Once these five risks have been considered, according to the outcome of the
analysis, Berkus assign up to $500k to each factor –these values are thought for the
American ecosystem and have to be adapted to the appropriate industry price level
when considering investing in other geographies–, which amount to a maximum of
$2,5m startup valuation. However, Berkus states that there is no question that
startup valuations must be kept at a low enough amount to allow for the extreme
risk taken by the investor and to provide some opportunity for the investment to
achieve a ten times increase in value over its life.

43
 A first limitation to the Berkus valuation method is that it can only be used for
startups in which the investor believes in its potential to reach over $20m in
revenues by the fifth year of business.

Another limitation is the rigidity of the method to establish what are the main
risks for a specific company. It may be argued that a marketplace does not share the
same crucial operating risks as a biotech company, at least not completely. Then,
Berkus has recently stated that nowadays his method should be used as a suggestion
rather than a restrictive form, adapting it to the particularities that we can find in
each business.

Finally, we can also argue that this method is too subjective since, in the end,
the risk rating has to be done by the investor without a particular scale or
methodology to grade it. However, this simplicity is also one of the main advantages
of the Berkus method, alongside with the independency of the valuation from
financial projections that very rarely are met.

3.2.3. Scorecard

The Scorecard method was developed by the famous business angel Bill Payne
in 2010. The main idea of this valuation method is to compare the company in which
we are considering investing to other funded startups. Adjusting the average
valuation based on different factors such as industry or geography is possible
although the most ideal scenario is that in which all comparable startups share the
same factors. Even though it is also possible to adjust based on stage, this method is
normally used for pre-revenue startups.

The first step that Payne proposes consists on computing the average pre-
money valuation of similar startups. Since startups use not to be public and
financing rounds information use not to be disclosed, gathering these data can be a
difficult task. In this sense, the author of the method published his Scorecard
Methodology Worksheet based on the results of a survey to business angels where
it was shown that North-American pre-revenue startups were valued between $1m
and $2m, with a $1.5m assumed average.

44
 In the second step, Payne defines the seven most relevant factors for a startup
to be successful, assigning a relative weight to each of them which allows the
investor to vary the previously mentioned weight within a certain range. The factors
and their ranges are shown in Figure 9. By doing so, we can adjust the average pre-
money valuation of the industry with the particularities of our target startup.

Comparison Factor Range

Strength of Entrepreneur and Team 0% – 30%
Size of the Opportunity 0% – 25%
Product/Technology 0% – 15%
Competitive Environment 0% – 10%
Marketing/Sales/Partnerships 0% – 10%
Need for Additional Investment 0% – 5%
Other factors 0% – 5%

Figure 9: Scorecard comparison factors and respective range

Source: Bill Payne and Associates

Finally, in the third step we assign comparison factors to the relative weights.
To so do, we must conduct an intensive market analysis to understand how our
target company stands with respect to its competitors. For instance, if the Size of the
opportunity for the startup is in line with its peers, we will assign a 100%
comparison factor. However, it will be above 100% if it is higher, or below if it is
lower. Then, we will compute the final factor as the summation of the product of
each comparison factor (CF) times its respective relative weight (RW), and we
multiply this final factor by the previously computed industry average pre-money
valuation.

𝑃𝑟𝑒– 𝑚𝑜𝑛𝑒𝑦 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑒– 𝑚𝑜𝑛𝑒𝑦 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 · M 𝑅𝑊$ · 𝐶𝐹$

$./

Similarly to other non-traditional valuation methods, the main limitations of the

Scorecard valuation method is the necessity of gathering pre-money valuations of
similar companies and the subjectivity of establishing relative weights and
comparative factors. The main advantage is the simplicity and the high level of
personalization of the method, which can be very useful for experienced investors.

45
3.2.4. First Chicago

The First Chicago method was developed by the venture capital division of First
Chicago Bank in 1970, aiming to value situation-specific businesses by combining
market-oriented and fundamental analytical methods. The main idea is to establish
different scenarios and to value each of them independently and, in the end, to come
up with a final valuation considering the respective probability of each scenario.

Hence, firstly we need to define different future scenarios for the startup that
we are valuing. Theoretically, any number of scenarios is possible, however in
practice usually three different scenarios are considered: (i) Best-case scenario; (ii)
Mid-case scenario; and (iii) Worst-case scenario. Each scenario will be independent
from the others and will have each own financial projections, with different
revenues, costs, earnings, cash flows and even investment horizons or time to exit.

Usually, the mid-case scenario is the most feasible and realistic one, which is
based on analyst expectations or intensive due diligence processes. On the other
hand, the best-case scenario is an optimistic one, in which the hopes of the
management team are reflected and drives to the best financial outcomes.
Depending on the business in which the company operates, it is possible that the
market determines a natural maximum cap of the financial outcome. Similarly, the
worst-case scenario is the most pessimistic one, in which the fears of the investor
are reflected driving the valuation to its lowest point. Because of the binary model
of startups that we have already talked about in different occasions, the worst-case
scenario often entails the possibility of failure, situation in which the investor may
lose all his invested capital.

In a second step, we need to come up with an estimation of the divestment price

for each scenario. To do so, we need to find the terminal value that the startup that
we are valuing will have once we decide to exit it. This terminal value, likewise, in
other previously analyzed methods, is computed applying multiples, following the
approach to estimate valuation by taking as a reference a group of peers similar to
our target company in terms of industry, geography and stage.

46
 Once we have a terminal value for each scenario, we need to determine the
required rate of return in order to be able to conduct the valuations of each scenario.
Although many professional investors determine the rate of return internally, the
CAPM –explained in detail in Section 3.1.1– can also be used. Nevertheless, the rate
of return produced by the CAPM is usually adjusted in order to account for the
characteristic illiquidity of the startup ecosystem. In fact, since one criteria that
defines a startup is the equity financing and the –almost– total absence of debt, the
rate of return that we will use to value each scenario corresponds to the outcome of
our adjusted CAPM formula.

𝑟 = 𝑅% + 𝛽$ · C𝐸(𝑅& ) − 𝑅% D + 𝑙4

Where:

r: Required rate of return

Rf: Risk-free rate (taken from the yield of high-quality bonds)

E(Rm): Expected return of the market

[E(Rm) - Rf]: Expected market risk premium

βi: Beta coefficient for asset i

lp: Liquidity premium

At this point we can already compute the valuation of each scenario, which will
result from the summation of cash flows projected in the respective scenario
discounted with the previously found rate of return, added to the terminal value that
the startup will have at the time of exit discounted as well.
6
𝐶𝐹-5 𝑇𝑉5
𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛5 = M +
(1 + 𝑟) - (1 + 𝑟)6
-./

Where:

ValuationS: Valuation under scenario S

h: Investment horizon

𝐶𝐹-5 : Cash flow at period t and under scenario S

r: Required rate of return

47
 TVS: Terminal value under scenario S

Once we have a valuation for each scenario, we have to allocate probabilities to

each of them. Naturally, these probabilities depend on our scenario definitions and
the number of them, hence they may vary a lot between different startup valuations
and significantly rely on the skills and experience of the investor. Nevertheless,
William Sahlman and Daniel Scherlis define the typical scenario probabilities for
venture capital investors, shown in Figure 10.

Scenario Probability
Best-case scenario 25%
Mid-case scenario 50%
Worst-case scenario 25%

Figure 10: Sahlman, Scherlis First Chicago method scenario probabilities

Source: William Sahlman and Daniel Scherlis; “The Venture Capital Method”; HBS

Now that we have a proper and independent valuation for each scenario, the
last step is to carry out the weighted sum of these valuations, resulting in the final
valuation of our target startup.
7

𝑆𝑡𝑎𝑟𝑡𝑢𝑝 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = M 𝑝5 · 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛5

5./

Where:

N: Number of scenarios

pS: Probability of scenario S

ValuationS: Valuation under scenario S

The First Chicago method provides the investor with a very high level of
freedom and flexibility in order to account for the many different situations that the
startup may encounter –actually as many as he wants–. However, this is a double-
edged sword: the higher the number of scenarios the higher the complexity of the
method. Another advantage is the possibility of taking into account possible
payments from the target company to the investor within its holding period, even
though makes the model more complex again. Finally, the use of multiples

48
introduces the previously mentioned uncertainty and issues of finding the necessary
appropriate data.

3.2.5. Risk Factor Summation

The Risk Factor Summation method was developed by the Ohio TechAngels, a
group of early stage investors of Ohio. This method, likewise, as the previously
explained valuation methods such as the Scorecard method or the Berkus method,
aims to come up with a pre-money valuation for pre-revenue companies but
considering a broader set of factors that will be analyzed.

As in the Scorecard method, first we have to find the average pre-money

valuation of comparable companies for our target startup. Then, we adjust this value
with twelve risk factors that the Ohio TechAngels propose. Concretely, the list of
risks that the Risk Factor Summation method suggests considering is the following:

i. Management
ii. Stage of the business
iii. Legislation/Political risk
iv. Manufacturing risk
v. Sales and marketing risk
vi. Funding/capital raising risk
vii. Competition risk
viii. Technology risk
ix. Litigation risk
x. International risk
xi. Reputation risk
xii. Potential lucrative exit

For each risk factor, the investor has to assign a grade in line with the following:

§ +2 Very positive for the company growth and future exit

§ +1 Positive for the company growth and future exit
§ 0 Neutral for the company growth and future exit
§ -1 Negative for the company growth and future exit

49
 § -2 Very negative for the company growth and future exit

A positive grade (+1 or +2) reflects a lower than average risk for the startup that
we are valuing, a neutral grade (0) reflects that the respective risk is in line with its
peers, and a negative grade (-1 or -2) reflects that the company is more exposed than
its peers to this specific risk.

Hence, the average pre-money valuation of the comparable startups is finally

positively adjusted for risks with positive grades increasing the valuation by $250k
for every +1 and $500k for a +2. On the other hand, the average value is negatively
adjusted for risks with negative grades decreasing the valuation of the target startup
by $250k for every -1 and $500k for a -2.

The main advantage of Risk Factor Summation is that this method forces
investors to consider important exogenous factors of risks that he may not have
considered otherwise. The downside is that this also implies an increase in the
subjectivity and the complexity of the method.

3.2.6. Cost-to-Duplicate

The Cost-to-Duplicate method, also known by the Cost-to-Recreate method,

values the startup by analyzing how much would cost to set up an identical company
from scratch according to the fair market value of its assets. However, this method
does not take into account future potential and intangible assets such as brand value
or management strength.

In addition to the physical assets of the startup, the Cost-to-Duplicate method

accounts as well for costs that have already been incurred such as developing their
prototype, patent protection, or research and development.

For the above mentioned limitations, this method is used as a Go/No-Go

decision maker or to set a floor in the valuation range rather than to asses a fair
valuation of the company in which an investor is considering to enter. In this sense,
he would never invest in the startup more than it would cost him to replicate the
business.

50
4. Case Study: Hello Fresh

4.1. Main goals of the case study

The objective of conducting a case study is to apply what we have studied until
this point in a real scenario. By doing so, we want to prove how difficult is the job of
a professional startup investor, who has to face the uncertainty inherent in the
ecosystem due to the binary model and high risks associated, which are reflected in
volatile valuations depending on the method used and the factors considered.

Moreover, we want to understand by our own experience which methods seem

to be more appropriate for this purpose and what are the main upsides and
downsides of each of them. In addition, we want to see how different are the
valuations provided by each method and whether they finally converge in a certain
reasonable value, meaning that the use of some of them is the most appropriate way
of finding a fair final average valuation.

With the above-mentioned objectives in mind, we will work in a real case,

valuing the startup HelloFresh just after its IPO on November 2nd 2017, with data
gathered from company reports, broker reports, equity analyst reports, initiating
coverage reports and other public data available. Hence, all the information
provided in this report will be as of December 2017, to consider the same data and
information and company characteristics that was used to carry out the IPO
valuation.

4.2. Company introduction

4.2.1. General information

HelloFresh is an online company which delivers fresh, pre-portioned

ingredients and recipes on a weekly basis via a subscription model. The company
was founded in Berlin in 2012 by Dominik Rickter, Thomas Griesel, and Jessica
Nilsson.

51
 HelloFresh’s core business is focused in sending fresh, healthy, personalized,
and nutritious step-by-step recipes, with the exact fresh ingredients needed to cook
them, to their customer’s homes every week. These meal-kits are delivered directly
to their customers door at a convenient time and contain sustainable, healthy, and
locally sourced ingredients to prepare the recipes above-mentioned. Most of the
recipes are designed to be prepared in 30 to 40 minutes.

The company operates in 10 markets and finished the year 2017 with
approximately 1.5 million active customers, who consumed around 137.4 million
meals, establishing them as the global leaders in their category.

Figure 11: HelloFresh locations
Source: HelloFresh SE Annual Report 2017

Just after the start of their operations in Berlin, the company decided to offer
nationwide coverage in Germany, expanding the business also in the Netherlands
and UK. Lately, HelloFresh entered the markets of Austria, Australia, United States,
Belgium, Canada, Switzerland, and Luxembourg.

To manage the business, HelloFresh does not divide their business into
operating segments based on the type of the business. Instead, the company is
organized on the basis of two geographical regions which form their operating and

52
reporting segments, and divided by the USA region, comprising United States of
America, and the International region, comprising the rest of the countries where
the company operates.

4.2.2. Business Activities

HelloFresh established an innovative business model, being one of the first

companies in the market to offer meal-kit solutions. Their main idea is to transform
traditional food supply chain model into a sustainable business, eliminating
intermediaries such as distributors and wholesalers and reducing substantially the
food waste from their supply chain.

In order to make this happen, as of 2017, HelloFresh worked with 600 local
suppliers which let them operate in a just-in-time basis, ordering from their
suppliers only the ingredients and quantities that were confirmed to be delivered
to their customers, reducing then the food waste. Hence, the company established a
near zero-inventory business model for all the perishable products, which are then
packed in their refrigerated fulfilment centers and delivered to the customers using
insulated packing or refrigerated vehicles. The food boxes are handed to the
customers throughout the company’s logistic partners for delivery or delivered by
their own delivery service. In this aspect, customers receive a box every week at the
time slot of their choice with perfectly portioned ingredients and the required
recipes to transform them into meals. As of 2017, most of the delivery services that
the company offers were free of charge to their customers.

With their meal-kit plan, the company’s value proposition is to approach an

enjoyable, customized, and personalized cooking experience using healthy and
nutritious ingredients, providing high value for money and a superior product and
service offering.

53

Figure 12: HelloFresh product
Source: HelloFresh SE Non-Financial Report 2017

Regarding the offering, customers can pick a meal-kit plan according to their
dietary preferences, their schedule, and the size of the household. Although it can
vary depending on the geography, most of the customers can choose from 3 to 5
meal food boxes –or even 2 to 5 in some locations– per week for 2 to 4 people, from
different dietary plans ranging from classic to veggie, family, and other more specific
such as pork-free, no-fish, express, etc., which are personalized meal
recommendations based on their customer’s indications. Within each plan the
customers can select up to 14 different recipes, which typically take around thirty
minutes to prepare and that change in a weekly basis.

The business operates through a flexible ordering model where customers sign
up to a plan, which can be customized according to parameters such as household
size, delivery window and dietary preferences. Once the customers are subscribed,
they have then to select their recipes in advance from a list of weekly changing
recipes and pay only for those deliveries that they order, since the customer’s
payment is drawn on the day of delivery. The process needs to be triggered once
only –online– and then turns into a fully automated process thereafter. This
operating model let customer pause or cancel the plan at any time –typically 5 days
in advance– without losing any money.

54
4.2.3. Company’s Facts and Figures

In order to fully understand HelloFresh and its pre-IPO situation, we will

analyze the most important facts and figures that the company presents.

Firstly, we can see in Figure 13 that HelloFresh revenue stream has grown
massively up to 2017 and it is expected to continue significantly increasing until
2021, although logically at a lower path. Moreover, in line with what was explained
in previous sections, US revenue currently represent a great portion of the total –
c.60% in 2017– and it is expected to keep this level up to 2021 according to Barclays
projections.

€m % YoY
2.500 500%

2.000 400%

1.500 300%

1.000 200%

500 100%

0 0%
2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E

Revenue USA Revenue International Growth (%)

Figure 13: HelloFresh revenue evolution (2014-2021)
Source: Company reports and Barclays research

Regarding HelloFresh margins, Figure 14 shows how either Gross margin, and
EBITDA and EBIT margins have improved considerably since 2014, recovering from
their lowest point in 2015, and are expected to keep going up for the following years,
breaking even in 2020 for the EBITDA and EBIT margins. It is worth to mention that
in this case, the EBITDA and EBIT taken into account to perform the analysis are the
ones adjusted by Barclays, which are more conservative than the reported ones.

55
 Gross Margin EBIT(DA) Margin
65% 10%

61% 0%

57% -10%

53% -20%

49% -30%

45% -40%
2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E

Gross Margin Adj. EBITDA Margin Adj. EBIT Margin

Figure 14: HelloFresh margins evolution (2014-2021)
Source: Company reports and Barclays research

Considering the current cost structure of HelloFresh in 2017 which is displayed

in Figure 15, clearly COGS represents the main cost, amounting for more than one
third of the total, followed closely by Fulfillment costs. This is not a surprise if we
think of HelloFresh business model, in which they buy food from its suppliers, pack
it, and then distribute it to its customers. Marketing is another relevant expense –
although less than it was two years ago as presented in Figure 16, when the company
was less known and needed massive marketing efforts to promote itself–, which is
also in line with what we should expect from a startup. Finally, SG&A is a little
portion of the cost structure, also consistent with the startup ecosystem and with
operating though the Internet, which requires little labor intensity.

SG&A
6%

Marketing COGS
24% 37%

Fulfillment
33%

56
 Figure 15: HelloFresh costs breakdown (2017)
Source: Company reports and Barclays research

50%

40%

30%

20%

10%

0%
2015A 2016A 2017A 2018E 2019E 2020E 2021E

COGS (% Sales) Fulfillment (% Sales) Marketing (% Sales) SG&A (% Sales)

Figure 16: HelloFresh costs as a percentage of sales evolution (2015-2021)
Source: Company reports and Barclays research

Once we have analyzed revenues and costs, we will focus on the global situation
of the company. To do so, we have built the Economic Balance Sheet of HelloFresh,
which is shown in Figure 17. We can see how non-current or fixed assets have
increased and are expected to continue doing so, as it is natural in a growing
company which is in process of expansion. In addition, current assets are lower than
its current liabilities and, as a result, HelloFresh working capital requirements are
negative. This is mainly due to the fact that the company collects the money from its
sales almost immediately while it takes between two to four weeks to pay its
suppliers. We can also note that HelloFresh total equity has increased –we will look
at it more in detail afterwards–, as it has done the net cash position that the startups
holds. Finally, its debt position is irrelevant compared to its equity, which matches
our startup criteria definition of the Section 2.1.

57
Economic Balance Sheet – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
Non-Current Assets 21 60 66 101 125 132 144

Current Assets 28 34 49 63 73 83 91
Current Liabilities 61 66 106 123 146 166 186
Working Capital Requirements -33 -33 -58 -61 -73 -83 -95

Capital Employed -12 27 9 40 52 49 49

Total Equity 88 20 294 226 222 295 434

Debt 10 64 45 36 36 36 36
Cash & Cash Equivalents 109 58 331 222 205 282 420
Net Financial Debt -99 6 -286 -186 -170 -247 -385

Capital Invested -11 27 8 39 52 49 49

Figure 17: HelloFresh Economic Balance Sheet (2015-2021)
Source: Company reports and JP Morgan, Morgan Stanley, Barclays research

Going now deeper into the HelloFresh equity, the startup has been issuing new
equity since its foundation 2012 to fuel its growth strategy as it shows Figure 18. In
this regard, the first financing round took place in 2014, where HelloFresh raised
€39m at €0.1bn pre-money valuation. The most recent at the IPO time equity
issuance was carried out in 2016, raising €85m at a pre-money valuation of €2bn.

Figure 18: HelloFresh capital raising (2012-2016)
Source: Company reports and Morgan Stanley research

58
After the several capital increases shown before, the pre-IPO non-diluted
shareholder structure remained as Figure 19 presents, dominated by Rocket
Internet with a 48% ownership as a clear major but non-controlling shareholder.
Additionally, in-the-money employee options outstand of more than 10% of
ownership.

18,9% Rocket Internet

Horing Jeff
0,1% Phenomen Ventures LP
4%
48% Vorwerk & Co.
3%
4% Qatar Investment Authority
Other Shareholders
7%
Treasury Shares
Other
15%

Figure 19: HelloFresh pre-IPO non-diluted shareholder structure (2017)
Source: Company reports and Morgan Stanley research

4.2.4. Company risks

When analyzing a company, specially a startup, it is important to make an

assessment about the risks that can challenge the company in the present or near
future. Having a clear image about the risks that the company will face will help to
understand the current market position of the firm and assess the future success of
the business.

Analyzing the company both internally –operations and business model– and
externally –market and competition– we have classified the company risks as
follows:

1. HelloFresh presents a limited track record as a company since it was

founded in 2012. The business model is based on high-growth, asset-
light model which relies on negative Working Capital, since the company

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 does not pay suppliers until 2-4 weeks after delivery and takes
customer’s payment on the day of delivery.
2. Low customer retention, considering that among the 4.4m household
that tried the product until the second quarter of FY2017, only 1.3m of
them were active customers.
3. Complexity to maintain the zero-inventory approach when scaling up
the business, which can generate logistic problems.
4. Since the company is still unprofitable as of December 2017, if the
company is unable to scale up the business to reach profitability, then
losses and cash burn could continue.
5. Low barriers to entry which can directly affect HelloFresh’s market
position. There is an important threat coming from supermarket chains,
since they can copy HelloFresh’s technology, which combined with their
current logistics and network of local presence, can become an
important competitor. Logistic companies such as Amazon can also offer
an important threat.
6. The company will face important marketing costs to increase both the
customer base and the retention rate.
7. Strict quality controls to be realized regularly. Since HelloFresh delivers
fresh food to its customers, there is a risk associated with food safety.
Any problem regarding the food conditions can negatively affect the
brand image and customer perception of the firm.

4.3. Industry Overview

4.3.1. Industry’s Facts and Figures

The meal-kit industry where HelloFresh operates represents a fragmented

sector, following the typical characteristics present in industries with operations
related to the production or manufacture of foods. Since food is a differentiated
product, different companies will likely coexist, offering a wide range of products
adjusted to different tastes.

60
 According to data extracted from Euromonitor as of 2016, the global food
industry represented an aggregated value of €7.5tn, with an online penetration
accounting the 2% of this market. Considering only the countries where HelloFresh
operates, the food industry accounts for €2.5tn, being €800bn generated by the
restaurant industry, whose online penetration is around 3% –quite small compared
to other industries– and €1.7 trillion generated by the grocery industry –with an
online penetration of 1%–. Regarding the meal-kit industry, it is more likely to
disrupt the grocery industry rather than the restaurant industry due to the business
nature of HelloFresh.

Focusing now on the meal kit-industry itself, data from Euromonitor and
Morningstar states that this industry represents a small part of the overall market
food, with a current estimated value of €1.9bn in the US and with an expected
growth to €8.1bn by 2021. As commented, meal-kit market represents a small
portion of the global food industry, which is currently worth €7.5tn and with an
expected growth to €9.0tn by 2021.

2016 – Global Food Market: €7.5tn 2021 – Global

Food Market:
€9.0tn

2016 2021

US Meal-Kit: €1.9bn US Meal-Kit: €8.1bn

Figure 20: Food and meal-kit industry volumes [2016 and 2021]
Source: Euromonitor and Morningstar

The growth forecasted both for the global food industry and the meal-kit
market, will be driven by three main trends, which will be aggregated to the
increasing penetration that online services is offering in the food industry.

1. Increase on the healthy food demand. According to Technomic,

around 68% of consumers in developed countries either eat or try to eat

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 healthy food to follow a healthy lifestyle. Consumers are more likely to
eat healthy ingredients and meals at home than away from home.
2. Stressful and busy lifestyle lead people focus on convenient eating.
Customers are increasing the time spend on shopping online to have a
less stressful experience and save time. As a result, the popularity of
proportioned foods is increasing quickly.
3. Increase on the interest towards high quality products. People are
willing to pay more for food options for organic and quality food.

4.3.2. Competitive Landscape

As seen in the recent past years, the online market has been increasing its
presence in developed countries to account for high penetration numbers in
industries such as fashion and accommodation. However, within the global food
industry, the penetration seen as of 2016 is quite low –3% for restaurants and 1%
for the grocery industry– which, aggregated to the low barriers to entry, attracted a
significant number of competitors. These competitors operate in a wide variety of
business models across several verticals within the food industry.

The most important threat to companies operating in the meal-kit industry are
the grocery retailers. Regarding the online takeaway platforms, although they would
be able to take advantage of their technological capabilities, as they operate as a
marketplace connecting customers with restaurants, they do not seem to be
threatening competitors in the future within the meal-kit market. Other important
players such as online retailers might enter to the meal-kit industry.

All in all, the meal-kit sector offers important opportunities to explore, with
many players trying to get into them. However, it is important to note that barriers
to achieve scale are considerable and it may be challenging to sustainably operate
in this competitive ecosystem. Players with the ability to adapt their inventory
challenges to their business scalability will succeed.

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4.3.2.1. Meal-kit providers

As of 2016, HelloFresh is the largest and only global player within the meal-kit
delivery market. However, according to a study realized by Packaged Facts, there
are c. 150 meal-kit delivery services in the market, which have been trying to
differentiate from the rest by offering different meal-kit experiences such as vegan
meal kits, or plans focused on professional athletes, for instance. Within these other
players, the more meaningful competitors in this segment are:

• Linas Matkasse – Swedish fresh-food subscription service launched in 2008

with operations in Scandinavia and the Netherlands. Profitable since 2013,
the company generated revenues of €116m in 2016. Linas Matkasse delivers
2.5m meals per month.
• Blue Apron – Launched in 2012 in the United States, the company operates
in the meal-kit industry, offering similar services to the ones offered by
HelloFresh. The company went public in June 2017, after experiencing an
outstanding revenue growth of 113%, from $340m of revenue in 2015, to
$795m in 2016.
• Other important competitors – Players operating in the meal-kit segment
with slightly different business models, ranging from “a la carte” to
subscription, are Gousto, Green Chef, Plated, Home Chef, FreshDirect,
SimplyCook, Quitoque, Handpick, Munchery, Hungryroot, Sun Basket,
Shuttlecook, SimplyCook, Gobble and Peachdish, among others.

4.3.2.2. Supermarket Chains

Among the players operating within the food industry, the largest threat to a
meal-kit provider such as HelloFresh comes from traditional grocery players that
aim to be more active in the business, offering new services such as meal-kit plans.
Nevertheless, meal-kit providers are specialists in offering attractive recipes backed
by data-driven approach to food, operating in a more flexible manner, being able to
vertically integrate the value chain to reduce the number of Stock Keeping Units
(SKUs) compared to a traditional grocery retailer, taking advantage of more
attractive economics.

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 In an attempt to maintain their market share in the retail sector, many
supermarkets seem to be interested either in acquiring a meal-kit provider or
implementing the meal-kit service within their product offering. As an example,
major supermarket chains like Waitrose, Tesco and Ocado have moved to the meal-
kit delivery market by launching their own product offering. As of May 2017, 40
branches of Tesco have been stocking meal-kits to be sold. Moreover, many
supermarkets are partnering with meal-kit providers, such as HelloFresh, who sells,
as of 2017, their dinner meal-kits in Sainsbury’s in London.

4.3.2.3. Amazon

Due to its business nature and its brand power, Amazon is an important threat
to companies operating in the meal-kit delivery market. As of July 2017, the
company decided to enter in the meal-kit market by launching their AmazonFresh
service, which was available in some US states and only for Amazon Prime members.
The business model of the Amazon’s meal-kit service is quite different from the one
offered by HelloFresh or Blue Apron, being “a la carte” without any subscription
required, and with delivery fees for those orders below $40. Although in 2017
AmazonFresh operated in a small scale, offering this service in US metro areas, it
could become a bigger focus area after the acquisition of Whole Foods by Amazon.

4.4. Company Valuation

The importance of a company valuation is to understand how much the firm is

worth at the moment in order to carry out financing rounds, company sale, and also
to analyze the fair value of the tradable shares outstanding in the market.

In the case of startups, the process of understanding its value is an important

point for the company. As startups usually are financed through equity, both
founders and investors are interested in knowing the fair value of the company to
negotiate, not only the amount of money raised in the financing round, but also the
percentage of ownership that investors will receive.

64
 In this particular case, the goal of this paper is to compute a company valuation
analysis focusing on the startup above described. As seen in precedent sections,
HelloFresh carried out several financing rounds between 2014 and 2016, raising a
total amount of €322m. The company became listed on the Frankfurt Stock
Exchange since its IPO in November 2017. Hence, this paper will analyze the value
of the company as of December 2017. The decision to choose this date is mainly due
to the availability of information and relying data, taking into account the fact that
the company was still considered to be a startup since it was still unprofitable,
mainly financed through equity, and with a new and disrupting business model.

This paper has analyzed the value of the company using different valuation
methods, both traditional and non-traditional. The theoretical explanation of each
of the methods is described in the Section 3 of this paper.

From a practical point of view, we gathered our financial data from estimations
developed by different investment banks –JP Morgan, Morgan Stanley and Barclays–
and published in different broker reports, as well as from other public available data
such as company reports. JP Morgan’s forecasts turn out to be the most optimistic
ones about the prospects of HelloFresh, while Barclays was the most pessimistic.
Morgan Stanley’s expectations were in between. Given that each forecast was
different, we decided to compute an average scenario, which we will use to compute
the valuation of the company.

4.4.1. Discounted Cash Flows

As stated in the Section 3.1.1, the Discounted Cash Flows is a widely used
valuation method very useful to value mature and stable companies, as well as
companies that have generated revenues and positive free cash flows. Hence, the
DCF is a very valid and useful method to valuate late stage startups such as
HelloFresh.

Although HelloFresh started generating significant revenues in 2014, in 2017

the company was still not profitable, forecasting net income breakeven in 2020.
However, the outstanding revenue growth that the company has been experiencing
since its foundation, accounting for a 71% CAGR FY15 – FY17, combined with a

65
projected CAGR FY17 – FY21 of 23%, and a positive trend of percentage of Gross
Margin to revenues, let brokers believe that the company will be profitable at the
EBITDA and FCF level in FY19.

Weighted Average Scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
Revenue 305 597 892 1.217 1.537 1.810 2.058
EBITDA -94 -83 -77 -55 15 95 165
D&A 0 -1 -1 -3 -8 -11 -12
EBIT -114 -90 -93 -77 -12 70 138
Net Financial Interest -1 -4 -6 -1 -1 -1 -1
EBT -106 -92 -96 -74 -9 72 140
Income Tax 0 0 2 -2 -3 -7 -13
Effective Tax Rate 0,0% 0,0% 2,1% -2,5% -9,2% 27,5% 13,3%
Net Income -106 -92 -94 -76 -13 64 127
EPS (EUR) n.a. -0,87 -0,62 -0,51 -0,09 0,40 0,81

Figure 21: HelloFresh weighted average scenario income statement

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

For the DCF analysis, since it is based in projections of financial performance, it

is important to tackle and consider the main factors that can affect the company’s
performance, considering that the company will work in solving the following
challenges:

• Low barriers to entry, which increases the competition

• Increase the customer retention rates to reduce the marketing costs
• Scalability of the business without increasing the asset cost base
• Asset-light model reliant on negative working capital might be sensible
to top line momentum

Free Cash Flow projections

Considering that the startup presents a high uncertainty due to its important
growth prospects and its unprofitable situation, the projected period for the Free
Cash Flows has been ranged between 2018 and 2021, obtaining the present value of
the future free cash flows as of year-end 2017.

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 Free Cash Flow – EURm 2017A 2018E 2019E 2020E 2021E
EBIT -93 -77 -12 70 138
Effective Tax Rate 2% -2% -9% 28% 13%
NOPAT -91 -79 -13 51 120
+ D&A 1 3 8 11 12
– Change in Working Capital -29 -3 -12 -11 -11
– Capex 10 29 36 21 26
Free Cash Flow -108 -51 20 73 146

Figure 22: HelloFresh free cash flows calculation

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

Discount rate

To compute the discount rate to be applied in the future Free Cash Flows and
the Terminal Value, we have used the WACC, considering the following assumptions:

WACC
Beta 1
Equity risk primium 6%
Risk free 3%
Discount rate 9%

Figure 23: HelloFresh discount rate calculation

Source: JP Morgan, Morgan Stanley, Barclays and Deutsche Bank

It is important to mention that the discount rate, or WACC, has been assumed
with a 100% equity. Although the company has some debt liabilities shown on the
balance sheet, the proportion debt-over-equity is very small, since the company is
mainly financed by equity, with a debt-over-assets ratio being close to zero.
Moreover, in order to account for the risk and uncertainty of the startup ecosystem,
we decided to consider only the cost of equity as the discount rate, obtaining then
more conservative values.

Regarding the values of the risk-free rate, risk premium and beta, they have
been assumed according to broker consensus from JP Morgan, Morgan Stanley,
Barclays and Deutsche Bank.

67
Terminal Value

To compute the terminal value as of December 2021, it has been done with the
Gordon Growth Method, considering the following assumptions.

Terminal Value
Discount rate 9%
Perpetuity growth 3%
FCF - 2021E (EURm) 146
TV as of 2021E (EURm) 2513

Figure 24: HelloFresh terminal value calculation

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

Again, the perpetuity growth assumption has been taken from broker
consensus. Regarding the Discount Rate, it represents the cost of equity as explained
in the precedent section, whereas the FCF – 2021E comes from the calculation of the
future Free Cash Flow of 2021E.

Discounted Cash Flow analysis

Once the projection period has been settled, the FCF and Terminal Value
calculated, and the discount rate determined, the next step is to discount the FCF
and TV to 2017 year-end, sum them up and obtain the Enterprise Value of the
analyzed company.

Disconted Cash Flow – EURm 2017A 2018E 2019E 2020E 2021E

EBIT -93 -77 -12 70 138
Effective Tax Rate 2% -2% -9% 28% 13%
NOPAT -91 -79 -13 51 120
+ D&A 1 3 8 11 12
– Change in Working Capital -29 -3 -12 -11 -11
– Capex 10 29 36 21 26
Free Cash Flow -108 -51 20 73 146
Terminal Value 2.513
Discount period 1 2 3 4
Discount rate 9% 9% 9% 9%
Discount factor 0,91743 0,84168 0,77218 0,70843
Discounted Cash Flow -46 17 56 1.884

Figure 25: HelloFresh DCF valuation model

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

68
 Implied Valuation
Enterprise Value (EURm) 1.911

Net Debt (EURm) -286

Equity Value (EURm) 2.196

Shares outstanding (m) 160

Share Value (EUR) 13,7

Figure 26: HelloFresh DCF implied valuation

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

Page
Considering the projections taken from the broker consensus with the given
assumptions for the WACC and Terminal Value, we get an Enterprise Value of
€1,9bn with an implied market share price of €13,7 as of December 2017.

Nevertheless, the assumptions considered in the calculation of the Discounted

Cash Flows analysis are taken from broker consensus, which slightly vary between
each other by small variations on the WACC and Perpetuity Growth rate
assumptions, affecting on the final Enterprise Value result. In order to take into
account these variations in the assumptions and to understand how the Enterprise
Value and Share Price change with a variation on the WACC and Long-Term growth,
a sensitivity analysis has been carried out.

WACC
1.911 7,0% 7,5% 8,0% 8,5% 9,0% 9,5%
0,50% 1.868 1.712 1.578 1.460 1.357 1.265
LT Growth Rate

1% 2.021 1.842 1.688 1.556 1.440 1.338

1,5% 2.202 1.993 1.816 1.665 1.534 1.420
2,0% 2.420 2.171 1.965 1.791 1.642 1.513
2,5% 2.685 2.386 2.141 1.938 1.766 1.619
3,0% 3.017 2.648 2.352 2.111 1.911 1.741
3,5% 3.444 2.975 2.611 2.320 2.082 1.884

Figure 27: HelloFresh Enterprise Value (EURm) sensitivity table

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

69
 WACC
14 7,0% 7,5% 8,0% 8,5% 9,0% 9,5%
0,50% 13,5 12,5 11,6 10,9 10,3 9,7
LT Growth Rate
1,00% 14,4 13,3 12,3 11,5 10,8 10,1
1,50% 15,5 14,2 13,1 12,2 11,4 10,7
2,00% 16,9 15,3 14,1 13,0 12,0 11,2
2,50% 18,6 16,7 15,2 13,9 12,8 11,9
3,00% 20,6 18,3 16,5 15,0 13,7 12,7
3,50% 23,3 20,4 18,1 16,3 14,8 13,6

Figure 28: HelloFresh Share Value (EUR) sensitivity table

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

Moreover, this sensitivity analysis shows us the possible ranges that the
Enterprise Value would take assuming different values for WACC and Long-Term
Growth rate. Since all the broker reports that were analyzed agreed in a LT Growth
Rate of 3% and a WACC between 8% and 9%, the Enterprise Value and Share Price
Value ranges considered as possible outcomes for the Enterprise Value and Share
Price, are highlighted in light blue in the tables above.

4.4.2. Comparable Companies

The Comparable Companies or Peer Comps method is a common relative

valuation methodology, very useful and reliable when the range of comparable
companies is wide. Since the business model of HelloFresh is quite new and
innovative, there are very limited public companies that can be considered as a peer
with a truly comparable business model. Moreover, according to the projections
shown in the Figure 21 on Section 4.4.1, HelloFresh is not expected to be profitable
until 2019, fact that enhances the idea to focus on EV/Sales multiples, both present
and forward multiples. For all these reasons, in this case study this valuation
methodology is useful as a cross-check with the other valuation methods.

As commented, projections of HelloFresh financials expect that the company

will deliver a revenue CAGR FY17 – FY21 of 23%, from €892m in 2017 to €2.058m
in 2021, with the business turning profitable at EBITDA and FCF level in 2019. Over
time, the company will be able to operate with EBITDA margins in high to mid-teens
levels. Considering that the business has very limited peers with a truly comparable

70
business model, and with the guideline of the broker consensus, we decided to
consider not only direct business peers but also companies operating in the food
marketplace industry and online retailers, taking into account that HelloFresh
operates online.

Direct peers

Blue Apron is the only public company with a truly comparable business model.
As commented in the Section 4.3.2.1, the company was founded in 2012 and as of
2017 only operates in the US. Blue Apron became public in June 2017.

Food marketplace companies

There are different companies operating in the food marketplace industry. For
this case study, and following the guideline of the considered brokers, we have taken
as company comparable some takeaway platforms such as Delivery Hero, Just Eat
and Takeaway.com. Although these companies do not operate in the meal-kit
industry, there are several features shared with the business model of HelloFresh
(disruptive companies with a relatively low online penetration in their operating
markets). One point to consider is the fact that these companies generate revenues
through commissions without being engaged in the delivery part, accounting for
higher margins compared to HelloFresh.

Online retail companies

Companies such as ASOS, Ocado, Zalando, Zooplus, Boohoo and Yoox Net-A-
Porter are relatively young companies, operating through the online services, which
shares with HelloFresh the challenge of the supply chain to source the product and
carry out the delivery to the customer. We flag that the growth rate of HelloFresh is
higher than this group of companies.

Analyzing the expected performance of each of the peers, which is shown in

Figure 29, we observe a general correlation between revenue CAGR FY16 – FY19,
and EV/Sales multiple.

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 60%
Boohoo

50%
Delivery Hero
40%

Takeaway.com
30%
ASOS Just Eat

Zalando
20% Zooplus

Ocado
10%
Blue Apron

0%
- 2,0x 4,0x 6,0x 8,0x 10,0x 12,0x 14,0x

Figure 29: Correlation between CAGR FY16-19 and EV/Sales multiple
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

We expect HelloFresh to present a EV/Sales multiple between 2,0x – 2,5x, similar to

the peers with expected revenue CAGR FY16 - FY19 close to the revenue CAGR of
HelloFresh expected for the same period. Carrying out the Comparable Company
analysis, we find out the results displayed in Figure 30.

Company Country Market Cap Enterprise Value EV/Sales EV/EBITDA

$m $m FY17A FY18E FY19E FY17A FY18E FY19E
Direct peers
Blue Apron US 749 713 0,7x 0,7x 0,6x - - -
Food marketplaces
Delivery Hero Germany 7.570 6.868 9,3x 6,6x 5,0x - - 65,7x
Just Eat UK 7.348 7.439 10,4x 8,0x 6,7x 33,9x 23,5x 17,2x
Takeaway.com Netherlands 2.483 2.375 11,5x 8,7x 6,9x - 67,1x 29,5x
Online retailers
ASOS UK 6.752 6.544 2,3x 1,8x 1,8x 37,1x 27,5x 21,2x
Ocado UK 2.980 3.232 1,6x 1,5x 1,3x 25,5x 21,5x 19,7x
Zalando Germany 13.800 12.712 2,2x 1,9x 1,5x 38,6x 30,2x 23,2x
Zooplus Germany 1.146 1.102 0,9x 0,7x 0,6x 110,7x 49,6x 32,0x
Boohoo UK 2.720 2.604 3,5 x 2,6 x 2,0 x 33,5 x 36,5 x 25,5 x
Yoox Net-A-Porter Italy 4.920 4.902 1,9 x 1,6 x 1,4 x 23,7 x 17,8 x 13,5 x
Average 4,4x 3,4x 2,8x 43,3x 34,2x 27,5x
Median 2,3x 1,9x 1,7x 33,9x 28,9x 23,2x
Figure 30: HelloFresh comparable companies analysis
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

Although the metrics shown above represent EV/Sales and EV/EBITDA multiples, it
is important to note that we will only use the Sales multiple in our analysis. The
reason behind this decision is related to the fact that the company is expected to
become profitable at EBITDA level in mid-2019, which would imply a very low EV
outcome through the EV/EBITDA analysis.

72
 Enterprise Value from EV/Sales in EURm
FY17A FY18E FY19E
Peer's Average 4,4x 3,4x 2,8x
Implied HelloFresh EV (EURm) 3.940 4.147 4.267
Peer's Median 2,3x 1,9x 1,7x
Implied HelloFresh EV (EURm) 2.022 2.251 2.561

Net Debt (EURm) -286 -186 -170

Equity Value (EURm) 2.308 2.437 2.731

Shares outstanding (m) 160 160 160

Share Value (EUR) 14,4 15,2 17,1

Figure 31: Public Comps valuation model

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

12,0x
11,5x

10,0x

8,7x
8,0x
Min
6,9x
6,0x Max
Mean
4,4x
4,0x Median
3,4x
2,8x
2,0x 2,3x
1,9x 1,7x
0,7x 0,7x 0,6x
-
FY17A FY18E FY19E

Figure 32: HelloFresh peers’ EV/Sales multiples
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

For the enterprise value calculation, we believe that it is more appropriate to base
our calculation on the median of the peer’s multiples, rather than the average, since
there are some outliers that we identified, corresponding to the Food Marketplace
companies, that can distortion the average multiple outcome. These outliers present
a higher revenue CAGR FY16 – FY19 compared to HelloFresh and the rest of the
selected peers, which would justify their high revenue multiples. Moreover, we

73
decided to carry out the EV calculation through the median of the peers’ multiples
in order to be more conservative, since the values obtained through the median of
the multiples are lower compared to the values obtained through the average of the
same multiples.

Having said that, the values obtained through the Comparable Company valuation
method suggest an Enterprise Value ranged between €2.022m and €2.561m and a
share price in the range of €14,4 and €17,1 per share.

4.4.3. Real Options

In order to value HelloFresh using the Real Options method, we have decided
to follow the Binomial Model. Firstly, as explained in Section 3.1.4, we have defined
two possible scenarios. Since we based our analysis on different investment banks
estimations, we assimilated our Up-State to the most optimistic business plan –i.e.
the one developed by JP Morgan–, and our Down-State to the most pessimistic
business plan –i.e. Barclays’ one–.

To come up with the stock price that HelloFresh would have had under each
scenario, we performed the same DCF valuation analysis explained in Section 4.1.1
to come up with each of them. We gave some flexibility to the model by taking to
possible stock prices, min and max, considering the WACC to be 9% and 8%
respectively. The results are shown in Figure 33.

Up-State Down-State
Future Stock Value
Max Min Max Min
Enterprise Value (EURm) 3.417 2.782 1.397 1.133
Net Debt (EURm) -286 -286 -286 -286
Equity Value (EURm) 3.702 3.068 1.682 1.419
Shares outstanding (m) 160 160 160 160
Share Value (EUR) 23,1 19,2 10,5 8,9

Figure 33: Real Options share price computation under Up-State and Down-State
Source: JP Morgan, Barclays, company reports and own analysis

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 Then, to compute the current stock price, we used the HelloFresh last financing
round, which took place in December 2016 and in which the company raised €85m
reaching a valuation of €2bn.

Current Stock Value

Equity Value (EURm) 2.000
Shares outstanding (m) 160
Share Value (EUR) 12,5

Figure 34: Real Options current share price computation

Source: Morgan Stanley, company reports and own analysis

Regarding the strike price of the option, we considered that a potential investor
would only be interested in owning HelloFresh shares if they were able to give him
an equal or higher return than his expected rate of return, i.e. Hello Fresh cost of
equity, computed in Section 4.4.1 and amounting to 9%. So, we computed the strike
price as the current stock value times the investor required rate of return. The only
remaining input was the risk-free rate of return, for which we took the same value
as in the DCF method, corresponding to 3%.

The computations and final outcomes are shown in Figure 35.

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 Real Options Method Min Max
Rf : Risk-free rate of return 3% 3%
So : Current stock value (EUR) 12,5 12,5
Su : Stock value at Up-State (EUR) 19,2 23,1
Sd : Stock value at Down-State (EUR) 8,9 10,5
K : Strike price (EUR) 13,6 13,6
Ce: Investor expected rate of return 9% 9%

u : Up-State factor of value increase 1,5 1,9

d: Down-State factor of value decrease 0,7 0,8

Cu : Option value at Up-State 5,5 9,5

Cd : Option value at Down-State 0,0 0,0

a : Stock portfolio allocation 0,5 0,8

b : Bond portfolio allocation 10,0 16,9

Real Options Valuation (EUR) 16,7 26,3

Shares outstanding (m) 160 160

Equity Value (EURm) 2.680 4.216

Net Debt (EURm) -286 -186

Enterprise Value (EURm) 2.395 4.030

Figure 35: Real Options valuation model

Source: Morgan Stanley, company reports and own analysis

4.4.4. Book Value

The Book Value method is a very simple one in which we assume the enterprise
value of the company to be the same as its book value.

Following this concept, we computed the book value of Hello Fresh as the
difference between its assets and liabilities and then calculated its share value as
shown in Figure 36.

76
 Book Value Method
Total Assets (EURm) 446
Total Liabilities (EURm) 422
Book Value (EURm) 24

Net Debt (EURm) -286

Equity Value (EURm) 309

Shares outstanding (m) 160

Share Value (EUR) 1,9

Figure 36: Book Value valuation model

Source: JP Morgan, Morgan Stanley, Barclays, company reports and own analysis

4.4.5. Venture Capital

Applying the Venture Capital method to value HelloFresh, we firstly computed

the terminal value that the company would have once the potential investor exited
the company. In this sense, assuming an investment horizon of four years –i.e. until
2021–, we used the 2021 forecasted sales and EBITDA and the furthest respective
multiples –i.e. 2019 forward multiples–. Regarding these multiples, we used the
same as in the Public Comps valuation in Section 4.4.2.

To compute the return on investment (ROI) that a potential investor would aim,
we used the previously mentioned cost of equity of 9% as the expected annual rate
of return and the 4-year investment horizon.

The computations and results are displayed in Figure 37.

77
 Venture Capital Method EV/Sales EV/EBITDA
Sales 2021 (EURm) 2.058 2.058
EBITDA 2021 (EURm) 165 165
Comps multiple 1,7x 23,2x
Terminal Value (EURm) 3.431 3.835

ROI 141% 141%

Expected annual rate of return 9% 9%
Investment Horizon 4 years 4 years
Post-Money Valuation (EURm) 2.430 2.717

Expected capital raised (EURm) 363 363

Pre-Money Valuation (EURm) 2.067 2.354

Net Debt (EURm) -286 -286

Equity Value (EURm) 2.353 2.640

Shares outstanding (m) 160 160

Share Value (EUR) 14,7 16,5

Figure 37: Venture Capital valuation model

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

4.4.6. First Chicago

To value HelloFresh using the First Chicago method, we first defined three
possible scenarios. We used the forecasts of JP Morgan, Morgan Stanley and Barclays
for the Best-Case scenario, Mid-Case scenario and Worst-Case scenario respectively.
We assign 25% probability for both Best-Case and Worst-Case scenarios, and 50%
for the Mid-Case scenario as recommended by the method itself.

Then, we computed the terminal value under each scenario in the same way as
in the Venture Capital method, in Section 4.4.5. The outcome is shown in Figure 38.

Best-Case Scenario Mid-Case Scenario Worst-Case Scenario

Scenario Definition
EV/Sales EV/EBITDA EV/Sales EV/EBITDA EV/Sales EV/EBITDA
Scenario probability 25% 25% 50% 50% 25% 25%

Sales 2021 (EURm) 1.960 1.960 2.034 2.034 2.182 2.182

EBITDA 2021 (EURm) 216 216 193 193 87 87
Comps multiple 1,7x 23,2x 1,7x 23,2x 1,7x 23,2x
Terminal Value (EURm) 3.266 5.009 3.390 4.478 3.636 2.018

Figure 38: First Chicago scenarios definition

78
 Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

Finally, assuming as in the previous method an investor expected rate of return

of 9% and a 4-year investment horizon, and considering that HelloFresh will not
distribute any dividend to the investor during the holding period, the valuation
model and outcome are displayed in Figure 39.

First Chicago Method EV/Sales EV/EBITDA

Expected annual rate of return 9% 9%
Investment Horizon 4 years 4 years

Expected annual dividend payments 0 0

Enterprise Value (EURm) 2.423 2.831

Net Debt (EURm) -286 -286

Equity Value (EURm) 2.709 3.116

Shares outstanding (m) 160 160

Share Value (EUR) 16,9 19,5

Figure 39: First Chicago valuation model

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

4.4.7. Risk Factor Summation

Finally, the last valuation method used to value HelloFresh is the Risk Factor
Summation method.

Firstly, we assigned to each of the key risk factors identified by the method, by
comparing HelloFresh with its peers. In this case, as we are valuing an European
startup, we multiplied the recommended adjustment of $250k per point by a
conversion factor of 0.5 –accounting for the difference in valuations between Europe
and the US–. HelloFresh risk assessment is shown in Figure 40.

79
 Risk Assessment Grade Adjustment
Management 0 0
Stage of the business +2 250.000
Legislation/Political risk +1 125.000
Manufacturing risk -1 -125.000
Sales and marketing risk +1 125.000
Funding/capital raising risk 0 0
Competition risk -1 -125.000
Technology risk +2 250.000
Litigation risk 0 0
International risk -1 -125.000
Reputation risk -1 -125.000
Potential lucrative exit +1 125.000
Total Adjustment (EUR) 375.000

Figure 40: Risk Factor Summation risk assessment

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

Then, we applied the resulting total adjustment to the peers-averaged valuation

to find HelloFresh fair value. In this stage, as we did in other valuations methods in
which multiples are involved, we tried to do it through not only EV/Sales multiples
but also other multiples such as EV/EBITDA or P/E. However, since HelloFresh
presents both negative EBITDA and earnings for 2017, it was not possible. The final
outcome is shown in Figure 41.

Risk Factor Summation Method EV/Sales EV/EBITDA

Revenue 2017 (EURm) 892 892
EBITDA 2017 (EURm) -77 -77
Comps multiple 2,3x 33,9x
Peers-averaged Valuation (EURm) 2.022 -

Total Adjustment (EURm) 0,375 -

Enterprise Value (EURm) 2.022 -

Net Debt (EURm) -286 -

Equity Value (EURm) 2.308 -

Shares outstanding (m) 160 -

Share Value (EUR) 14,4 -

Figure 41: Risk Factor Summation valuation model

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

80
4.4.8. Valuation Football Field

Once we valued HelloFresh using different methods, we developed a Football

Field analysis in order to determine the final valuation of our startup focusing on
the two main outcomes of our valuation, its Enterprise Value and its Share Value.
This analysis will also allow us to identify outliers and methods that were clearly
not able to come up with an appropriate valuation.

Regarding the Enterprise Value, the results are shown in Figure 42.

Valuation Football Field – Enterprise Value – EURm Min Max Diff Weight 1 Weight 2
DCF 1.911 2.352 442 20,00% 25,00%
Public Comps 2.022 2.561 539 20,00% 25,00%
Real Options 2.395 4.030 1.635 10,00% 0,00%
Book Value 24 24 0 0,00% 0,00%
Venture Capital 2.067 2.354 286 20,00% 25,00%
First Chicago 2.423 2.831 407 20,00% 25,00%
Risk Factor Summation 2.022 2.022 0 10,00% 0,00%
Weighted-Average Valuation 1 2.126 2.625 498 100% 100%
Weighted-Average Valuation 2 2.106 2.524 419 100% 100%

Figure 42: Summary table of the HelloFresh Enterprise Value football field analysis
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

At a first sight, we can note that the valuation provided by the Book Value
method massively differs from the others due to its extremely low value. If we
consider the rational of the method, as it was explained in Section 3.1.5, it only
captures the current picture of the analyzed company, but it does not take into
account its future prospects. This is per se a great drawback, but it is even worse
when valuing startups, which are precisely characterized by the potential of scaling
its business and reaching a much mature state of their business. For this reason, the
Book Value method is discarded for our final HelloFresh valuation.

Examining the resulting valuations, we can realize that the Real Options
method, although it did not provide such an extreme valuation as the Book Value it
delivered a significantly higher valuation than the rest. Moreover, this valuation is
also comprised within a wide range, with a high difference between its lowest and
highest values.

Finally, we can also observe –or remember from Section 4.4.7– that with the
Risk Factor Summation method we were able to obtain a single valuation, not being

81
possible to establish a valuation range comprised within a minimum and maximum
value. We consider that this fact diminishes the reliability of the outcome.

Because of the above mentioned, when performing the Football Field analysis
of the HelloFresh valuation we made the decision of discarding the Book Value
method for our final HelloFresh valuation. In addition, we carried out two final
valuations. In the first one, we included the Real Options and the Risk Factor
Summation methods, although we gave them lower weight than to the rest. In the
second one we discarded these two last methods as well.

Since the effects produced by the Real Options and the Risk Factor Summation
methods are opposed –the first one pushes up the valuation and the second one
pushes it down–, the final HelloFresh valuation does not differs so much from the
one obtained without these two methods. Even though, we considered the last one
as the most reliable, so that we picked it as the final outcome of our analysis,
resulting in an Enterprise Value of between €2.1bn and €2.5bn. The results are
plotted in Figure 43.

2,1 2,5

DCF 1,9 2,4

Public Comps 2,0 2,6

Real Options 2,4 4,0

Venture Capital 2,1 2,4

First Chicago 2,4 2,8

Risk Factor
2,0 2,0
Summation

€1bn €2bn €3bn €4bn €5bn

Figure 43: HelloFresh Enterprise Value football field graph
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

Once the Football Field analysis is performed, we want to know what has been
the method which has produced the most accurate result by its own compared to
the final valuation. In this sense, we compared the deviation between the average

82
value of each selected method and the average of the final outcome range –shown in
Figure 44–. By doing so, we realized that the one which performed most accurately
was the Public Comps method.

Accuracy of the Method – Enterprise Value – EURm Average Error Error (%)
DCF 2.132 -184 -7,9%
Public Comps 2.292 -24 -1,0%
Venture Capital 2.211 -105 -4,5%
First Chicago 2.627 312 13,5%
Weighted-Average Valuation 2 2.315 0 0,0%

Figure 44: Accuracy of each method analysis for Enterprise Value

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

Regarding the Share Value, the results are shown in Figure 45.

Valuation Football Field – Share Value – EUR Min Max Diff Weight 1 Weight 2
DCF 13,7 16,5 2,8 20,00% 25,00%
Public Comps 14,4 17,1 2,6 20,00% 25,00%
Real Options 16,7 26,3 9,6 10,00% 0,00%
Book Value 1,9 1,9 0,0 0,00% 0,00%
Venture Capital 14,7 16,5 1,8 20,00% 25,00%
First Chicago 16,9 19,5 2,5 20,00% 25,00%
Risk Factor Summation 14,4 14,4 0,0 10,00% 0,00%
Weighted-Average Valuation 1 15,1 18,0 2,9 100% 100%
Weighted-Average Valuation 2 14,9 17,4 2,4 100% 100%

Figure 45: Summary table of the HelloFresh Share Value football field analysis
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

The same observations extracted in the case of the Football Field analysis of the
Enterprise Value hold for the Share Value, resulting in a HelloFresh final Share Value
of between €14,9 and €17,4. The results are plotted in Figure 46.

83
 14,9 17,4

DCF 13,7 16,5

Public Comps 14,4 17,1

Real Options 16,3 25,9

Venture Capital 14,7 16,5

First Chicago 16,9 19,5

Risk Factor
14,4 14,4
Summation

€10 €13 €15 €18 €20 €23 €25 €28 €30

Figure 46: HelloFresh Share Value football field graph
Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

When carrying out the same previously explained accuracy analysis but for the
Share Value, we reached the same conclusion; the Public Comps method was the one
which deviated the less from the final valuation outcome again.

Accuracy of the Method – Share Value – EUR Average Error Error (%)
DCF 15,1 -1,1 -6,5%
Public Comps 15,7 -0,4 -2,6%
Venture Capital 15,6 -0,6 -3,5%
First Chicago 18,2 2,0 12,6%
Weighted-Average Valuation 2 16,2 0,0 0,0%

Figure 47: Accuracy of each method analysis for Share Value

Source: JP Morgan, Morgan Stanley, Barclays, Deutsche Bank, company reports and own analysis

84
5. Conclusions

At the beginning of this research paper, we have seen that, although nowadays
the term startup is massively spread, it is not always appropriately used. In this
sense, we identified the main criteria which identify companies as startups:
operating in a binary business model, holding negative free cash flows, and being
equity financed. Nevertheless, not all startups look alike, and we can categorize
them into six different maturity stages –from earliest to latest: pre-seed, seed, early,
growth, expansion and exit–, each one with its own particularities in terms of
objectives, needs, risks and financing.

The previously mentioned need of financing, mainly carried out through equity
issuances, brings us to the next point of our paper: the necessity of valuing the
startup. However, given the idiosyncrasy of this type of companies, which present
negative free cash flows and operate in most of the cases in niche markets with very
few competitors and very little public and historic data available, alongside the huge
uncertainty that involves the business model itself, makes this task a huge –and at
the same time an extremely interesting– challenge.

In this sense, we dived into the available options that a potential investor or the
owner of a startup himself can use in order to come up with the fair value of the
company. We divided the methods that can be used into two types: the traditional
ones, which may be commonly used as well to value mature companies, and the non-
traditional ones, which have been developed during the years for practitioners and
experts in the matter to surpass the exiting limitation of the traditional ones when
those cannot be used.

Finally, we dared to apply those studied valuation methods in the real case
study in order to test them analyzing the HelloFresh’s company value post-IPO in
2017. In this regard, we put them in practice and carried out a football field analysis
of the outcomes of each valuation method, resulting in an enterprise value of
between €2.1bn and €2.5bn, and a share value of between €14.9 and €17.4.

Comparing these results with the actual HelloFresh share performance, we

realized that our recommended share value was pretty much in line with what it had

85
turned out to be the actual share price two years after the IPO –see Figure 48–. We
think that the initial difference between our recommended share price and the
actual one possibly comes from the conservatism over the expectations of
HelloFresh, the potential threat of other big players getting in the business and
disrupting it, and the difficulties to scale of the business itself. Nevertheless,
HelloFresh showed that it could meet its forecasts, and the market priced it. In the
most recent times, we can see how the share price has dramatically increased
because of the Coronavirus crisis that we are currently suffering, from which
HelloFresh can take profit.

€45

€35

€25

€15

€5

Share Value Range COVID-19 Crisis HelloFresh Share Price

Figure 48: HelloFresh share price evolution
Source: Yahoo Finance

All in all, we can definitely conclude that valuing a startup is a complex and
challenging process, more driven by the know-how and expertise on the field of the
one who performs the valuation than for mature companies, not being an exact
science but rather an art itself. That said, using different methods, and rationally
choosing or discarding them to come up with a final valuation might lead to a sound
result which, used wisely, might also lead to impressive capital gains derived from
rationally-selected investment opportunities.

86
Appendix

1. HelloFresh Income Statement

1.1. Weighted Average HelloFresh Income Statement

1.2. JP Morgan HelloFresh Income Statement – Optimistic Scenario

87
1.3. Morgan Stanley HelloFresh Income Statement – Neutral Scenario

1.4. Barclays HelloFresh Income Statement – Pessimistic Scenario

88
2. HelloFresh Balance Sheet

2.1. Weighted Average HelloFresh Balance Sheet

2.2. JP Morgan HelloFresh Balance Sheet – Optimistic Scenario

JP Morgan – Optimistic scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
PP&E 6 38 36 44 52 52 57
Other Intangible Assets 15 21 22 23 23 23 23
Deferred Income Tax Assets 0 1 8 16 25 35 45
Total Non-Current Assets 21 60 66 83 99 109 125

Inventories 6 10 14 17 20 22 24
Trade Receivables 12 9 23 31 39 46 53
Other Current Assets 11 14 14 14 14 14 14
Cash & Cash Equivalents 109 58 313 256 272 406 605
Total Current Assets 137 91 365 319 345 488 696

Total Assets 159 152 431 402 444 597 821

Share Capital 115 117 117 117 117 117 117

Capital Reserves 94 113 470 470 470 470 470
Other Reserves 22 27 37 49 58 65 72
Accumulated Losses -142 -236 -348 -419 -414 -292 -99
Other Comprehensive Income -1 -1 -1 -1 -1 -1 -1
Shareholders Equity 88 21 276 217 231 359 560

Non-Controlling Interests 0 0 0 0 0 0 0
Total Equity 88 21 276 217 231 359 560

Non-Financial Liabilities 10 16 16 16 16 16 16
Long-Term Debt 0 46 28 28 28 28 28
Total Non-Current Liabilities 10 62 44 44 44 44 44

Financial Liabilities 0 2 2 2 2 2 2
Trade and Other Payables 46 43 86 115 144 168 191
Provisions 3 4 4 4 4 4 4
Income Tax Liabilities 0 0 0 0 0 0 0
Non-Financial Liabilities 13 19 19 19 19 19 19
Total Current Liabilities 61 69 111 141 170 194 217

Total Equity & Liabilities 159 152 431 402 444 597 821

89
2.3. Morgan Stanley HelloFresh Balance Sheet – Neutral Scenario

Morgan Stanley – Neutral scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
PP&E 6 38 37 62 73 87 100
Other Intangible Assets 15 21 25 23 21 20 20
Deferred Income Tax Assets 0 1 5 5 5 5 5
Total Non-Current Assets 21 60 67 90 99 112 125

Inventories 6 10 14 12 14 17 19
Trade Receivables 11 9 14 31 38 45 50
Other Current Assets 11 14 19 19 19 19 19
Cash & Cash Equivalents 109 58 340 245 237 298 442
Total Current Assets 137 91 387 307 308 379 530

Total Assets 159 152 453 395 407 490 654

Share Capital 125 127 161 161 161 161 161

Capital Reserves 94 113 442 442 442 442 442
Other Reserves 12 17 30 30 30 30 30
Accumulated Losses -142 -236 -328 -398 -408 -350 -212
Other Comprehensive Income -1 -1 -2 10 20 30 42
Shareholders Equity 88 20 303 245 245 313 463

Non-Controlling Interests 0 0 0 0 0 0 0
Total Equity 88 20 303 245 245 313 463

Non-Financial Liabilities 9 6 0 0 0 0 0
Long-Term Debt 1 56 42 42 42 42 42
Total Non-Current Liabilities 10 62 42 42 42 42 42

Financial Liabilities 0 2 3 3 3 3 3
Trade and Other Payables 46 43 77 77 90 104 119
Provisions 3 4 3 3 3 3 3
Income Tax Liabilities 0 0 1 1 1 1 1
Non-Financial Liabilities 13 19 24 24 24 24 24
Total Current Liabilities 62 68 108 108 121 135 150

Total Equity & Liabilities 159 152 453 395 407 490 654

2.4. Barclays HelloFresh Balance Sheet – Pessimistic Scenario

Barclays – Pesimistic scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
PP&E 6 38 37 83 126 129 135
Other Intangible Assets 15 21 24 43 45 43 42
Deferred Income Tax Assets 0 1 5 5 5 5 5
Total Non-Current Assets 21 60 66 130 176 176 181

Inventories 6 10 14 20 25 29 34
Trade Receivables 12 9 14 24 31 36 42
Other Current Assets 11 14 19 19 19 19 19
Cash & Cash Equivalents 109 58 340 164 107 143 215
Total Current Assets 137 91 387 227 181 228 309

Total Assets 159 152 453 357 358 404 490

Share Capital n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Capital Reserves n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Other Reserves n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Accumulated Losses n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Other Comprehensive Income n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Shareholders Equity 88 21 303 216 190 214 279

Non-Controlling Interests 0 0 0 0 -1 -1 0
Total Equity 88 21 303 215 190 214 278

Non-Financial Liabilities 10 16 12 12 12 12 12
Long-Term Debt 0 46 29 0 0 0 0
Total Non-Current Liabilities 10 62 42 12 12 12 12

Financial Liabilities 0 2 3 3 3 3 3
Trade and Other Payables 45 43 77 99 124 146 168
Provisions 3 4 3 3 3 3 3
Income Tax Liabilities 0 0 1 1 1 1 1
Non-Financial Liabilities 13 19 24 24 24 24 24
Total Current Liabilities 61 69 108 130 155 177 199

Total Equity & Liabilities 159 152 453 357 358 404 490

90
3. HelloFresh Cash Flow Statement

3.1. Weighted Average HelloFresh Cash Flow Statement

Source Scenario Weight

JP Morgan Optimistic 33,3%
Morgan Stanley Neutral 33,3%
Barclays Pesimistic 33,3%

Weighted Average Scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
Change in Working Capital 24 -1 29 3 12 11 11
Operating Cash Flow -66 -76 -55 -53 24 101 167
Capex -6 -36 -10 -29 -36 -21 -26
Investing Cash Flow -18 -42 -13 -46 -41 -24 -29
Financing Cash Flow 174 67 344 -10 0 0 0

Total Cash Flow 90 -51 277 -109 -16 77 138

Cash & Cash Equivalents at End of Year 109 57 331 222 206 282 420

Free Cash Flow Calculation – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
EBIT -114 -90 -93 -77 -12 70 138
Effective Tax Rate 0,0% 0,0% 2,1% -2,5% -9,2% 27,5% 13,3%
NOPAT -114 -90 -91 -79 -13 51 120
+ D&A 0 1 1 3 8 11 12
– Change in Working Capital -24 1 -29 -3 -12 -11 -11
– Capex 6 36 10 29 36 21 26
Free Cash Flow -132 -51 -108 -51 20 73 146

3.2. JP Morgan HelloFresh Cash Flow Statement – Optimistic Scenario

JP Morgan – Optimistic scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
Profit or Loss -117 -94 -112 -71 5 122 193
Net Financial Interest 1 4 6 2 1 1 0
Income Tax 0 0 0 0 0 0 1
D&A and Impairments 1 4 12 17 18 12 10
Other Adjustments 18 6 10 12 9 7 11
Change in Working Capital 23 -1 24 19 18 16 15
Income Tax Paid 0 0 -7 -8 -9 -10 -10
Interest Paid 0 -1 -6 -2 -1 -1 -1
Other Operating Cash Flow 8 6 0 0 0 0 0
Operating Cash Flow -66 -76 -73 -32 40 146 218

Capex -6 -35 -9 -23 -22 -9 -16

Software Development Expenditures 0 0 -2 -2 -3 -3 -4
Other Investing Cash Flow -12 -7 0 0 0 0 0
Investing Cash Flow -17 -43 -10 -25 -25 -12 -20

Capital Contributions from Shareholders 184 23 0 0 0 0 0

Net IPO Proceeds 0 0 357 0 0 0 0
Increase / Decrease in Debt 0 44 -18 0 0 0 0
Repurchase of Shares into Treasury -10 0 0 0 0 0 0
Financing Cash Flow 174 67 339 0 0 0 0

Total Cash Flow 91 -52 256 -57 16 134 199

Cash & Cash Equivalents at Beginning of Year 20 109 58 313 256 272 406
Effects of Exchange Rate Changes -1 -1 0 0 0 0 0
Cash & Cash Equivalents at End of Year 109 57 313 256 272 406 605

91
3.3. Morgan Stanley HelloFresh Cash Flow Statement – Neutral
Scenario

Morgan Stanley – Neutral scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
EBIT -116 -90 -89 -71 -11 68 160
D&A 1 4 8 12 15 18 21
Change in Working Capital 23 -1 31 -15 3 5 7
Income Tax Paid 0 0 0 0 0 -10 -23
Interest Paid 0 -1 -4 1 1 1 1
Other Operating Cash Flow 26 12 8 13 10 10 12
Operating Cash Flow -66 -76 -46 -60 18 92 178

Capex -6 -37 -14 -35 -25 -31 -35

Acquisitions -3 0 0 0 0 0 0
Other Investing Cash Flow -9 -5 0 0 0 0 0
Investing Cash Flow -18 -42 -14 -35 -25 -31 -35

Capital Contributions from Shareholders 184 23 0 0 0 0 0

Net IPO Proceeds 0 0 363 0 0 0 0
Increase / Decrease in Debt 0 44 -16 0 0 0 0
Repurchase of Shares into Treasury -10 0 0 0 0 0 0
Financing Cash Flow 174 67 347 0 0 0 0

Total Cash Flow 90 -51 287 -95 -7 61 143

Cash & Cash Equivalents at Beginning of Year 20 109 58 340 245 237 298
Effects of Exchange Rate Changes -1 -1 -5 0 0 0 0
Cash & Cash Equivalents at End of Year 109 57 340 245 238 298 441

3.4. Barclays HelloFresh Cash Flow Statement – Pessimistic Scenario

Barclays – Pesimistic scenario – EURm 2015A 2016A 2017A 2018E 2019E 2020E 2021E
Adj. EBITDA - Barclays -111 -85 -78 -78 -4 47 87
Change in Working Capital 25 -1 31 6 14 12 12
Income Tax Paid 0 0 -3 -7 -9 -12 -15
Interest Paid 0 -1 -4 -2 -2 -2 -2
Other Operating Cash Flow 20 11 8 13 16 19 22
Operating Cash Flow -66 -76 -46 -69 15 64 104

Capex -6 -35 -9 -28 -62 -24 -28

Software Development Expenditures 0 -2 -4 -4 -9 -3 -4
Other Investing Cash Flow -12 -5 -1 -46 -2 -1 -1
Investing Cash Flow -17 -43 -14 -78 -72 -29 -33

Capital Contributions from Shareholders 184 23 0 0 0 0 0

Net IPO Proceeds 0 0 363 0 0 0 0
Increase / Decrease in Debt 0 44 -16 -29 0 0 0
Repurchase of Shares into Treasury -10 0 0 0 0 0 0
Financing Cash Flow 174 68 347 -29 0 0 0

Total Cash Flow 91 -51 288 -176 -58 36 72

Cash & Cash Equivalents at Beginning of Year 20 109 58 340 164 107 143
Effects of Exchange Rate Changes -1 -1 -5 0 0 0 0
Cash & Cash Equivalents at End of Year 109 58 340 164 107 143 215

92
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