the application to investment process at venture capital and approach to start up valuation method at z area uniform private enterprise

FOREIGN TRADE UNIVERSITY HO CHI MINH CITY CAMPUS -*** MID-COURSE INTERNSHIP REPORT Major: International Finance THE APPLICATION TO INVESTMENT PROCESS AT VENTURE CAPITAL AND APPROACH TO START-UP VALUATION METHOD AT Z AREA UNIFORM PRIVATE ENTERPRISE Student: VU HOANG PHUONG Student ID: 1801035710 Class: K57CLC2 Supervisor: Mr LE TRUNG THANH Ho Chi Minh City, August 2021 FOREIGN TRADE UNIVERSITY SOCIALIST REPUBLIC OF VIETNAM HO CHI MINH CITY CAMPUS Independence - Freedom - Happiness MIDTERM PROFESSIONAL REPORT REMARKS Student’s full name: VU HOANG PHUONG Student code: 1801035710 Name of the report: The application to investment process at venture capital and approach to start-up valuation method at Z Area Uniform Private Enterprise Assessment of compliance with regulations, progress and work ethics (Maximum of 1.0 point, with one decimal number): ……………………………………………… Remarks (circle the appropriate one): The student has completed the report properly under the guidance of the supervisor The supervisor is responsible for the title, purpose, subjects, scope and research method(s), and chapters’ titles, and main headings of the report (3 digits): 0.81.0 point(s) The student has failed to carefully follow the supervisor’s instructions The supervisor is responsible for chapters’ titles, purpose, subject, scope and research method(s), and titles and main headings of the report (2 digits): 0.5-0.7 point(s) The student has failed to carefully follow the supervisor’s instructions The supervisor is not responsible for the report: 0.1-0.4 point(s) The student has totally failed to follow the supervisor’s instructions The supervisor rejects the submission of the report: point Ho Chi Minh City, August 20th 2021 Supervisor Mr LE TRUNG THANH INTERNSHIP ORGANIZATION’S REMARKS Organization’s legal name: Z Area Uniform Private Enterprise Address: 01 A4 Street, Ward 12, Tan Binh District, Ho Chi Minh City, Vietnam Tax code: 0316661214 Main business sectors: Garment, E-Commerce, Digital Transformation We hereby confirm that Mr Vu Hoang Phuong has completed an internship at our organization from July 10th 2021 to August 10th 2021 - For his/her attitude: Phuong has a proactive mindset about work He is energetic, diligent, and constantly goes above and beyond to complete given duties He may also quickly learn from early errors in order to prevent repetition Throughout the internship, He shown a strong desire to learn and a strong sense of responsibility - For his/her perception of the organization’s activities: He adapts quickly to her new business surroundings Phuong was introduced to the accounting & finance department in our company as well as working in pitch desk with VC project In general, he has gained a strong understanding of the department's operations - For the data illustrated in the report (Please confirm the accuracy of the data): This paper details a business model that is crystal clear and accurate The report's data is accurate and was provided by the business - Other remarks: Although our start-up environment was quite new and full of challenges, he excelled in overcoming and adapting to his assigned tasks We recognized his ability and considered offering him a long-term position at the company after his graduation Signature (Please write the full title, sign and seal) Mr DANG PHUONG NAM STATEMENT OF AUTHORSHIP I hereby certify that this is my personal mid-course internship report, written under the guidance and supervision of Mr Le Trung Thanh With the exception of material cited in the text of the mid-course internship report, this internship report does not contain any information that has previously been published There has been no unauthorized use of another person’s work in this report without their permission This mid-course internship report has not been submitted for consideration for any other institution's degree or certificate award Ho Chi Minh City, August 20th, 2021 Student Author VŨ HOÀNG PHƯƠNG ACKNOWLEDGMENT For the accomplishment of this mid-course internship report, I would like to convey my sincere appreciation to Mr Le Trung Thanh for his conscientious and meticulous directions In the absence of his ongoing and invaluable mentorship, this report would simply not have been completed Additionally, I would like to express my gratitude to the Board of Directors and staff of Z Area Uniform Private Enterprise, for their comprehensive guidance, knowledge, and practical expertise in finishing this report Especially, I would also want to express my heartfelt gratefulness to Mr Dang Phuong Nam, Mr Duong Bao Long, and Mr Nguyen Quang Huy Not only did they give me useful reference resources, but they also provided me with detailed responses to my topic-related queries, allowing me to complete the report to the best of my knowledge and capability Nevertheless, due to the fact that the five-week internship period does not allow me to acquire enough in-depth knowledge and skills in terms of professional process as well as practical experiences, shortcomings in this report are unavoidable As such, I would really appreciate any constructive feedback and recommendations in order to enhance my skillsets for my personal career performance into different jobs in the future TABLE OF CONTENTS PREFACE .1 CHAPTER 1: GENERAL INTRODUCTION OF Z AREA UNIFORM PRIVATE ENTERPRISE 1.1 Foundation and Development of Z Area Unifor m Private Enterprise 1.2 Vision & Main business activities Vision Main business activities 1.3 Organization Structure & Division Overview Organization Structure Division Overview 1.4 Business Performance of Z Area Uniform during 2019 – 2021 1.5 Internship Duties at Z Area Uniform CHAPTER 2: THE APPLICATION TO INVESTMENT PROCESS AT VENTURE CAPITAL AND APPROACH TO START-UP VALUATION METHOD 2.1 10 The application to investment process at venture capital 10 Sourcing Stage 11 Deal Screen Stage 12 2.2 Approaches to Discounted cash flow (DCF) valuation methods 13 Step 1: Create financial projections & determine the future free cash flow 13 Step 2: Determine the discount factor 15 Step 3: Aggregating all the calculations’ results 17 2.3 Overall evaluation of the Discounted Cash Flow valuation method 18 Strengths 18 Weaknesses 18 CHAPTER 3: RECOMMENDATIONS FOR THE IMPROVEMENT OF THE PROCEDURE OF START-UP VALUATION AND KEY LEARNING POINTS AFTER A FIVE–WEEK INTERNSHIP AT Z AREA UNIFORM PRIVATE ENTERPRISE 19 3.1 Opportunities & Challenges of the procedure 19 Opportunities 19 Challenges 19 3.2 Recommendations for the improvement of the valuation process 20 3.3 Key learning points after a five-week internship at Accounting & Finance Department – Z Area Uniform 21 CONCLUSIONS .23 REFERENCES 24 LIST OF APPENDIES 25 LISTS OF ABBREVIATIONS Abbreviations Full phrase DCF Discounted Cash Flow IT Information Technology MVP Minimum Viable Product POD Print-on-demand SaaS Software as a Service USD United States Dollars VC Venture Capital VND Viet Nam Dong LISTS OF TABLES, CHARTS AND FIGURES Table/Chart/Figure Page Table 1.1 General information of Z Area Uniform Private Enterprise Chart 1.1 Organizational Hierarchy of Z Area Uniform Table 1.2 Summary of Income Statement of Z Area Uniform in 2019 & 2020 Figure 2.1 The venture selection process at XYZ Venture Capital 10 Table 2.1 The instructions of calculating free cash flow 14 Table 2.2 Valuation of Z Area Uniform under DCF-method 17 12 Deal Screen Stage XYZ Venture Capital will an early evaluation of the endeavor after the first contact To conduct an initial assessment, the team or VC associate will examine the intake form or request any further information required The pitch deck, business strategy, historical performance of the company, and other papers are often submitted in for evaluation Once the first evaluation is complete and the Idea Capitalists has shown interest or recognized promise in the venture, the associate will respond to the application and attempt to schedule a face-to-face or online meeting The VC will attempt to learn all there is to know about their company by asking a lot of questions This first meeting is also to see whether the venture founder or CEO is on the same page as the VC, if they understand how Venture Capitalists operate, and if they are as enthusiastic and dedicated to working on the company if they get funding At this point, the employees and colleagues will also dig out additional information to assess these following elements: Trend and potential of the market in which the venture is operating, as measured by the competitiveness of the e-commerce and print-on-demand industry The company's founder or entrepreneur: Venture capitalists also look at the entrepreneur's history and professional skills to determine whether they believe in the company concept as much as the entrepreneur does A background check on the entrepreneur's former customers, coworkers, or employers is often included in this process The execution team: the VC will examine whether the gathered team has the credibility and credentials to commit to and provide the product or service in question Business valuation: To give comparable of similar enterprises with similar types of products or service in the industry, VC often use different methods to determine valuation of the start-up such as discounted cash flow (DCF) to arrive at a fair business value, comparable company analysis (COMPS), and precedent transactions analysis, et cetera 13 2.2 Approaches to Discounted cash flow (DCF) valuation methods Theoretically, Discounted cash flow (DCF) is a valuation technique for estimating the value of an investment based on its anticipated future cash flows DCF analysis tries to determine the current value of an investment based on future predictions of how much money it will produce The goal of a DCF analysis is to calculate how much money an investor would get from a given investment after accounting for the time value of money Because money may be invested, the temporal value of money implies that a dollar now is worth more than a dollar tomorrow As a result, a DCF analysis is applicable in any scenario where a person is spending money now in the hopes of getting more money later Following the following formula, the discounted cash flow (DCF) is the total of the cash flows in each period divided by one plus the discount rate (WACC) raised to the power of the period number DCF = [CF/(1+r)^1] + [CF/(1+r)^2] + [CF/(1+r)^3] + … + [CF/(1+r)^n] (CF = Cash Flow in the Period; r = the interest rate or discount rate (WACC); n = the period number) The following subsections use the company's financial data, applied to this valuation method to determine the value of the company step-by-step under DCF analysis Step 1: Create financial projections & determine the future free cash flow To use the DCF technique to value business, initially the company must predict the company's future financial performance The business must forecast income streams, expenditures, expenses, and investments for the years ahead in a financial model These elements are included in a financial overview, which includes a forecast of financial statements (profit and loss, balance sheet, and cash flow statement) as well as the company's most important Key Performance Indicators (KPIs) The process of calculating free cash flows is illustrated in Table 2.1 below: 14 Table 2.1 The instructions of calculating free cash flow Steps Start with the Earnings before Interest & Taxes (EBIT) Explanation Source of information EBIT is the financial outcome of company after subtraction of interest & taxes Operational taxes are Deduct any operational those that must be paid taxes Profit/Loss Statement based on a company’s Profit/Loss Statement financial performance Deductions should be made for investments in Correct for investments assets such as property, plant, and equipment Cash flows & Balance Sheet Statement (PPE) When computing EBIT in the profit and loss statement, depreciation is treated as a cost Depreciation, on the other hand, is not a real cash Correct for depreciation flow When compute free Profit/Loss & Balance cash flows using EBIT Sheet Statement from the profit and loss statement, depreciation must be added back to EBIT to compensate for the incorrectly subtracted cash outflow 15 The Correct for investments in working capital number of investments in working capital is calculated based Balance Sheet Statement on current assets and current liabilities (Source: Accounting & Finance Department – Z Area Uniform Private Enterprise) The board of management built a model to predict the business results of the startup with a growth rate of 20% in the period 2022-2025, then 10% per year Free cash flow is calculated as follows: 2022 2023 2024 2025 EBIT 500 600 720 864 Operational Tax (20%) -100 -120 -144 -172,8 400 480 576 691,2 Investments -100 -120 -140 -160 Depreciation 100 120 140 160 Investments in working capital -25 -30 -35 -25 Free cash flow 375 450 541 666,2 Net operating profit less adjusted taxes (Source: Accounting & Finance Department – Z Area Uniform Private Enterprise; Unit: Million VND) Step 2: Determine the discount factor Money's value deteriorates over time: today's money is worth less than tomorrow's money After calculating free cash flow in the previous section, the business must now calculate its current value The discount factor determines the present value of firm’s future cash flows, calculated as below formula: Discount factor = / (1 + WACC %) ^ Number of time period The Weighted Average Cost of Capital (WACC) will be used to determine the discount factor In essence, the WACC is a percentage that is used to quantify the risk that an investor assumes while investing in a company The greater the WACC percentage, the greater the risk and the lower the firm's value Consequently, it is not 16 surprising to find high WACC percentages for startups, given how risky they are to begin with After that, the total present value will be calculated as multiplying discount factor with each year free cash flow figure Last but not least, in addition to calculating the net present value throughout the specified time period, the start-up must also compute the value of cash flows produced in subsequent years, known as terminal value, using the following two equations: Free cash flow terminal value = Free cash flow in last projected period * (1 + g) then Terminal value = Free cash flows in subsequent years / (WACC – g) (g: growth rate (%)) There are also couples of approaches to the growth rate factor (g) in the equation Conservatively, this growth percentage equals to the inflation percentage of that market In contrast, when the start-up is optimistic about the company future, they might use anticipated annual growth rate of the company to increase the value of the company The following table assume the WACC and growth rate of the start-up are 15% and 10%, respectively: Terminal Value 2022 2023 2024 2025 400 480 576 691,2 Investments -100 -120 -140 -160 Depreciation Investments in working capital 100 120 140 160 -25 -30 -35 -25 Free cash flow 375 450 541 666,2 14656,4 4 0,87 0,76 0,66 0,57 0,57 326,09 340,26 355,72 380,90 8379,84 Net operating profit less adjusted taxes Discounted period Discount factor Discounted cash flow 17 (Source: Accounting & Finance Department – Z Area Uniform Private Enterprise; Unit: Million VND) Step 3: Aggregating all the calculations’ results As mentioned before, the startup computed the net present value of all future cash flows in the preceding step (including the Terminal Value) Finally, when all of these numbers are added together, the value of the startup on the basis of the DCF-method is determined In this specific case, the value of start-up Z Area Uniform is currently priced at approximately 9.78 billion Vietnam Dong, calculated as follow: Table 2.2 Valuation of Z Area Uniform under DCF-method Terminal Value 2022 2023 2024 2025 EBIT 500 600 720 864 Operational Tax (20%) -100 -120 -144 -172,8 400 480 576 691,2 Investments -100 -120 -140 -160 Depreciation Investments in working capital 100 120 140 160 -25 -30 -35 -25 Free cash flow 375 450 541 666,2 14656,4 4 0,87 0,76 0,66 0,57 0,57 326,09 340,26 355,72 380,90 8379,84 Net operating profit less adjusted taxes Long term growth rate = 10% WACC = 15% Discounted period Discount factor Discounted cash flow Enterprise Value 9782,81 (Source: Accounting & Finance Department – Z Area Uniform Private Enterprise; Unit: Million VND) 18 2.3 Overall evaluation of the Discounted Cash Flow valuation method Strengths The DCF valuation technique has several advantages over other approaches This is a frequently utilized technique, first and foremost, because of its great depth, which includes all of the key assumptions about the company Furthermore, the DCF incorporates variables that are difficult to measure, such as the intrinsic value of the company and all expectations about the company's future performance For new startups the DCF method does not require comparable companies for valuation of their own company Due to the fact that the valuation is based on free cash flows, and that these cash flows are derived from the projected performance of the company, the founder has the ability to construct numerous scenarios to take actions for his or her projection This has an impact on the value since the underlying free cash flows vary depending on which scenario is used On the other hand, DCF makes it simple for investors to compute internal rates of return (IRR) and conduct sensitivity analysis, allowing them to make investment choices that are both quicker and more datadriven Weaknesses The DCF approach has many drawbacks, the most significant of which is that it is nothing more than a formula, or a mathematical operation, when it comes to valuing companies In other words, the quality of the valuation is highly sensitive to the input factors of the calculation (such as the WACC and the growth rate), as well as to the ability of the management to make an accurate prediction of their company's future performance After all, future profits (free cash flows) serve as the basis for determining a company's worth And this exemplifies the difficulty in determining the value of a new company It is simpler for well-established companies to make predictions because they can extrapolate past data that gives a fair degree of confidence In most cases, a company does not have much previous financial information at this point A pre-revenue startup is one that has not yet generated any revenues In that situation, it is vital to have a proper financial model 19 CHAPTER 3: RECOMMENDATIONS FOR THE IMPROVEMENT OF THE PROCEDURE OF START-UP VALUATION AND KEY LEARNING POINTS AFTER A FIVE–WEEK INTERNSHIP AT Z AREA UNIFORM PRIVATE ENTERPRISE 3.1 Opportunities & Challenges of the procedure Opportunities Regarding the current business model in the field of e-commerce and print-ondemand, Z Area Uniform has a lot of potential for strong growth In the domestic market, Z Area Uniform is the first start-up to develop this print-on-demand B2B2C business platform Understanding Vietnamese culture and market will help businesses have a certain competitive advantage over international competitors Globally, this business model has proven very successful by many "big guys" with huge valuations such as Printful reaching $1 billion in May 2021 or Teespring reaching $650 million since 2015 With the continuous development of the internet today, this market is expected to have a lot of growth potential, forecasted to reach billion USD by 2025 Challenges In addition to the possible opportunities that are opening up, it would be remiss not to highlight the difficulties that are impeding the growth of Z Area Uniform as well First and foremost, despite the fact that the business's financial indicators are very good, as well as the thorough preparation of valuation papers and tools by the company, raising capital during the covid-19 period is exceedingly tough When venture capital funds become more conservative in their investment choices, it becomes more challenging In addition, companies face short-term risks such as disruptions in the supply chain of raw materials for manufacturing, difficulty to transport products as a result of the tense epidemic scenario in Ho Chi Minh City, and other similar issues The difficulties of competing with international competitors in the context of globalization will make the local market no longer a "blue ocean" in the long run Getting companies into regional markets like ASEAN or other developing countries quickly is also a conundrum for the start-up’s board of management 20 3.2 Recommendations for the improvement of the valuation process Discounted cash flow, while being one of the most common and comprehensive valuation techniques today, nevertheless has flaws, as discussed in section 2.3.2 of this study As a result, the company's finance and accounting department should prepare more than other valuation techniques for comparison and reference to market benchmarks Other techniques used by technology startups and venture capital firms include Comparable Analysis (multiplying EBITDA by an industry-wide coefficient of determination) and the Berkus Approach (looks at valuing a start-up enterprise based on a detailed assessment of five key success factors) The adoption of a variety of various valuation models will provide management with the most realistic picture of the value of the company in the current status However, while negotiating with investors, start-up must be careful to offer a sufficient price that is attractive enough to entice venture capitalists while without diluting reasonable of the shares held by the original investors Giving away too much stake in the earlystage of a startup's lifecycle may make it more difficult to raise subsequent Serie A, B, and C rounds, as well as adversely impact the performance of the founders when they no longer have the necessary desire to continue developing the firm To conclude, running business in the midst of the COVID-19 pandemic during recent months proves to be a significant obstacle for all companies, regardless of their size At this point, the company's leadership must be adaptable in developing policies that protect the benefits of all stakeholders, including customers, workers, suppliers, and others, while also maintaining the company's cash flow It is also critical for companies to cut unnecessary expenses during this of social distancing Businesses that want to break through and gain a competitive advantage at this time must devote a significant amount of time and resources to developing campaigns that take care of existing customers in order to take full advantage of word-of-mouth, resulting in their loyal customers Aside from that, the team must continuously innovate and adapt digitally in order to provide the greatest possible values and experiences for consumers in light of the "new normal" that has emerged as a result of the epidemic 21 3.3 Key learning points after a five-week internship at Accounting & Finance Department – Z Area Uniform When it came to prior university courses involving corporate finance and comprehending the financial reports, I simply grasped the basic formula without truly grasping the rationale behind those or the ambiguity around how to use them in reality In this internship, as I get particular training and experience with the issues listed above, I gradually understand the problem deeply and can apply it more easily when I encounter it in the future Aside from that, the five-week internship helped me develop my soft-skills and changed my working attitude, which would help me perform better in my future job path once I complete my degree In Z Area Uniform, I had the opportunity to improve my abilities in critical thinking, communication, structural-detailed planning and execution thanks to my superiors and coworkers My queries about the current Z Area Uniform process were not simply answered, but they lead me to the correct answers by asking me many questions backwards and encouraging me to self-reflect on my own study and previously acquired academic knowledge Slowly following their suggestions, I was able to find the solutions to my questions, as well as improve my critical thinking and structure – thorough planning abilities During this journey, I was inspired by my colleagues' proactive, spirit of learning and solution-oriented mindset, and I treasured every moment spent listening to their stories about the daily operations of the procedure, valuable pieces of advice, and constructive feedback for the improvement of my mid-course internship report during the course of this journey Finally, as a Foreign Trade University student who has been motivated by past generations of students and professors, I have always aspired to one day be able to establish my own company The process of internship in a start-up environment like Z Area Uniform also gives me the opportunity to learn more about management skills, know what is going on day-to-day in a start-up company and especially the process to raise capital from the VC when necessary Not only did this trip provide me with practical knowledge that improved my skills in the area of Finance – Banking, but it also provided me with the opportunity to work in a pleasant atmosphere and form 22 new networks with other seniors, colleagues, and interns at Z Area Uniform The friendly relationships and experiences I've formed with other seniors, coworkers, and interns here will live on in my heart forever Those important learning elements from Z Area Uniform are regarded as stepping stones on my own road to freeing myself from the "comfort zone," pushing my boundaries, and achieving success in the future journey after my graduation from Foreign Trade University Ho Chi Minh City Campus 23 CONCLUSIONS The Vietnamese start-up sector has witnessed a substantial increase in both quantity and investment capital in recent years Investment inflows into Vietnamese startups have rocketed to approximately 1.77 billion USD in the last three years Being funded by investment funds is a fantastic launch pad for any start-up, in addition to developing goods that meet market needs and having a strong execution team It allows them to grow rapidly and reach a wide range of markets The value of the business, on the other hand, is one of the most significant differences between investors and start-ups The challenge for business owners is always how to provide a sufficient fair price to attract investors while maintaining the company's worth for subsequent financing rounds After completing a five-week internship in the Accounting & Finance Department at Z Area Uniform Private Enterprise, a Vietnamese start-up pioneering in the ecommerce and print-on-demand industries, I'm lucky enough to be working on a pitch deck for some venture capitalists (VCs), specialized in financial report analysis, company valuation, and future cash flow projections I was able to bridge the gap between what I learned in school and what a real business actually does as a result of this pitch deck procedure Working for a start-up, rather than a large corporation, personally, will allow me to get more multidisciplinary knowledge that enhance my skillset in my future career 24 REFERENCES Official website of Z Area Uniform Private Enterprise: https://www.zarea.vn/ Internal website for Z Area Uniform Private Enterprise’s employees: https://www.staff.zarea.vn/ Accounting & Finance Department - Z Area Uniform Private Enterprise: Profit & Loss Statement (2019), Profit & Loss Statement (2020), Profit & Loss Statement (Q1&Q2/2021), Balance Sheet (2019, 2020, 2021), Cash Flow Statement (2019, 2020, 2021) Human Resources Department – Z Area Uniform Private Enterprise: General information of Z Area Uniform Private Enterprise, Organizational structure of Z Area Uniform Private Enterprise Nextrans (2021) Q1.2021 Vietnam Startup Report Do Ventures (2020) Vietnam Innovation & Tech Investment Report 2020 Orbis Research (2021) Global Print On Demand Software Market 2021 Research Report by User Demand, Consumption, Applications, Types, Trends and Forecast 2026 Alexandros Matthiessen (2019) Startup valuation: applying the discounted cash flow method in six easy steps Retrieved from https://www.ey.com/en_nl/finance-navigator/startup-valuation-applying-thediscounted-cash-flow-method-in-six-easy-steps Stephen Ross (1988), 5th edition Fundamental of Corporate Finance 25 LIST OF APPENDIES Appendix Official Investment Process at XYZ Venture Capital (Source: XYZ Venture Capital) Appendix XYZ Venture Capital’s Intake Form (Source: XYZ Venture Capital) 26 Appendix Start-up snapshot example by XYZ Venture Capital (Source: XYZ Venture Capital) Appendix Start-up term sheet example (Template provided by Accounting & Finance Deparment – Z Area Uniform) ... Name of the report: The application to investment process at venture capital and approach to start- up valuation method at Z Area Uniform Private Enterprise Assessment of compliance with regulations,... after putting a lot of attention on: ? ?THE APPLICATION TO INVESTMENT PROCESS AT VENTURE CAPITAL AND APPROACH TO START- UP VALUATION METHOD AT Z AREA UNIFORM PRIVATE ENTERPRISE? ?? The internship report... Introduction to Z Area Uniform Private Enterprise Chapter 2: The application to investment process at venture capital and approaches to start- up valuation method Chapter 3: Recommendations for the improvement