The Chinese-style Corporate Financial Services Handbook.
Editor’s note: This article is from WeChat public account “If it is the Financial Research Institute” (ID: RuShiYanJiu), author Guan Qingyou, Zhang Aoping.
The basic financing methods of enterprises include equity financing and debt financing.
Under the traditional economic model, domestic companies are accustomed to debt financing, especially bank loans. However, under the trend of economic transformation, enterprises increasingly need equity financing to achieve the large amount of capital needed for enterprise development.
Equity financing is not exclusive to listed companies, but a financing tool that every company must master. Traditional financing methods are no longer suitable for the current industrial development trend. On the one hand, the initial investment of emerging industries is large, and the risk of recycling is large, and there is no model to be formed. On the other hand, most emerging industries are light assets and lack. Mortgage can’t rely solely on debt financing, and must invest more capital and resources through equity financing.
Before the company realizes IPO, it has to go through several different equity financing stages, which are generally divided into “Angel Wheel, A Wheel, B Wheel, C Wheel, Pre-IPO Wheel”, in addition to the seed wheel, Pre-A The round, D, E, F and other rounds of the statement.
Companies in different stages of financing have to face different investment institutions and therefore need different financing logic to deal with different financing issues. So it is a top priority for companies to clearly grasp the key points of financing.
First, the initial stage of angel round financing
An angel round is the initial stage of equity financing. Generally speaking, the project at this stage is only limited to the “blueprint”. Therefore, it is necessary to invest a certain amount of funds to officially start the project and transform the concept products into actual products. . The amount of financing for Angel Wheel is generally between RMB 500,000 and RMB 15 million. The year 2015, which is the most intensive period of angel round financing, is used as a reference indicator. The total investment amount of 5128 financings is 59.254 billion yuan, and the average financing amount is 115.55 million yuan. Times.
An earlier angel round is the “seed round”, and the financing amount is generally between 100,000 and 1 million yuan. The concept of the seed wheel mentioned abroad is relatively closer to the domestic angel round or the first round of financing, such as “Innovative biopharmaceutical company Oncologie has invested $16.5 million in seed round financing.”
The valuation of angel round enterprises can be referenced because there is no information such as past business model and profit indicators. Therefore, it is mainly based on “slap the head” to price. Most angel investments are investing in “people” and investing in the team. For example, Xu Xiaoping, a real money fund, invested in Jumeiyou in August 2009. At first, Jumei was not an e-commerce provider of cosmetics O2O. Xu Xiaoping did not decide to invest because of the early business model of Jumei, but because Stanford graduated from MBA. Chen Ou, the founder of Jumei, who had had a successful entrepreneurial experience before, decided to invest.
The proportion of equity given by Angel Wheel is generally around 15%-20%. Investment institutions can give corresponding valuations by combining the expectations of the business model and market space. Due to the small amount of investment, the direct contact of the company is the angel round investor.
An angel round investor can have more than one or only one, and there is a difference between a lead shot and a cast. Because angel investors prefer to “sow the net” and “put the eggs in more baskets” in a larger range than the investment institutions at other stages, so the attention of individual companies will not be very concentrated. The risk point at this stage is mainly whether the company itself can further develop and grow.
On average, only 2.5 of the 1,000 angel rounds can get the C round, and there are very few companies that can go to the IPO.
In recent years, China’s angel round financing has also seen a trend of rising first and then falling. Compared with the peak period of 2015, the financing scale of last year fell by 68.5%. As of the end of July this year, there were 927 financing cases, with a total investment of only 7.4 billion yuan.
In the case of a “deficit” in equity financing institutions, it is expected that investment institutions will be more cautious in the second half of 2018 due to the decline in the amount of investable capital. Especially for companies in the angel wheel, the great risks and instability make them more difficult to attract money than other stages.
Second, the initial stage A round of financing
A round generally refers to the financing of the first formal introduction of strategic investors, and the financing amount is generally between 15 million and 150 million yuan.
In terms of the scale of financing in 2017, the average financing amount is about 105 million yuan. In fact, there is a Pre-A wheel between the Angel Wheel and the A Wheel. Those companies that are temporarily cautious about A-round financing or do not want to accept VC’s A-round valuation at the time will first buffer the Pre-A round of financing.
The pre-A round of financing is generally between 5 and 15 million. For example, the Pre-A round of the small yellow car ofo is 9 million, and the subsequent round A financing is 25 million. But for more mature companies, the amount of A round of financing will be even greater. Take Netease Cloud Music’s A round of financing in 2016 as an example. Before the cloud music, NetEase was 100% owned. In the A round, it introduced a strategic investor holding 12%-15% of the equity. The leading investment institution is Shanghai Radio and Television. Shanghai Culture Communication Film and Television Group, the financing amount reached 750 million, and the valuation of A round reached about 6 billion yuan.
Overall, the quota for the A round of valuation is neither high nor low. It should be moderately appropriate to attract more investment institutions while facilitating the development of the market. .
A round of financing introduces strategic investors, so investors are no longer individual angel investors in the angel round, but mainly institutional investors such as venture capital and venture capital. Compared with the angel round, the investment institutions participating in the A round of financing are more concerned with the KPI as a hard indicator. For example, the DAU, which is often referred to by the Internet industry, is the Daily Active User, the number of daily active users, and the GMV, which is the Gross Merchandise Volume. Amount, total number of users, etc.
The companies at this stage mainly rely on the growth space of users and enterprises to evaluate, but not all of them are valued by P/E method, depending on the valuation method of the leading institutions.
Comprehensively, the scale of investment in Round A has shown a slow upward trend year by year. Although the scale of the capital cold winter has declined in the first half of this year, it is not so severe compared with the angel round. The capital stock of investment institutions is still there. It is expected that the impact will be more obvious in 2019.
Three, the long-term B round financing stage
The financing amount of the B round is generally more than 200 million yuan. In 2017, the average financing amount of the B round reached 241 million yuan/time.
Generally, at this stage, most companies are already starting to make a profit, and the business model is expected to obtain further investment from investment institutions in order to show viable and sustainable growth relative to competing products.
Investors in Round B have some differences from the previous two rounds. The financing sources of the company in the B round mainly include the follow-up investment of the A round of investment institutions and the new investment of other private equity investment institutions (PE)..
Taking the AI chip startup Cambrian as an example, Cambrian completed a $100 million Series A financing in August 2017, led by SDIC entrepreneurship, Alibaba Innovation Investment, Lenovo Venture Capital, and National Science Investment , Zhongke Turing, Yuanhe origin, and Yongyu Investment Joint Investment; on June 20 this year, the Cambrian announced the B round of financing from China’s state-owned capital venture capital fund, Guoxin Qidi, SDIC entrepreneurship, Guoxin Capital Joint lead investment, CICC Capital, CITIC Securities Investment & Jinshi Investment, TCL Capital, Chinese Academy of Sciences Science and Technology Achievements Transformation Fund and investment, A round of VC Yuan Heyuan, Guoke Investment, Alibaba Innovation Investment, Lenovo Venture Capital, Zhongke Turing continued to support the investment, with an overall valuation of $2.5 billion.
One of the concerns of the B round of investment is the valuation method. Some investment institutions value it according to the P/E ratio. Some investment institutions value it according to the single user contribution P/MAU. Some institutions follow the market. The sales rate P/S is valued. Behind the different valuation methods are the different valuations and understandings of investment institutions on business models and corporate growth, as well as the consideration of market space prospects.
The valuation rules of China’s capital market for enterprises are the P/E P/E rules. Therefore, most local venture capital firms will have higher profit requirements for enterprises, instead of paying more attention to corporate coverage and growth. After considering all the above valuation methods, companies need to weigh the pros and cons, and then negotiate with VC and PE to select a valuation plan that is most beneficial to the long-term development of the company.
The second concern of the B round of investment is the amount of valuation in the previous period. Some start-up companies are over-funded in the A round and cannot be further financed in the B round. The first reason is that the bubble in the early stage of the A round is too big. The valuation of the B round cannot support the valuation of the A round. The prospect of the project is expected to get the ceiling and there is no further room for growth. The second reason is that the investor’s investment principle is nothing but low buying. Selling, if the next round of financing does not have “receiving the man”, that is, the exit channel of the A round is not smooth, or if you want to withdraw, you can only “bleed” and withdraw. The result is naturally unhappy.
Four, long-term C round financing stage
The financing amount of the C round is generally around 500 million yuan. The average amount of C round financing in the first seven months of 2018 in China is 7.1 billion yuan.
After the precipitation and experience accumulation of the previous rounds of financing, the business logic of the company’s C-round financing should be very clear, and the company has more reference data and financial data available for reference. Can giveThere are more and more comparable companies. For example, the company can estimate the growth space of the company according to the valuation multiple of the price-earnings ratio and the price-to-book ratio of an industry.
After completing this stage of financing, some companies can already be called “unicorns.” For example, the chain company announced in 2017 that it accepted the C-round investment of Sunac China’s leading investment, and Sunac China obtained a 6.25% stake in the chain with RMB 2.6 billion. According to this estimate, the chain’s C-round valuation reached 41.6 billion yuan. Another recent high-profile case is Alipay’s parent company Ant Financial. In June 2018, Ant Financial announced that the C round of financing reached a total amount of 14 billion US dollars, about 95 billion yuan.
However, the risks associated with the C round of financing cannot be ignored.
In the industry, there is a saying called “C-round curse”. According to statistics, 60% of enterprises will be eliminated from Round A to Round B, and nearly 70% of enterprises will be eliminated from Round B to Round C. The survival rate of C-round companies is only about 12%, and even lower.
In the field of market hot concept, the development process from the A round to the C round is the process of the tide receding and the investors returning to rationality. For example, in the first half of 2015, the intelligent hardware that was boiling in the first half of the year, Angels had 270 in the A round, 18 in the B round, and only one in the C round.
In 2018, capital market funds are not abundant, and many investment institutions are increasingly cautious in choosing the underlying environment. Angel Wheel, Round A, and Round B have all scaled down more or less, but China C At the end of July, the amount of round financing exceeded the total amount of financing for the previous years.
At the same time, an interesting phenomenon has emerged. Such a huge amount of fundraising has been supported by more than 200 C-round financing events. This also reflects the fact that in the context of today’s lack of funds and the scarcity of high-quality enterprises, more and more investment institutions have chosen to “bring the group to warm up”, and a large amount of funds have been piled up to invest in high-quality star projects with clear prospects to withstand risks.
V. Mature stage Pre-IPO round financing stage
Companies from the beginning of the C round to the IPO stage have entered maturity. After the C round, the company can also carry out financing from the D round to the E round to the F round, such as the Moby bicycle, depending on its financing needs and expansion needs.
In general, some companies that have developed to this stage can be regarded as “star unicorns”, which is only one step away from IPO.
Before the IPO, the companyThe industry also needs to go through a financing round, Pre-IPO. For example, after three rounds of financing, the Internet medical unicorn enterprise micro-medical officially announced the completion of the US$500 million Pre-IPO round of financing on May 9 this year, becoming the largest pre-IPO financing in China’s current medical health technology industry. . This round of financing was led by AIA and NWS Group, and CIC Zhongcai Fund followed the investment. After the completion of the financing, the company’s valuation reached US$5.5 billion. At this point, micro-medicine became the largest star unicorn company in the industry, and also completed the last round of financing sprint before listing.
The Pre-IPO round of investment is a high-quality project to be listed, and the traders involved in this part of the investment are mostly private equity investments (PE). Most of the exit channels of this round of investment are after the listing of the company, the stocks sold from the open capital market are cashed out.
Investment institutions often protect their interests by adopting gambling agreements. The gambling agreement usually stipulates that if the enterprise fails to meet the financial target or stock price target set by the agreement, the management of the company needs to transfer certain stocks to the investment institution, and vice versa if the corresponding target is reached. In 2003, a gambling agreement signed by Morgan Stanley and other institutions was a typical case.
Pre-IPO also has a certain risk as a financing method and private equity business model. The first reason is that this round of financing will push up the pre-IPO valuation, resulting in speculation. After the listing, the income will shrink due to the high valuation. Secondly, with the tightening of IPO regulation, the regulatory “red line” will increase. Uncertainty has increased dramatically.
On the one hand, the arbitrage space is shrinking, on the other hand, the business space is shrinking, which poses no small challenge to the private equity withdrawal mechanism. However, from the perspective of corporate finance, it is first necessary to determine the financing round and scale as needed before listing, in order to facilitate long-term development. The valuation methods adopted by the Pre-IPO round include income method, market method, cost method, etc., but mainly through the income method, the valuation is based on the price-earnings ratio.
Business factors, market conditions, or capital exit channels are all risks that companies must consider when financing. Enterprises do not have to be too rigid in the form of financing, but should flexibly decide the investment round according to their own needs in order to seek better development.