Novel Bin Chapter 21: Discussing about Business with Catherine
Chapter 21: Discussing about Business with Catherine
Catherine rolled her eyes playfully at Michael's question. "Your performance?" she echoed, a teasing tone in her voice. "Well, you certainly impressed Engineer Benico, which is no small feat. But I think the real test will be how this technology performs in further evaluations."
She paused, crossing her arms and looking at Michael thoughtfully. "I have to admit, I was skeptical at first. But seeing the engineer's reaction and the results of the preliminary tests... it's hard not to be intrigued."
Michael nodded. "I understand your skepticism. It's not every day someone claims to have developed a solar panel with such high efficiency. But I'm confident in what I've created."
Catherine moved closer, her expression becoming more serious. "Michael, if this technology holds up under further testing, it could change the landscape of renewable energy. You're potentially holding a very powerful and valuable invention. And my mother would be very pleased to invest in your startup."
Michael chuckled. "Well, Sir Benico said that it's going to be a predicament for your mother. I don't know why he said that. Any idea?"
Catherine shook her head. "I have no idea. Well...do you have any questions you'd like to ask? I am free this evening."
"Hmm..." Michael hummed, thinking of a question. "Well, how about this? I watched a popular business reality show on YouTube and the investors would offer the companies the money they want in exchange for equity. So does it mean that I have a 100 percent equity stake in a company?"
Of course, he knew the answer to this thanks to a lot of business research he conducted. He wanted to make Catherine feel valued.
Catherine smiled, appreciating Michael's attempt to engage in a more business-oriented conversation. "In simple terms, yes. Initially, as the founder, you own 100% of your company's equity. But when you take on investors, you're essentially selling a portion of your company in exchange for their investment."
She walked over to a small coffee table and picked up a notepad and pen as if preparing to illustrate her point. "Let's say SolaraTech Innovations is valued at a certain amount, and you need a certain level of investment for growth, research, or production. If an investor agrees to provide that investment, they will typically want a share of your company proportional to the investment and the valuation."
Catherine started jotting down hypothetical numbers. "For example, if SolaraTech is valued at $1 million, and an investor gives you $100,000, they might ask for 10% of your company. This way, your equity stake reduces to 90%, and the investor owns 10%."
She looked up from the notepad. "It's a trade-off. You lose a portion of your company, but you gain essential capital to grow. And it's not just about the money. Investors like my mother bring experience, networks, and resources that can be invaluable."
Michael listened intently, nodding as Catherine explained. "That makes sense. So, it's about finding the right investors who can offer more than just money."
"Exactly," Catherine affirmed. "And remember, the more valuable your company becomes, the more valuable your remaining equity is. So, even if you own a smaller percentage, it can be worth much more in the long run."
"Well...okay, that's easier to digest," Michael chuckled embarrassingly.
"Do you have any other questions?" Catherine, asked, her eyes beaming with joy, which is quite the opposite of what she was wearing during their first encounters.
"Hmm..." Michael paused for a moment, formulating his next question. "Actually, yes. I've been wondering about company valuations. How exactly do you estimate the valuation of a company, especially a startup like SolaraTech Innovations?"
"Valuing a startup can be more of an art than a science, especially when it's in the early stages and doesn't have a long track record of revenues or profits. But there are a few methods commonly used."
She began explaining the different approaches. "One method is the cost-to-duplicate approach. This looks at how much it would cost to build another company just like yours from scratch. This includes the cost of developing your product, setting up a business, and so forth."
"Then there's the market multiple approach," she continued. "This involves looking at similar companies that have been sold or are publicly traded, and using their valuations as a benchmark. However, this can be tricky for a unique business like yours with a potentially groundbreaking technology."
"The most common method, though, especially for startups, is the risk-adjusted net present value (NPV) of future cash flows. This means estimating how much money your company will make in the future and then working out how much that cash flow is worth in today's terms, adjusted for risk."
Michael absorbed the information. "Okay, how about we try and calculate our valuation of my company right now?"
"Are you serious?" Catherine asked.
"Of course, I am. Didn't I tell you, I am starting a business and that I have a business plan? Though it didn't include the valuation."
Catherine nodded, intrigued by the challenge. "Alright, let's do a basic valuation. We'll use the risk-adjusted net present value (NPV) method since it's the most applicable for a startup like SolaraTech Innovations. We'll need to estimate your future cash flows and then discount them to present value."
She grabbed a larger notepad and a calculator, ready to work through the process. "First, let's make some assumptions. Given the groundbreaking nature of your solar panel technology, which could potentially disrupt the market, we can assume a high demand. However, we also need to factor in the costs of production, R&D, marketing, and other operational expenses."
Michael nodded, "I've projected significant revenue growth, especially after the second year when we start large-scale production and sales. Let's say we expect to generate $5 million in revenue by year three."
Catherine started jotting down the numbers. "Alright, $5 million in year three. What about years one and two?"
"For year one, let's be conservative and say $500,000, as we'll be setting up and starting production. Year two could see a jump to $2 million as we start selling and gaining market traction," Michael suggested.
"Fair enough," Catherine said as she wrote down the numbers. "Now, we need to discount these future revenues to their present value. We'll use a discount rate that reflects the risk involved in this venture. Given the high potential but also the high risk of a new technology, let's use a discount rate of 15%."
She started calculating, "So, the present value of $500,000 in one year at a 15% discount rate is approximately $435,000. For year two's $2 million, it's around $1.5 million, and for year three's $5 million, it's approximately $3.4 million."
Michael watched as she added up the numbers. "So, the total present value of the future cash flows for the first three years is about $5.34 million?"
"Exactly," Catherine confirmed. "Now, this is a very basic calculation. In a real-world scenario, we'd also consider factors like market growth, potential competitors, regulatory changes, and more. But for now, this gives us a ballpark valuation for SolaraTech Innovations."
"So, based on these numbers, SolaraTech could be valued at around $5 million?" Michael asked.
"Yes, roughly. But remember, this is just an estimate. Actual valuation might be higher or lower depending on many factors, including investor interest and market conditions," Catherine clarified.
"This is making my heart pounding," Michael said, chortling.
"Don't be excited just yet. Remember, your technology is still being tested. But I highly suggest that you patent it."
"Will do ma'am," Michael said.
"Don't call me ma'am, we are just about the same age!" Catherine smacked him gently on the shoulder.
"Now, now. Catherine, you have been a huge help, thank you," Michael said genuinely.
Catherine's cheeks flushed slightly at Michael's gratitude, and she quickly composed herself, reverting to a more composed demeanor.
"Well, it's part of what I do," she said, trying to sound nonchalant. "After all, understanding and evaluating business propositions is key in my family's line of work."
Michael grinned, noticing her slight change in behavior. "I can see that. You have a knack for making complex things seem simple."
Catherine averted her gaze, her tone becoming a bit more formal as if trying to maintain a professional distance. "It's important to be thorough, especially with something as groundbreaking as your invention. But, Michael, you should really consider the legal and business aspects seriously. Patenting your technology is crucial, and setting up your business properly from the start will save you a lot of trouble down the line."
"Absolutely," Michael nodded, appreciating her advice. "Oh last one, speaking of patents, do I have to apply only in the Philippines? Like if I apply for a patent in the Philippines, is it patented in other countries?"
"Patent laws are territorial, meaning they only provide protection in the country where the patent is granted. If you patent your technology in the Philippines, it will only be protected here. However, if you want international protection, you need to file for patents in other countries as well."
She leaned back slightly, explaining further. "There are ways to streamline this process. For example, the Patent Cooperation Treaty (PCT) allows you to file a single international patent application that can provide patent protection in multiple countries. This doesn't grant you a patent in all those countries, but it simplifies the process of seeking protection in them."
"So, I would need to file separately in each country where I want protection?"
"Yes," Catherine confirmed. "Each country will review your application according to its own laws and decide whether to grant a patent. It's a process that requires careful planning and, ideally, advice from a patent attorney who specializes in international law...which is out of my forte."
After having a productive discussion with Catherine, he thought to himself. Updat𝒆d fr𝒐m nov𝒆lb(i)n.c(o)m
"Catherine can be a good business partner for me."