1

Financing Plan for mymuesli

Lennart Einemann (92050@student.hhs.se)
Hossein Khanaki (khanaki@kth.se)
Santhakumar Mettampalayam Vaduganathan (skmv@kth.se)






Course Assignment
Finance for Start-ups 2010
Instructor: Anna Sderblom
Stockholm School of Economics
March, 12
th
2010
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Content


Introduction .................................................................................................................................................. 3
1. Mymuesli ............................................................................................................................................... 3
2. The market ........................................................................................................................................... 4
3. Business model .................................................................................................................................... 7
4. Financial situation ............................................................................................................................... 9
5. Valuation techniques ......................................................................................................................... 10
5.1. Discounted Cash Flows (DCF) valuation ................................................................................... 10
5.1.1. Cash Flows to Entity model or WACC ............................................................................... 11
5.1.2. Cash Flows to Equity Valuation ........................................................................................... 12
5.1.3. Adjusted Present Value technique (APV) ........................................................................... 12
5.2. Relative Valuation/Multiple Valuation ....................................................................................... 12
5.2.1. Price/Earnings (PE) Multiple ............................................................................................... 13
5.2.2. Price Book Value (PBV) Multiple ........................................................................................ 13
5.2.3. Price/Sales (PS) Multiple ....................................................................................................... 14
5.3. Dividend Discount Model (DDM) .............................................................................................. 14
5.4. Net asset valuation ......................................................................................................................... 14
5.5. Real Options Valuation ................................................................................................................. 15
6. Valuation approach for mymuesli........................................................................................................ 15
Summary and Recommendations ............................................................................................................ 18





3

Introduction

The content of this work is an evaluation and a finance plan for a young German start-up
company, called mymuesli. First we will describe the firm itself and the market they are engaged
in. Afterwards the business model will be explained and evaluated. Than the little given financial
information will be assessed and projections about the potential financial need and sources of
finance in the future will be made. Furthermore different valuation techniques will be described
and used for mymuesli. Finally there will be a DCF valuation for the company and possible
recommendations will be made.

1. Mymuesli

The story of mymuesli begins back in the summer of 2005. Three students from Passau, a city
near Munich in Germany, are on their way to the beach and listening to a famous radio
commercial from a big cereals and cornflakes producer. Then the idea was born to offer
customized muesli where people could choose their favorite ingredients on their own. Some
people like fruits in their cereals, other are more into wheat instead of corn, some prefer
chocolate in there. So the idea to offer a breakfast 2.0 was born. Using the global trend of mass
customization and the customer need of multiple options, they had the idea to distribute
customized muesli ordered and chosen on the internet. This was all matched with the strong
trend in Europe and Germany in particular of sustainable ecological ingredients. Biological food
is a very big trend there with a huge demand. So the young company, founded in 2007, started to
provide the customers with a variety of 60 ingredients which could be mixed up to 566 billion
different combinations of cereals. The product is rather expensive, but the high demand shows
peoples willingness to pay for a healthy and tasty breakfast, designed on their own. The founders
were able to finance their activities in the beginning without venture capital. Using their own
money and savings as well as family funds, the type of financing can be described as
bootstrapping. This was possible since there were no big investments needed for the webpage
and the warehouse to act as a reseller and distributor of the customized cereals. The demand was
very high, so that they were in trouble to fulfill all the orders, but with over 30 short-term
employees (90 by the end of 2009) the problem was solved. This ongoing rapid growth is due to
the viral marketing strategies through blogs, social networks as facebook and very positive media
reports in general. Over the time two successful founders of a t-shirt customization startup firm
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entered the company as venture capitalist. They were able to bring in fresh money, needed for the
further expansion, as well as their own experience as successful founders and young
entrepreneurs in the internet based customization market. In 2008 the company expanded to the
Austrian, Netherland, UK and Swiss market. They even built a small production facility in
Switzerland.

2. The market

The market for breakfast cereals in 2008 was around 24.2 billion USD and it is expected to grow
to 28.7 billion USD in the year 2013 which accounts for a growth rate of around 17 %. The
volume of the global breakfast cereal market in 2008 was around 3.9 billion kilograms and it is
expected to grow up to 4.4 billion kilograms by 2013
1
. In Europe, the breakfast cereal industry is
worth 4.5 billion. Every year around 1.1 billion kilograms of breakfast cereals are produced and
the sector employs around 11000 people
2
.

The breakfast cereal market in the US is roughly two third of the worlds market. They account
for 64.9% of worlds market. The industry is well established in the US and it is dominated by a
few giants like Kelloggs, General Mills, Post Foods and Quaker Oats. The success in this
established market largely depends on the pricing of the product and also on the brand image. It
is very important to do extensive marketing to gain market share in this segment dominated by
established companies.

Top Cereal Producers
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Market share for 1999, 2005, and 2008.
Manufacturer 1999 2005 2008
Kellogg's 32% 32% 33%
General Mills 31% 26% 25%
Post 16% 15% 15%
Private Labels 8% 14% 14%
Quaker Oats 9% 6% 7%
Malt-O-Meal 3% 5% 5%
All Other 1%

1
http://www.the-infoshop.com/report/dc108460-breakfast-cereals.html
2
http://www.ceereal.eu/documents/bw_flyer.pdf
3
http://www.lavasurfer.com/cereal-stats.html
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The market of hot cereals grains which have to be soaked or boiled to eat, accounts for just over
10% and the market is clearly dominated by ready to eat cereals, which accounts for 88% of total
revenues. Even though the growth rate of the overall cereal market is low in recent years, the
companies have to bring in new products every now and then to retain their market share. If we
see the trends in the cereal industry, some of the new products have grown considerably in
capturing the market share even though the overall market remains the same. This is one of the
welcome signs for new products and companies entering the industry. Brand extension is done
for the established brands. New products are introduced under the same brand label and the
brand is broadened with the specific line of products.

Most Popular Cereal Brands
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Market share for 1995, 1999, 2005 and 2008.
Cereal 1995 1998 2005 2008
General Mills Cheerios 6.5% + 7.6% + 11.30% 12.60%
Kellogg's Special K < 2.0% < 2.0% 4.00% 5.40%
Post Honey Bunches of Oats < 2.0% < 2.0% 4.10% 4.90%
Kellogg's Frosted Flakes 4.20% 3.90% 4.10% 3.80%
Kellogg's Frosted Mini Wheats < 2.0% 2.90% 3.20% 3.50%
Kellogg's Raisin Bran 2.70% 2.70% 2.90% 3.00%
Kellogg's Froot Loops < 2.0% < 2.0% 2.50% 2.60%
General Mills Cinnamon Toast Crunch < 2.0% 1.90% 2.60% 2.40%
General Mills Lucky Charms 2.00% 2.20% 2.40% 2.40%
Quaker Oats Cap'n Crunch < 2.0% < 2.0% 2.40% 2.40%
Quaker Oats Life < 2.0% < 2.0% 2.30% 2.30%
Kellogg's Rice Krispies 2.80% 1.90% 2.10% 2.30%
Kellogg's Corn Flakes 3.00% 2.60% 2.10% 1.90%
All Others Combined 72.20% 74.30% 54.00% 50.10%


4
http://www.lavasurfer.com/cereal-stats.html
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Mymuesli has a clearly identified market segment. They sell premium quality, organic muesli and
the customers can customize the product according to their wishes. As of now, the company
concentrates on people who are either interested in customizing their own cereals or people who
are interested in buying organic food. Both the customization industry and the organic food
industry are growing in recent times.

The total amount of organic food sold in the US in 2006 was about 3.6 billion USD which is
double the amount compared to 2000. And also from 2004 to 2006, sales of organic food in
super market and mass merchandisers (e.g. Wal-Mart) were grown 38.4%
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. It is also estimated
that the sales of growth in organic foods will increase by 71 % from 2006 till 2011. If we take the
organic bread and grain market, the sales increased from 422 million USD to 551 million USD in
two year period from 2006 till 2008 and it is estimated that the growth will continue and by 2011
the sales will be around 859 million USD. The breads and grains share of market out of whole
organic food market is shown in the figure below
6
. In Europe, the organic cereal market
penetration is very low with only about 0.06 % in UK
7
and with the current mindset of people,
there is a big scope of opportunity to grow in this sector.





5
http://www.productcenter.msu.edu/documents/Working/organicfood1.pdf
6
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis8434
7
http://hgca.com/publications/documents/Breakfastcereals_REVISED_JULY_2007.pdf

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Another important component of their product is customization. Research has shown that
around 75% of American adults like to have customized products and they are willing to pay
more money for a customized product (R. Gardyn, Swap meet, American Demographics, July
2001). A lot of companies started selling customized products recently. For example companies
like zazzle, cafepress and spreadshirt (whose founder joined mymuesli as a venture capitalist in
the first round of finance and is now holding 5% of the company) sell customized T-shirts online
and a company called misterspex.de sells customized spectacles. The trend towards customizing
the product favors the company and its business model well.

The penetration of the cereal market in developing countries in Asia and other parts of the world
is very low. The sale of cereals in Russia and China is small compared to global terms with 263
million USD and 71 million USD of sales
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in a 24 billion USD cereal industry. These markets are
growing fast and have a huge potential lying ahead. As of now the company is selling cereals only
via its website and it is delivered to the customers home. They have a partnership with DHL, a
huge logistics company for the delivery. Considering the fact that 77.5% of cereals are distributed
via supermarkets and hypermarkets
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, the company should concentrate on adding another valuable
distribution channel like supermarkets. So we think it was a great step that mymuesli started to
sell their products in trendy coffee shops in Berlin. This is a good step to test and develop
another distribution channel. If the sales turn out to be a success they could easily expand this
strategy. Possible partnerships with huge coffee store chains like Starbucks or Waynes Coffee
could be a step towards supermarkets and other distribution channels.

3. Business model

The business model of mymuesli is very innovative. People can mix, customize and order their
desired muesli online. One can choose from 60 different ingredients and mix billons of
combinations. After the order online the customized product is delivered via mail to the
customer. This simple so called build-to-order principle is very rewarding. First of all there are no
large investment costs for production facilities. Since the ingredients are ordered from various
suppliers the company just needs small space for mixing the product in the desired way. The
marketing is highly innovative and rather cheap as well. There were no high costs for

8
http://www.euromonitor.com/Cereal_Partners_Worldwide_exploits_developing_markets
9
http://www.the-infoshop.com/report/dc108460-breakfast-cereals.html
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commercials on national TV, radio or newspapers at the beginning. The Web 2.0 was used very
effectively through various social media channels such as blogs and youtube or social networks
like facebook. This viral marketing turns out to be quite successful and to popularity was
increasing exponentially. The distribution process is efficient, rather cheap and fast. The value
they add to the product is the mixing of the ingredients as well as a trendy and nice package.
This business model gained several rewards and from the success of the first 3 years we know
that it develops very successful. In general the idea of customization is not entirely new. It is
more the specific product the founders chose. In an interview one of the founders said they
made a survey in order to estimate the demand for customized muesli with 450 persons.
Although the results are not published in detail, we know from him that they should rather not
have founded the company if they had followed them. But in general the market is tremendously
big, if we expect that almost everyone on earth is eating breakfast. A large proportion is eating
cereals and since global trends like biological, functional and healthy food products as well as the
desire of people to customize products to their specific needs are more and more evolving they
found a niche to the right time. The uniqueness of this idea is still a problem since it can easily be
copied. So it depends on whether they are able to build such a strong brand during the first years
that they can preserve a competitive advantage over the time. At the moment there are no real
competitors but this is subject to be changed for sure. For example if a big supplier like Kellogs
with its multibillion marketing budget is starting to build an online shop, offering a customization
opportunity we cant predict for sure how mymuesli could compete. Maybe they are more
comparable to other startups which are offering chocolate, coffee or juice mixed and customized
for the specific needs of potential buyers. Since these businesses are all rather new and young we
cant project if they have a place in the market in the long run. But overall the business model of
mymuesli is viable and fundable. The entrepreneurs all have a strong personality and with the
successful venture capitalists from a former startup company on board the management team
seems to be able to be successful in the future. In addition the business model generates positive
cash flows right from the beginning because of the high prices and the build-to-order principle.
Moreover the awards they got for their business model are an indicator that the venture capitalist
scene in Germany and Europe believes in that business.



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4. Financial situation

From an interview with the founders of mymuesli we know that they were able to start the
business in 2007 without external funding and without the help of venture capitalists. Somehow
they managed to raise the funds necessary on their own with the so called bootstrapping method.
This was possible since the initial investments were not that high. The founders developed the
website which was not too expensive and started packing the ordered muesli in the basement of a
small store in Passau, Germany. This was mostly done on their own handcraft. The marketing
costs were not too high either, since they used social media in a smart way. But all in all we have
only very little financial information given about the company. This is kind of an advantage
sometimes but also a bit complicated for the stakeholders. Since they are unlisted they dont have
to publish financial information, which makes it quite complicated to evaluate and valuate the
business from a financial perspective. The policy not to disclose too much financial data might be
reasonable for them at this stage, since the company is still growing and already profitable. It was
kind of a special situation, that they were generating positive cash flows right from the beginning.
This must be due to the special business model with the build-to-order principle. The customers
had to pay the orders in advance and it was delivered after roughly one week. This is part of the
bootstrapping finance method and one of many reasons of the early success of mymuesli. After
venture capitalists joined the company in 2008 in order to finance the expansion to other
European countries like Great Britain, Switzerland and Austria they published at least some basic
income and expense numbers. At this stage of development the next financial steps should be
raising more money in a second round from venture capitalists. Since the first round investors are
former successful entrepreneurs themselves, engaged in a similar business (T-shirt customization)
they somehow have character of business angels in terms of the region in Germany as well as the
amount of money they can be expected to be engaged in the company (ca. 1 mSEK). So although
we dont have enough concrete data we can say that it is too early for private equity buyout fund
to invest and hence too early as well to think about an IPO. But to finance mymueslis further
growth and expansion plans there will be needed fresh venture capital. We estimate the financial
need for the upcoming three years with roughly 1 million Euros (10 mSEK). This money is
needed for further market penetration through traditional marketing methods such as
commercials to build a strong brand. Moreover some packaging facilities will be needed in the
future to mix, pack and deliver the orders faster. Since the brand is already quite strong in
Germany, we know that they sell a couple of different pre-mixed mueslis to go in some coffee
shops in Berlin. This new distribution channel as well as acquiring and developing more of them
is capital intense as well. But with respect to the positive cash flows right from the beginning 1
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million Euros of external funding should be sufficient for the second financing round because
there is the possibility of organic growth through retained earnings and internal financing from
the revenues.
5. Valuation techniques

In this section we want to describe some valuation methods in theory before applying one of
them on mymuesli later. This will be a difficult task since there is only very little financial data
give from 2008, so that we have to project and estimate the future free cash flows (FCF) derived
from the earnings before interest and taxes (EBIT) on our owns.
There are three dominant models to value target companies including simple to elaborate models.

5.1. Discounted Cash Flows (DCF) valuation

Since expected future cash flows are one input of this valuation technique, this model is
appropriate for companies whose future cash flows can be estimated reliably. Moreover, the
estimated cash flows should be essentially positive. Furthermore the so called discount rate is
another input of this technique and the risk contributes in the discount rate calculation.
Implementing this technique for the valuation of distressed companies (with negative cash
flows/earnings), cyclical companies (whose earnings are a function of economic and business
cycles, hence with a high elasticity) and companies with unrealized assets, properties, patents or
products can be misleading.
The Cash Flows to Entity model or WACC (weighted average costs of capital) is the most widely
used method that implements the discounted cash flows approach for the valuated companies.
The Cash Flows to Equity model is another method implementing DCF (discounted cash flows)
to valuate companies, which initial endowment or investment was financed just by equity. For
companies with dynamic capital structures the adjusted present value (APV) is the most
appropriate method. The DCF approach relies on the analysis of the company and the market it
operates in, so it can be very subjective since it depends on the person who prepares the DCF
spreadsheet.



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5.1.1. Cash Flows to Entity model or WACC

Expected future free cash flows (FCF) are the most important parameters that should be
calculated in advance to be used for valuating a company by WACC. Free cash flow is defined by
the EBITDA (earnings before interest, taxes, depreciations and amortization), minus taxes on
EBITDA, plus/minus capital expenditures, plus depreciations, adjusted by the change in working
capital and other net assets. The WACC is the weighted average cost of capital that defines the
yearly discount rate.


=
1
1 +
+
2
(1 +WACC)
2
++

1 +

+

=
(1 +)
(1 +)

( )


= . 1

+.

The costs of equity can be calculated by the formula below, called Capital Asset Pricing Model
(CAPM):
. = +

is the risk-free interest rate
is the return of the market index (market portfolio)
is the risk factor calculated based on the market and equity risk of the company

= ( )




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5.1.2. Cash Flows to Equity Valuation

This model can be implemented whenever the only source of finance for company is equity that
results in the simplest form of DCF. Here, Cash Flows To Equity (CFTE) should be used as
input instead of Free Cash Flow (FCF).


=
1
1 +.
+
2
(1 +r. equity)
2
++

1 +.

+
=
(1 +)
(1 + . )

(. )



CFTE is measured as what the company can pay out to the equity owners and is calculated as
free cash flow, plus the tax shield, plus new debt issues, minus interest and debt payments. Since
most of the free cash flows at first years of the investment are allocated to cover debt and
interest, a result of CFTE will be close to zero for first years. Consequently, the usage of Cash
Flows to Equity Valuation for leveraged buyouts (LBO) should be questioned. Furthermore,
based on this formula the value of the company is affected by changes in financing issues. For
example, based on this model issuing new debt will increase the value of company inconsistently
and incorrectly.

5.1.3. Adjusted Present Value technique (APV)

Unlike the WACC technique, that takes the tax shield into consideration by adjusting debt costs
when calculating the WACC, the APV technique discounts future taxes directly to adjust tax
issues through interest payments.

5.2. Relative Valuation/Multiple Valuation

If we suppose that capital markets value companies correctly and there are lots of companies that
are listed on the financial markets, the relative valuation technique is the quickest way to value a
company and its assets. Since there are no companies that are completely similar in the terms of
risk and growth, the definition of comparable is subject to biased judgment. Hence, relative
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valuation relies on some assumptions that sometimes left unstated, while the DCF approach
always tries to state every assumption clearly to avoid manipulation. However for simplicity
reasons, the relative valuation technique is a part of all valuation procedures. The multiple
valuation can be very subjective since it is based on the selection of comparable companies. That
means for example, exaggerated parameters of the chosen competitors will result in a wrong
valuation of the target company itself.

5.2.1. Price/Earnings (PE) Multiple

This ratio depends on the payout ratio, the forecasted growth rate (g) and the consistent discount
rate (r).

= =
(1 +)
( )


Obviously, an average amount of earnings should be used to calculate the payout ratio.
Otherwise, companies with temporary negative earnings or cyclical companies with volatile
earnings will be valued incorrectly. When the discount rate and the growth rate are close to each
other this multiple will be useless.

5.2.2. Price Book Value (PBV) Multiple

The difference between the book value of a companys assets and liabilities yields to the book
value of the entity. The book value of assets is the purchase price of assets minus depreciation
based on accounting convention or method. The advantage of this multiple is the ability to value
companies even with negative earnings. However, this multiple is not applicable to value services
companies that dont have considerable assets. Here the concept of valuation is to measure a
market value of a company by comparing its book value with those of other companies in the
business.

= =
(1 +)
( )


A high PBV with a low ROE (return on equity) indicates an overvaluation. Similarly, a low PBV
with high ROE implies an undervaluation.
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5.2.3. Price/Sales (PS) Multiple

PS is the most reliable valuation multiple that uses revenues (sales) instead of earnings and book
value in PE and PBV. Hence, the result of the PS multiple is applicable even if the company has
negative earnings or doesnt have significant assets. However, the negative side of PS is the
inability to detect cost control problems that probably exists.

= =
(1 +)
( )




5.3. Dividend Discount Model (DDM)

This model is used to value the price of a stock by discounting the predicted dividends back to
the present value. Here the net present value of the expected dividends is used to value the
company. If the value calculated by the DDM is higher than the price of the outstanding shares
which are currently traded, then the stock is probably undervalued.

=

( )



5.4. Net asset valuation

This valuation technique relies on the assumption, that the value of a company is the book value
of its assets minus the book value of its liabilities. This method is similar to the PS multiple;
however the Net Asset Valuation will not work compared with other comparable companies.
Here, the core idea of the business is supposed to be worthless. This technique cannot be used to
valuate start-up companies relied on entrepreneurs ideas or intellectual property rights.