In this chapter: Relate venture capital methods to more formal equity valuation methods, understand how valuation and percent ownership are related, calculate the amount of shares to be issued to secure a fixed amount of funding, understand the impact of subsequent financing rounds on the structure of the current financing round, construct multiple-scenario valuations and unify them in a single valuation. | Chapter 10 VENTURE CAPITAL VALUATION METHODS 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher Chapter 10 Learning Objectives Relate venture capital methods to more formal equity valuation methods Understand how valuation and percent ownership are related Calculate the amount of shares to be issued to secure a fixed amount of funding Understand the impact of subsequent financing rounds on the structure of the current financing round Construct multiple-scenario valuations and unify them in a single valuation 2 Definition of 'Venture Capital' Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. 3 Venture Capital (VC) Method VC Method: estimates the venture’s value by projecting only a terminal flow to . | Chapter 10 VENTURE CAPITAL VALUATION METHODS 1 © 2012 South-Western Cengage Learning ENTREPRENEURIAL FINANCE Leach & Melicher Chapter 10 Learning Objectives Relate venture capital methods to more formal equity valuation methods Understand how valuation and percent ownership are related Calculate the amount of shares to be issued to secure a fixed amount of funding Understand the impact of subsequent financing rounds on the structure of the current financing round Construct multiple-scenario valuations and unify them in a single valuation 2 Definition of 'Venture Capital' Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. 3 Venture Capital (VC) Method VC Method: estimates the venture’s value by projecting only a terminal flow to investors at the exit event modifications of the basic VC method introduce additional rounds and incentive compensation 4 Venture Capital Shortcuts on the Equity Method Cash investment today Cash return at some future exit time Discount this entire return flow back at the venture investor’s target return Divide today’s cash investment by the venture’s present value Equals percent ownership to be sold in order to expect to provide the venture investor’s target return 5 Venture Capital Shortcuts on the Equity Method Example: Venture formed w/ 2,000,000 shares held by founders New investor adds $1,000,000 for new shares Exit (horizon) time = 5 years Investor demands 50% annualized return Venture income of $1,000,000 per year @ exit Similar venture sold shares to public for $20,000,000 Similar venture income =$2,000,000 for last year 6 Venture Capital Shortcuts on the Equity Method 7 Venture Capital Shortcuts on the Equity Method 8 Venture Capital Shortcuts on the Equity Method 9 Venture .
