Venture Capital Valuation Models by SupremeLord

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```									                 Venture Capital Valuation Method
The venture capital method assumes that a firm will undertake an Initial Public Offering
(IPO) at some point in the future. The future value of the firm is determined by
multiplying the earnings of the firm in the year of the IPO by the expected price/earnings
(P/E) ratio that the market will support. (The long-run P/E ratio of NYSE stocks is about
15.) This provides the expected future value of the firm. The present value of the firm is
then calculated using a risk adjusted discount rate. Discount rates of 50 to 100% (and
more) are frequently used in valuing start-up businesses to capture the inherently risky
nature of new ventures. Similarly, venture capitalists frequently demand an Internal Rate
of Return (IRR) of 100% (or more) in order to justify investing in a risky startup. (An IRR
of 100% is equivalent to doubling an investment every year.)

Instructions
Only enter data into green-shaded cells with green type-font
All valuation calculations fall out from these inputs
Company Name
Valuation -- Venture Capital Method

Assumptions                                                                Ref

Month of IPO           60                                     A
Forecast annualized earnings at IPO \$       5,927,400                               B
P/E ratio at IPO         15                                     C

Investment Round          First          Second         Third
Month of Investment            0              12            24       C
Investor required IRR         25%             20%           15%       D
Amount of Investment       \$1,000,000      \$1,000,000    \$1,000,000    E
Required Monthly IRR         2.08%            1.67%        1.25%       F
Duration of Investment          60              48            36       G

Calculations

Market Capitalization at IPO    \$88,911,000                                 H

First          Second         Third
Firm Value at Time of Investment     \$29,134,356     \$42,877,604   \$58,460,426
Required FV for Investor at IPO      \$3,051,758      \$2,073,600    \$1,520,875   I
Individual Investor's Share        3.4%            2.3%          1.7%      J
Individual Investor's ROI        305%            207%          152%      K
Individual Investor's IRR         25%             20%           15%      L

Investors' Share          7.5%                                    M
Founders' Share          92.5%                                    N

Negotiations

First         Second         Third
Individual Investor's Share       15.0%           5.0%          3.0%
FV for Investor at IPO    \$13,336,650     \$4,445,550    \$2,667,330
Individual Investor's ROI       1334%           445%          267%
Individual Investor's IRR        68%             45%           39%

Investors' Share         23.0%
Founders' Share          77.0%
Calculation

D/12
A-C

B*C

H/(1+F)^G
E*(1+F)^G
I/H
I/E
(I/E)^(12/G)-1

sum(J)
1-M
Company Name
Valuation -- Venture Capital Method
Years 1 to 5

Assumptions:
Investor required IRR        100%           A
P/E ratio at IPO or acquisition        15            B
Initial investment   \$1,000,000        C

D             E                F                G
Market        Required Future
Venture Capital Method               Year      Net Income     Capitalization   Value (Investor)
income stmt         B*E             FV(F,D)
IPO in Year 1                    1           (1,000,000) (\$15,000,000)      \$2,000,000
IPO in Year 2                    2                    0        \$0           \$4,000,000
IPO in Year 3                    3            1,000,000   \$15,000,000       \$8,000,000
IPO in Year 4                    4            2,000,000   \$30,000,000      \$16,000,000
IPO in Year 5                    5            3,500,000   \$52,500,000      \$32,000,000

Year
1
2
3
4
5
4

H                 I             J           K
Investor's         Investor's   Investor's   Investor's
Share              Return         ROI         IRR
C/G                F*H           I/C      IRR(I,C,D)
100.0%              \$0            0%          #N/A
100.0%              \$0            0%          #N/A
53.3%          \$8,000,000       800%        100%
53.3%         \$16,000,000      1600%        100%
61.0%         \$32,000,000      3200%        100%

Negotiation Worksheet
Investor's     Investor's       Investor's   Investor's
Share          Return             ROI         IRR
25.0%           \$0                0%          #N/A
25.0%           \$0                0%          #N/A
25.0%       \$3,750,000           375%         55%
25.0%       \$7,500,000           750%         65%
25.0%      \$13,125,000          1313%         67%

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