Sadada

Chapter 10

VENTURE CAPITAL VALUATION METHODS

FOCUS

In this chapter, we present several variations on the simplified valuation procedures and rules of thumb frequently grouped under the designation “venture capital methods.” We introduce a three-scenario approach to examining the value of different possible future venture outcomes.

LEARNING OBJECTIVES

1. Relate venture capital methods to more formal equity valuation methods

2. Understand how valuation and percent ownership are related

3. Calculate the amount of share to be issued to secure a fixed amount of funding

4. Understand the impact of subsequent financing rounds on the structure of the current financing round

5. Construct multiple-scenario valuations and unify them in a single valuation

CHAPTER OUTLINE

1. BRIEF REVIEW OF BASIC CASH FLOW-BASED EQUITY VALUATIONS

2. BASIC VENTURE CAPITAL VALUATION METHOD

A. Using Present Values

B. Using Future Values

3. EARNINGS MULTIPLIERS AND DISCOUNTED DIVIDENDS

4. ADJUSTING VCSCs FOR MULTIPLE ROUNDS

5. ADJUSTING VCSCs FOR INCENTIVE OWNERSHIP

6. ADJUSTING VCSCs FOR PAYMENTS TO SENIOR SECURITY HOLDERS

7. INTRODUCING SCENARIOS TO VCSCs

A. Utopian Approach

B. Mean Approach

SUMMARY

LEARNING SUPPLEMENT 10A:

Sustainable Growth

LEARNING SUPPLEMENT 10B:

PDC’S Equity Valuation: Synthesizing Equity Methods and VCSC Valuations (Advanced)

DISCUSSION QUESTIONS AND ANSWERS

1. What is meant by “finding the value of a venture’s assets is the same as finding the value of a venture’s debt plus equity”?

This is just a statement of the accounting identity expressed in market values: Market Value of Assets = Market Value of Debt + Market Value of Equity.

2. Describe the basic venture capital (VC) method for estimating a venture’s value.

Venture capital (VC) method: estimates the venture’s value by projecting only a terminal flow to investors at the exit...