1 chapter 10 venture capital valuation methods entrepreneurial finance

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Chapter 10

VENTURE CAPITAL VALUATION METHODS

ENTREPRENEURIAL FINANCE

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Chapter 10Learning 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

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Venture Capital (VC) Method

VC Method: 风险投资（ VC ）评估方法• 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

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Venture Capital Shortcuts on the Equity Method权益方法 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

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Venture Capital Shortcuts on the Equity Method 权益方法例题

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

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75.9375%

5)5.(1 / 1,000,000] x [10/1

1,000,000

Tr)(1 / ]E x [P/E

I Ownership Final % Acquired

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6,3111,688 .240625

(.759375) x 2,000,000

% Acquired -1

%) (Acquired x mn Issued Be toShares

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shareper 15843622$.

shares 6,311,688

$1,000,000 Price Share Issue

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Pre-money valuation: 创业企业注资前现值present value of a venture prior to a new money investment

Post-money valuation: 创业企业注资前现值加新投资者的注资pre-money valuation of a venture plus money injected by new investors

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Venture Capital Shortcuts on the Equity Method 权益方法例题 Pre-Money Valuation

= 2,000,000 shares x $.15843622 per share= $316,872

Post-Money Valuation= 8,311,688 shares x $.15843622 per share= $1,316,872

Founder % Between Financing & Exit= 2,000,000 / 8,311,688= 24.0625%

Investor % Between Financing & Exit= 6,311,688 /8,311,688= 75.9375%

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Venture Capital Shortcuts on the Equity Method 权益方法

Staged Financing: 按企业不同发展阶段融资

financing provided in sequences of rounds rather than all at one time

Capitalization (cap) Rate:spread between the discount rate and the growth rate of cash flow in terminal value period

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Earnings Multipliers and Discounted Dividends收入乘数与股息贴现 From P/E x E = P, we get:

•Direct Comparison:valuation by applying a direct comparison ratio to the

related venture quantity

•Direct Capitalization:valuation by capitalizing earnings using a cap rate implied

by a comparable ratio

Venture

5Year

Venture

5Year FirmsOther

Current

FirmsOther

Current P E x E

P

Venture

5Year FirmsOther

Current

FirmsOther

Current

Venture

5Year P P/E

E

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Earnings Multipliers and Discounted Dividends收入乘数与股息贴现

000,000,10 .10

1,000,000

20,000,000 / 2,000,000

1,000,000 P

P/E

E

:methodtion capitalizadirect Under

10,000,000 1,000,000 x 10

1,000,000 x 2,000,000

20,000,000P E x

E

P

Venture

5Year FirmsOther

Current

FirmsOther

Current

Venture

5Year

Venture

5Year

Venture

5Year FirmsOther

Current

FirmsOther

Current

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Earnings Multipliers and Discounted Dividends收入乘数与股息贴现

g)-(r

g)(1 x b)-(1

E

P

and g)-(r

b)-(1

g)(1E

P

E

P:assumptiongrowth smooth using and

g-r

b)-(1

E

P :grearrangin

g-r

b)-(1 x E P

thenD)/E,-(E b of ratioplowback minus one ratiopayout

and D/E ratio,payout constant x earnings dividends growth,constant In

rate.growth dividend g & ratediscount r whereg -r

D P

:(P) price & (D), dividends (E), earnings of valuesshareper Given

5

5

5

5

6

5

6

5

6

5

6

5

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Adjusting the VC Shortcut for Multiple Rounds

704,703,23.84375

2,000,000 Financingafter Shares Total

084375.759375.1562.1 % Remaining sFounder'

%9375.75 1,000,000] x [10/1

.5) (1 x 1,000,000

]E x [P/E

r) (1 x I Acquired RoundFirst

%625.15 1,000,000] x [10/1

.25) (1 x 1,000,000

]E x [P/E

r) (1 x I Acquired Round Second

5T

2T

5

5

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First Round: 第一轮 Shares issued = .759375 x 23,703,704 = 18,000,000 Share Price = $1,000,000/18,000,000 = $.055556 per share Pre-money Valuation = $.055556 x 2,000,000 = $111,111 Post-money Valuation = $.055556 x 20,000,000 =$1,111,111 Founder % between 1st & 2nd round 2,000,000/20,000,000 = 10% 1st round investor % between 1st & 2nd rounds =

18,000,000/20,000,000 = 90%

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Second Round: 第二轮 Shares issued = .15625 x 23,703,704 = 3,703,704 Share Price = $1,000,000/3,703,704 = $.27 per share Pre-money Valuation = $.27 x 20,000,000 = $5,400,000 Post-money Valuation = $.27 x 23,703,704 = $6,400,000 Founder % between 2nd round & exit =

2,000,000/23,703,704 = 8.4375% 1st round investor % between 2nd round & exit =

18,000,000/23,703,704 = 75.9375% 2nd round investor % between 2nd round & exit =

3,703,704/23,703,704 = 15.625%

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Adjusting the VC Shortcut for Incentive Ownership 激励所有者

282,051,82.024375

2,000,000 Options Incentive and Financingafter Shares Total

024375.06.759375.15625.1 % Remaining sFounder'

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Adjusting the VC Shortcut For Incentive Ownership 激励所有者

First Round: 第一轮 Shares issued = .759375 x 82,051,282 = 62,307,692 Share Price = $1,000,000/62,307,692 = $.01604938 per sh. Pre-money Valuation = $.01604938 x 2,000,000 = $32,099 Post-money Valuation = $.01604938 x 64,307,692=$1,032,099 Founder % between 1st & 2nd round = 2,000,000/64,307,692

= 3.11% 1st round investor % between 1st & 2nd rounds =

62,307,692/64,307,692 = 96.89%

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Second Round: 第二轮 Shares issued = .15625 x 82,051,282 = 12,820,513 Share Price = $1,000,000/12,820,513 = $.078 per share Pre-money Valuation = $.078 x 64,307,692 = $5,016,000 Post-money Valuation = $.078 x 77,128,205 = $6,016,000 Founder % between 2nd round & exit = 2,000,000/77,128,205 =

2.5931% 1st round investor % between 2nd round & exit =

62,307,692 / 77,128,205 = 80.7846% 2nd round investor % between 2nd round & exit =

12,820,513 / 77,128,205 = 16.6223%

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Incentive Ownership Round: Shares issued = .06 x 82,051,282 = 4,923,077 Founder % after Incentive Compensation Issue =

2,000,000 / 82,051,282 = 2.4375% 1st round investor % after Incentive Compensation =

62,307,692 / 82,051,282 = 75.9375% 2nd round investor % after Incentive Compensation =

12,820,513 / 82,051,282 = 15.625% Employee % after Incentive Compensation =

4,923,077 / 82,051,282 = 6%

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Scenario Methods 案例方法

ratesdiscount utopian at forecasts

plan businessutopian only gdiscountinby valuation:ProcessDiscount Utopoia

%536.8100$100,000,0

(1.7) x 0$20,000,00 0$60,000,00 0

return? portfolio annualized isWhat

outcomes. allon years at twoliquidity with

return annualized 70%at 20%

evenbreak at 60%

loss at total % 20

:invests fund nturemillion ve $100 :Given

2/1)(2

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Three-scenario Mean Flow ApproachPROB YEAR 1 YEAR 2 YEAR 3 YEAR 4

Black Hole 0.2 0 0 0 0

__________________________________________________

Living Dead 0.6 0 0 0 0__________________________________________________

Venture Utopia 0.2 0 2,000 2,000 2,000__________________________________________________

Three-ScenarioMean Flow 0 400 400 400

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Three-scenario Mean Flow Approach (Yrs 5 – 7)

PROB YEAR 5 YEAR 6 YEAR 7

Black Hole 0.2 0 0 0

____________________________________________________________________________________1,400,000

Living Dead 0.6 2,000 2,000 x γ + 2,000____________________________________________________________________________________

40,000,000Venture Utopia 0.2 x γ + 2,000 0 0

____________________________________________________________________________________Three-Scenario 8,000,000 840,000Mean Flow x γ + 1,600 1,200 x γ + 1,200

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Three-scenario Mean Flow Approach

%49689.31

1.22

2 x 8,000,000

1.22

1,200

1.22

x 8,000,000

1.22

400

1.22

400

1.22

400

1.22

0 1,000,000

76

54321

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Internal Rate of Return (IRR)

IRR: compound rate of return that equates the present value of the cash inflows received with the initial investment

Expected RealizedYEAR (Mean) Flows Flows

0 ($1,000,000) ($1,000,000)1 0 02 400 4003 400 4004 400 4005 2,521,351 2,200,0006 1,200 1,2007 265,774 250,000

IRR 22.00% 18.90%

1 chapter 10 venture capital valuation methods entrepreneurial finance

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