1Venture Capital Method of Valuation

Business Plan PreparationBusiness Plan Preparation

Frank MoyesFrank MoyesCollege of Business and AdministrationCollege of Business and AdministrationUniversity of ColoradoUniversity of ColoradoBoulder, ColoradoBoulder, Colorado

2Venture Capital Method of Valuation

Required Return on Required Return on InvestmentInvestment

❚ SeedSeed 80%+ 80%+❚ Start-UpStart-Up 60% 60%❚ Early Stage 50%Early Stage 50%❚ Second Stage 40%Second Stage 40%❚ Third Stage 30%Third Stage 30%❚ BridgeBridge 25% 25%

ROI

5 yr.Increase

❚ 19x 19x ❚ 10x10x❚ 8x8x❚ 5x5x❚ 4x4x❚ 3x3x

Bygraves & Zacharakis

0

3Venture Capital Method of Valuation

Venture Capital Method Venture Capital Method Key AssumptionsKey Assumptions

❚ Net ProfitNet Profit❚ Valuation MultipleValuation Multiple

l Price/EarningsPrice/Earningsl Price/RevenuePrice/Revenuel Price/EBITDAPrice/EBITDAl Price/Seller’s Discretionary EarningsPrice/Seller’s Discretionary Earnings

❚ Investor ROIInvestor ROI

4Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

5Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year 5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value ? ?

6Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value $30 million$30 million

7Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Equity valueEquity value $30 million$30 million

Required ROIRequired ROI ? ?

Required IncreaseRequired Increase

Required $ valueRequired $ value

8Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value $30 million$30 million

Required ROIRequired ROI 60% 60%

Required Increase Required Increase ? ?

Required $ valueRequired $ value

9Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year 5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value $30 million$30 million

Required ROIRequired ROI 60% 60%

Required Increase Required Increase 10x 10x

Required $ valueRequired $ value ? ?

10Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year 5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value $30 million$30 million

Required ROIRequired ROI 60% 60%

Required Increase Required Increase 10x 10x

Required $ valueRequired $ value $10 million$10 million

% of company required% of company required ? ?

11Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year 5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value $30 million$30 million

Required ROIRequired ROI 60% 60%

Required Increase Required Increase 10x 10x

Required $ valueRequired $ value $10 million$10 million

% of company required% of company required 33% 33%

Pre-money valuationPre-money valuation ? ?

Post-money valuationPost-money valuation ? ?

12Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million

Exit yearExit year 5th year 5th year

RevenueRevenue $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million

Growth RateGrowth Rate 20% 20%

P/E multipleP/E multiple 15x 15x

Company valueCompany value $30 million$30 million

Required ROIRequired ROI 60% 60%

Required Increase Required Increase 10x 10x

Required $ valueRequired $ value $10 million$10 million

% of company required% of company required 33% 33%

Pre-money valuationPre-money valuation $2 million$2 million

Post-money valuationPost-money valuation $3 million$3 million

13Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $ 2 million$ 2 million

Growth RateGrowth Rate 20% 20% 30% 30%

P/E multipleP/E multiple 15x 15x ? ?

Company valueCompany value $30 million$30 million ? ?

Required ROIRequired ROI 60% 60% ? ?

Required Increase Required Increase 10x 10x ? ?

Required $ valueRequired $ value $10 million$10 million ? ?

% of company required% of company required 33% 33% ? ?

Pre-money valuationPre-money valuation $2 million$2 million ? ?

Post-money valuationPost-money valuation $3 million$3 million ? ?

14Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $ 2 million$ 2 million

Growth RateGrowth Rate 20% 20% 30% 30%

P/E multipleP/E multiple 15x 15x 20x 20x

Company valueCompany value $30 million$30 million ? ?

Required ROIRequired ROI 60% 60% ? ?

Required Increase Required Increase 10x 10x ? ?

Required $ valueRequired $ value $10 million$10 million

% of company required% of company required 33% 33%

Pre-money valuationPre-money valuation $2 million$2 million

Post-money valuationPost-money valuation $3 million $3 million

15Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $ 2 million$ 2 million

Growth RateGrowth Rate 20% 20% 30% 30%

P/E multipleP/E multiple 15x 15x 20x 20x

Company valueCompany value $30 million$30 million $40 million $40 million

Required ROIRequired ROI 60% 60% 60% 60%

Required Increase Required Increase 10x 10x 10x 10x

Required $ valueRequired $ value $10 million$10 million ? ?

% of company required% of company required 33% 33% ? ?

Pre-money valuationPre-money valuation $2 million$2 million ? ?

Post-money valuationPost-money valuation $3 million$3 million ? ?

16Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $ 2 million$ 2 million

Growth RateGrowth Rate 20% 20% 30% 30%

P/E multipleP/E multiple 15x 15x 20x 20x

Company valueCompany value $30 million$30 million $40 million $40 million

Required ROIRequired ROI 60% 60% 60% 60%

Required Increase Required Increase 10x 10x 10x 10x

Required $ valueRequired $ value $10 million$10 million $10 million$10 million

% of company required% of company required 33% 33% 25% 25%

Pre-money valuationPre-money valuation $2 million$2 million ? ?

Post-money valuationPost-money valuation $3 million$3 million ? ?

17Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $ 2 million$ 2 million

Growth RateGrowth Rate 20% 20% 30% 30%

P/E multipleP/E multiple 15x 15x 20x 20x

Company valueCompany value $30 million$30 million $40 million $40 million

Required ROIRequired ROI 60% 60% 60% 60%

Required Increase Required Increase 10x 10x 10x 10x

Required $ valueRequired $ value $10 million$10 million $10 million$10 million

% of company required% of company required 33% 33% 25% 25%

Pre-money valuationPre-money valuation $2 million$2 million $3 million $3 million

Post-money valuationPost-money valuation $3 million$3 million $4 million $4 million

18Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $1 million$1 million

Growth RateGrowth Rate 20% 20% 10% 10%

P/E multipleP/E multiple 15x 15x ? ?

Company valueCompany value $30 million$30 million

Required ROIRequired ROI 60% 60%

Required Increase Required Increase 10x 10x

Required $ valueRequired $ value $10 million$10 million

% of company required% of company required 33% 33%

Pre-money valuationPre-money valuation $2 million$2 million

Post-money valuationPost-money valuation $3 million$3 million

19Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $1 million$1 million

Growth RateGrowth Rate 20% 20% 10% 10%

P/E multipleP/E multiple 15x 15x 10x 10x

Company valueCompany value $30 million$30 million ? ?

Required ROIRequired ROI 60% 60%

Required Increase Required Increase 10x 10x

Required $ valueRequired $ value $10 million$10 million

% of company required% of company required 33% 33%

Pre-money valuationPre-money valuation $2 million$2 million

Post-money valuationPost-money valuation $3 million$3 million

20Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $1 million$1 million

Growth RateGrowth Rate 20% 20% 10% 10%

P/E multipleP/E multiple 15x 15x 10x 10x

Company valueCompany value $30 million$30 million $10 million $10 million

Required ROIRequired ROI 60% 60% ? ?

Required Increase Required Increase 10x 10x ? ?

Required $ valueRequired $ value $10 million$10 million ? ?

% of company required% of company required 33% 33%

Pre-money valuationPre-money valuation $2 million$2 million

Post-money valuationPost-money valuation $3 million$3 million

21Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $1 million$1 million

Growth RateGrowth Rate 20% 20% 10% 10%

P/E multipleP/E multiple 15x 15x 10x 10x

Company valueCompany value $30 million$30 million $10 million $10 million

Required ROIRequired ROI 60% 60% 60% 60%

Required Increase Required Increase 10x 10x 10x 10x

Required $ valueRequired $ value $10 million$10 million $10 million $10 million

% of company required% of company required 33% 33% ? ?

Pre-money valuationPre-money valuation $2 million$2 million ? ?

Post-money valuationPost-money valuation $3 million$3 million ? ?

22Venture Capital Method of Valuation

Venture Capital MethodVenture Capital MethodMountain UnicyclesMountain Unicycles

InvestmentInvestment $1 million$1 million $1 million$1 million

Exit yearExit year 5th year 5th year 5th year5th year

RevenueRevenue $20 million$20 million $20 million$20 million

Net profit (10%)Net profit (10%) $2 million$2 million $1 million$1 million

Growth RateGrowth Rate 20% 20% 10% 10%

P/E multipleP/E multiple 15x 15x 10x 10x

Company valueCompany value $30 million$30 million $10 million $10 million

Required ROIRequired ROI 60% 60% 60% 60%

Required Increase Required Increase 10x 10x 10x 10x

Required $ valueRequired $ value $10 million$10 million $10 million $10 million

% of company required% of company required 33% 33% 100% 100%

Pre-money valuationPre-money valuation $2 million$2 million ?! ?!

Post-money valuationPost-money valuation $3 million$3 million ?! ?!

23Venture Capital Method of Valuation

Venture Capital Method Venture Capital Method Key AssumptionsKey Assumptions

❚ Net ProfitNet Profit❚ P/E MultipleP/E Multiple❚ Investor ROIInvestor ROI