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    Venture Capital Method: Investment Scenarios

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    Shivani Karkera
    The document discusses different methods for venture capital investment scenarios. It examines a basic venture capital method where a $3.5 million investment values the company at $1.44 per share. It then explores sensitivity analysis by varying assumptions like terminal value, time to exit, IRR, investment amount, and number of shares. Finally, it analyzes methods that involve multiple financing rounds, dilution from additional investments, and varying discount rates over time.

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    Venture Capital Method: Investment Scenarios

    Uploaded by

    Shivani Karkera
    141 views2 pages
    The document discusses different methods for venture capital investment scenarios. It examines a basic venture capital method where a $3.5 million investment values the company at $1.44 per share. It then explores sensitivity analysis by varying assumptions like terminal value, time to exit, IRR, investment amount, and number of shares. Finally, it analyzes methods that involve multiple financing rounds, dilution from additional investments, and varying discount rates over time.

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    Investment Scenarios

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    The document discusses different methods for venture capital investment scenarios. It examines a basic venture capital method where a $3.5 million investment values the company at $1.44 per share. It then explores sensitivity analysis by varying assumptions like terminal value, time to exit, IRR, investment amount, and number of shares. Finally, it analyzes methods that involve multiple financing rounds, dilution from additional investments, and varying discount rates over time.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    141 views2 pages

    Venture Capital Method: Investment Scenarios

    Uploaded by

    Shivani Karkera
    The document discusses different methods for venture capital investment scenarios. It examines a basic venture capital method where a $3.5 million investment values the company at $1.44 per share. It then explores sensitivity analysis by varying assumptions like terminal value, time to exit, IRR, investment amount, and number of shares. Finally, it analyzes methods that involve multiple financing rounds, dilution from additional investments, and varying discount rates over time.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Venture Capital Method: Investment Scenarios

    1. Basic Venture Capital Method

    A venture capitalist is contemplating a $3.5 million investment in a company that expects


    to require no further capital through year five. The company is expected to earn $2.5
    million in year five and should be comparable to companies commanding price/earnings
    ratios (PERs) of about 15. The venture capitalist expects to harvest his investment at that
    point through sale of his stock to an acquiring company. Assume further that the venture
    capitalist requires a 50% projected internal rate of return (IRR) on a project of this risk.
    Assume there are 1 million shares outstanding before the investment. What is the share
    price using these assumptions? (Price=$1.44)

    2. Venture Capital Method with Sensitivity Analysis

    How will the value of the company change if the assumptions are changed? The effect of
    changing the following assumptions in the base model can be examined:

    Variation 1: Reduce the terminal value by 10 percent


    Variation 2: Increase time to exit by 10 percent
    Variation 3: Increase IRR by 10 percent
    Variation 4: Increase investment by 10 percent
    Variation 5: Increase the number of existing shares

    3. Venture Capital Method with Dilution

    A first-round venture capitalist is contemplating a $1.5 million investment in a company


    that expects to require an additional $1 million in years two and four. The company is
    expected to earn $2.5 million in year five and should be comparable to companies
    commanding price/earnings ratios (PERs) of about 15. The venture capitalist expects to
    harvest his investment at that point through sale of his stock to an acquiring company.
    Assume further that the first-round venture capitalist requires a 50% projected internal
    rate of return (IRR) on a project of this risk. Since several rounds are required, in addition
    to estimating the appropriate discount rate for the current round, the first-round VC must
    also estimate the discount rates that are most likely to be applied in the following rounds,
    which we will project for years two and four. Although a 50% rate is appropriate for year
    zero, it is estimated that investors in this company will demand a 40% return in year two
    and a 25% return in year four. Assume there are 1 million shares outstanding before the
    investment. What is the terminal share price? (Price=$22.12)

    vcmethod.com 1 v1.0
    4. Venture Capital Method with Multiple Financing Rounds

    A first-round venture capitalist is contemplating a $3 million investment in a company that


    expects to require an additional $2 million in a second round. The assumed exit value is
    $25 million. The venture capitalist expects to harvest his investment at that point through
    sale of his stock to an acquiring company. Suppose that the discount rate is highest in the
    early years and becomes lower after a while. For example, assume that the discount rate is
    60 percent in the first year, stays at 50 percent in years two and three, and falls to 40
    percent in the fourth year. In addition to determining the appropriate compound interest
    rate for the current round, the first-round VC must also determine the compound interest
    rate most likely to be applied in the second round. Suppose, for example, that the company
    might be able to delay the timing of the second round until year four. Assume there are 1
    million shares outstanding before the investment. What would be the wealth of the
    entrepreneurs? (Wealth of Entrepreneurs=$7,080,000)

    vcmethod.com 2 v1.0

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