Valuation of Vc Deals

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The Entrepreneurial Manager

VALUATION OF VENTURE CAPITAL DEALS

Bernardo Bertoldi

bbertoldi@escp eap.it bbertoldi@escp-eap.it

Candid Capital Partners We are a private equity firm that does not add value to its portfolio companies, but  W i t it fi th t d t dd l t it tf li i b t rather seeks to boost returns through the egregious application of leverage and  irresponsible gutting of corporate resources in search of cost savings.  Our firm has always been a generalist, and our partners have no industry specialties  to speak of, unless you consider willy‐nilly cold‐calling to be a specialty. We invest in  the middle portion of the middle market, where the most competition resides.  With each successive fund, we seek to raise enough capital such that we abandon  familiar deal territory for larger, more complex transactions in which we have no familiar deal territory for larger, more complex transactions in which we have no  track record. This strategy is intended to boost management fees and decrease our  frightening reliance on performance fees as a method of wealth building.  Our fund performances have consistently been in the bottom quartile, a status that  is the result not of poor luck but of demonstrable lack of operating skills.  Our founding partners, ages 74 and 81, have no plans to transition leadership of the  firm to junior partners. The firm, in fact, employs no junior partners other than an  administrative assistant (and third wife of a co‐founder) who organizes LP account  d ( d h d f f f d ) h information using a series of legal notepads. Copyright © Bernardo Bertoldi 2007

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OBJECTIVE

¶ Discuss some of fundamental issues of valuation in venture capital deals • Venture capital method • Estimation of the terminal value • Risk analysis • Investment • Determinants of valutation ¶ Give an overviews of entrepreneurial companies that are financed either by venture capitalists or private equity investors

The valuation of Venture Capital Deals consists in five fundamental steps…

Step

Method

Estimation of the terminal value

Risk analysis

Investment

Determinants

Activity • Venture Capital • Definition Method • Analysis • Option Pools • IRR • Principal methods

• Scenario • Method 1 • Method 2

• Venture Capital • Conclusions Method • Further examples

Copyright © Bernardo Bertoldi 2007

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The Venture Capital Method is a simple net present value method that takes the perspective of the investor instead of the firm

Approach

•The Basic Venture Capital Method is sometimes explained in the language of internal rates of return (IRR) and sometimes in term of NPV. To illustrate the method we use a financial start-up company called “SpiffyCalc” that is seeking financing from a Venture Capital* fund by the name of “Vulture Venture”

SpittyCalc contest “The founders of SpiffyCalc” expect to be able to sell the company for $25 million in four years. At this point they need to raise $3 million. Vulture Ventures considers this a risky business and wants to apply a discount rate of 50 percent to be adequately compensated for the risk they will bear. The entrepreneurs also decided that whatever valuation they would get, they wanted to own 1 million shares, e.i a majority interest, which they thought would be a cool number to brag about”

* Venture Capital or everyone who invests in the early stage Copyright © Bernardo Bertoldi 2007

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Case datas
SpiffyCalc situation p y • V = terminal value (at time of exit) = $25 million (in four years) y • t = time to exit event = 4 years • I = amount of investment = $3 million • r = discount return used by investors = 50 percent • x = n mbe of e isting shares (owned by entrepreneurs) = 1 million (majority) number existing sha es (o ned b ent ep ene s) (majo it )

25,0 25 0

+50% 16,7 11,1 7,4

3,0
year 1

4,5
year 2

6,7 67
year 3

10,1

Copyright © Bernardo Bertoldi 2007

year 4

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The VC Method can be...
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