WRITEUP (10) - 1 OUTREACH NETWORKS OUTREACH NETWORKS FIRST...

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OUTREACH NETWORKS OUTREACH NETWORKS: FIRST VENTURE ROUND QUESTION 1: Why do Everest Partners require a 30% equity stake in Outreach Networks in exchange for an early-stage investment of $30 million? Show how Everest would justify requiring this stake using the Venture Capital valuation methodology. The valuation of the funding negotiations that are just about to start is a difficult task. There are many methods which can determine the worth of the investment of the Venture Capital. The Venture Capital valuation method was created by the Professor of Harvard Bill Sahlman in the year 1987. The valuation of the investment of Everest Partners has been done on the basis of Venture capital valuation method. In order to calculate the value of the company or the terminal value at the time of exit, the projected net income of the 6 th year has been taken. This year has been assumed to be the exit year for the venture capital firm. The case states that the anticipated return on investment for Everest Partners is 40% to 60%. An average of this range which is 50% has been used as the anticipated return of investment of the venture capital investment till year six. The price-earnings multiple used in this calculation is the industry average price earnings ratio which is assumed as similar to that of Outreach Network Company. Based on this information, the valuation of the company has been calculated by discounting the terminal value of the company to present value. The value of the company is $207.96 based on the venture capital valuation method. As the initial investment by the venture capital company is $30 million, therefore, based on this the equity stake of the venture capital is around 14.43 % under the PE multiple method and it is 23.03% under the EBITDA multiple method.. Also the post-money valuation would be $207.96 million. This means that when the venture capital firm will exit in the sixth year, then it could increase the wealth of the shareholder of Outreach Networks by $207.96 million (PE
OUTREACH NETWORKS multiple method) or $130.26 million (EBITDA multiple method) and in this way the venture capital firm can also earn a return on its investment of around 40% to 60%. Based on these calculations the price per share would also be increased by $4.16 ($ 2.61 under EBITDA multiple) by the time the venture capital firm will exit. Venture capital valuation method is normally used in situations when the exit year and the exit value of the venture capital firm could be estimated with certainty. In the case of Everest Partners, we can easily estimate the exit value of the company. Based on these facts, the post money valuation is calculated in present value terms today which take into account the risks and the time the investor takes to earn his target rate of investment return. The calculations performed in the spreadsheet show that the value of the company would increase after the venture capital funding is provided. The calculations justify the equity stake which is required by the venture capital firm in Outreach Networks.

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