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Unformatted text preview: Chapter 10 VENTURE CAPITAL VALUATION METHODS FOCUS In this chapter, we present several variations on the simplified valuation procedures and rules of thumb frequently grouped under the designation venture capital methods. We introduce a three- scenario approach to examining the value of different possible future venture outcomes. LEARNING OBJECTIVES 1. Relate venture capital methods to more formal equity valuation methods 2. Understand how valuation and percent ownership are related 3. Calculate the amount of share to be issued to secure a fixed amount of funding 4. Understand the impact of subsequent financing rounds on the structure of the current financing round 5. Construct multiple-scenario valuations and unify them in a single valuation CHAPTER OUTLINE 10.1 BRIEF REVIEW OF BASIC CASH FLOW-BASED EQUITY VALUATIONS 10.2 BASIC VENTURE CAPITAL VALUATION METHOD 10.3 EARNINGS MULTIPLIERS AND DISCOUNTED DIVIDENDS 10.4 ADJUSTING VCSCs FOR MULTIPLE ROUNDS 10.5 ADJUSTING VCSCs FOR INCENTIVE OWNERSHIP 10.6 ADJUSTING VCSCs FOR PAYMENTS TO SENIOR SECURITY HOLDERS 10.7 INTRODUCING SCENARIOS TO VCSCs A. Utopian Approach B. Mean Approach SUMMARY LEARNING SUPPLEMENT 10A: SUSTAINABLE GROWTH LEARNING SUPPLEMENT 10B: PDCS EQUITY VALUATION: SYNTHESIZING MDM, PDM, AND VCSC (ADVANCED) DISCUSSION QUESTIONS AND ANSWERS 1. What is meant by finding the value of a ventures assets is the same as finding the value of a ventures debt plus equity? This is just a statement of the accounting identity expressed in market values: Market Value of Assets = Market Value of Debt + Market Value of Equity. 2. Describe the basic venture capital (VC) method for estimating a ventures value. 170 Chapter 10: Venture Capital Valuation Methods Venture capital (VC) method: estimates the ventures value by projecting only a terminal flow to investors at the exit event. 3. Describe the process for estimating the percentage of equity ownership that must be given up by the founder when a new equity investment is needed. Estimate the value of the exit event. Discount that value at the venture capital discount rate to get a present value. Divide the amount the new investor will contribute by that present value to determine the percentage of the ventures ownership that must be sold. 4. How does a present value venture valuation pie differ from a future value valuation pie? The present value valuation pie is the present value of the future valuation pie where the discounting is done at the venture capital discount rate. 5. What is meant by pre-money valuation? What is post-money valuation? Pre-money valuation: present value of a venture prior to a new money investment Post-money valuation: pre-money valuation of a venture plus money injected by new investors....
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