1 chapter 10 venture capital valuation methods entrepreneurial finance
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1
Chapter 10
VENTURE CAPITAL VALUATION METHODS
ENTREPRENEURIAL FINANCE
2
Chapter 10Learning Objectives
Relate venture capital methods to more formal equity valuation methods
Understand how valuation and percent ownership are related
Calculate the amount of shares to be issued to secure a fixed amount of funding
Understand the impact of subsequent financing rounds on the structure of the current financing round
Construct multiple-scenario valuations and unify them in a single valuation
3
Venture Capital (VC) Method
VC Method: 风险投资( VC )评估方法• estimates the venture’s value by projecting
only a terminal flow to investors at the exit event
• modifications of the basic VC method introduce additional rounds and incentive compensation
4
Venture Capital Shortcuts on the Equity Method权益方法 Cash investment today Cash return at some future exit time Discount this entire return flow back at
the venture investor’s target return Divide today’s cash investment by the
venture’s present value Equals percent ownership to be sold in
order to expect to provide the venture investor’s target return
5
Venture Capital Shortcuts on the Equity Method 权益方法例题
Example:• Venture formed w/ 2,000,000 shares held by
founders
• New investor adds $1,000,000 for new shares
• Exit (horizon) time = 5 years
• Investor demands 50% annualized return
• Venture income of $1,000,000 per year @ exit
• Similar venture sold shares to public for $20,000,000
• Similar venture income =$2,000,000 for last year
6
Venture Capital Shortcuts on the Equity Method 权益方法例题
75.9375%
5)5.(1 / 1,000,000] x [10/1
1,000,000
Tr)(1 / ]E x [P/E
I Ownership Final % Acquired
5
7
Venture Capital Shortcuts on the Equity Method 权益方法例题
6,3111,688 .240625
(.759375) x 2,000,000
% Acquired -1
%) (Acquired x mn Issued Be toShares
8
Venture Capital Shortcuts on the Equity Method 权益方法例题
shareper 15843622$.
shares 6,311,688
$1,000,000 Price Share Issue
9
Venture Capital Shortcuts on the Equity Method 权益方法例题
Pre-money valuation: 创业企业注资前现值present value of a venture prior to a new money investment
Post-money valuation: 创业企业注资前现值加新投资者的注资pre-money valuation of a venture plus money injected by new investors
10
Venture Capital Shortcuts on the Equity Method 权益方法例题 Pre-Money Valuation
= 2,000,000 shares x $.15843622 per share= $316,872
Post-Money Valuation= 8,311,688 shares x $.15843622 per share= $1,316,872
Founder % Between Financing & Exit= 2,000,000 / 8,311,688= 24.0625%
Investor % Between Financing & Exit= 6,311,688 /8,311,688= 75.9375%
11
Venture Capital Shortcuts on the Equity Method 权益方法
Staged Financing: 按企业不同发展阶段融资
financing provided in sequences of rounds rather than all at one time
Capitalization (cap) Rate:spread between the discount rate and the growth rate of cash flow in terminal value period
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Earnings Multipliers and Discounted Dividends收入乘数与股息贴现 From P/E x E = P, we get:
•Direct Comparison:valuation by applying a direct comparison ratio to the
related venture quantity
•Direct Capitalization:valuation by capitalizing earnings using a cap rate implied
by a comparable ratio
Venture
5Year
Venture
5Year FirmsOther
Current
FirmsOther
Current P E x E
P
Venture
5Year FirmsOther
Current
FirmsOther
Current
Venture
5Year P P/E
E
13
Earnings Multipliers and Discounted Dividends收入乘数与股息贴现
000,000,10 .10
1,000,000
20,000,000 / 2,000,000
1,000,000 P
P/E
E
:methodtion capitalizadirect Under
10,000,000 1,000,000 x 10
1,000,000 x 2,000,000
20,000,000P E x
E
P
Venture
5Year FirmsOther
Current
FirmsOther
Current
Venture
5Year
Venture
5Year
Venture
5Year FirmsOther
Current
FirmsOther
Current
14
Earnings Multipliers and Discounted Dividends收入乘数与股息贴现
g)-(r
g)(1 x b)-(1
E
P
and g)-(r
b)-(1
g)(1E
P
E
P:assumptiongrowth smooth using and
g-r
b)-(1
E
P :grearrangin
g-r
b)-(1 x E P
thenD)/E,-(E b of ratioplowback minus one ratiopayout
and D/E ratio,payout constant x earnings dividends growth,constant In
rate.growth dividend g & ratediscount r whereg -r
D P
:(P) price & (D), dividends (E), earnings of valuesshareper Given
5
5
5
5
6
5
6
5
6
5
6
5
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Adjusting the VC Shortcut for Multiple Rounds
704,703,23.84375
2,000,000 Financingafter Shares Total
084375.759375.1562.1 % Remaining sFounder'
%9375.75 1,000,000] x [10/1
.5) (1 x 1,000,000
]E x [P/E
r) (1 x I Acquired RoundFirst
%625.15 1,000,000] x [10/1
.25) (1 x 1,000,000
]E x [P/E
r) (1 x I Acquired Round Second
5T
2T
5
5
16
Adjusting the VC Shortcut for Multiple Rounds
First Round: 第一轮 Shares issued = .759375 x 23,703,704 = 18,000,000 Share Price = $1,000,000/18,000,000 = $.055556 per share Pre-money Valuation = $.055556 x 2,000,000 = $111,111 Post-money Valuation = $.055556 x 20,000,000 =$1,111,111 Founder % between 1st & 2nd round 2,000,000/20,000,000 = 10% 1st round investor % between 1st & 2nd rounds =
18,000,000/20,000,000 = 90%
17
Adjusting the VC Shortcut for Multiple Rounds
Second Round: 第二轮 Shares issued = .15625 x 23,703,704 = 3,703,704 Share Price = $1,000,000/3,703,704 = $.27 per share Pre-money Valuation = $.27 x 20,000,000 = $5,400,000 Post-money Valuation = $.27 x 23,703,704 = $6,400,000 Founder % between 2nd round & exit =
2,000,000/23,703,704 = 8.4375% 1st round investor % between 2nd round & exit =
18,000,000/23,703,704 = 75.9375% 2nd round investor % between 2nd round & exit =
3,703,704/23,703,704 = 15.625%
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Adjusting the VC Shortcut for Incentive Ownership 激励所有者
282,051,82.024375
2,000,000 Options Incentive and Financingafter Shares Total
024375.06.759375.15625.1 % Remaining sFounder'
19
Adjusting the VC Shortcut For Incentive Ownership 激励所有者
First Round: 第一轮 Shares issued = .759375 x 82,051,282 = 62,307,692 Share Price = $1,000,000/62,307,692 = $.01604938 per sh. Pre-money Valuation = $.01604938 x 2,000,000 = $32,099 Post-money Valuation = $.01604938 x 64,307,692=$1,032,099 Founder % between 1st & 2nd round = 2,000,000/64,307,692
= 3.11% 1st round investor % between 1st & 2nd rounds =
62,307,692/64,307,692 = 96.89%
20
Adjusting the VC Shortcut for Incentive Ownership 激励所有者
Second Round: 第二轮 Shares issued = .15625 x 82,051,282 = 12,820,513 Share Price = $1,000,000/12,820,513 = $.078 per share Pre-money Valuation = $.078 x 64,307,692 = $5,016,000 Post-money Valuation = $.078 x 77,128,205 = $6,016,000 Founder % between 2nd round & exit = 2,000,000/77,128,205 =
2.5931% 1st round investor % between 2nd round & exit =
62,307,692 / 77,128,205 = 80.7846% 2nd round investor % between 2nd round & exit =
12,820,513 / 77,128,205 = 16.6223%
21
Adjusting the VC Shortcut for Incentive Ownership 激励所有者
Incentive Ownership Round: Shares issued = .06 x 82,051,282 = 4,923,077 Founder % after Incentive Compensation Issue =
2,000,000 / 82,051,282 = 2.4375% 1st round investor % after Incentive Compensation =
62,307,692 / 82,051,282 = 75.9375% 2nd round investor % after Incentive Compensation =
12,820,513 / 82,051,282 = 15.625% Employee % after Incentive Compensation =
4,923,077 / 82,051,282 = 6%
22
Scenario Methods 案例方法
ratesdiscount utopian at forecasts
plan businessutopian only gdiscountinby valuation:ProcessDiscount Utopoia
%536.8100$100,000,0
(1.7) x 0$20,000,00 0$60,000,00 0
return? portfolio annualized isWhat
outcomes. allon years at twoliquidity with
return annualized 70%at 20%
evenbreak at 60%
loss at total % 20
:invests fund nturemillion ve $100 :Given
2/1)(2
23
Three-scenario Mean Flow ApproachPROB YEAR 1 YEAR 2 YEAR 3 YEAR 4
Black Hole 0.2 0 0 0 0
__________________________________________________
Living Dead 0.6 0 0 0 0__________________________________________________
Venture Utopia 0.2 0 2,000 2,000 2,000__________________________________________________
Three-ScenarioMean Flow 0 400 400 400
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Three-scenario Mean Flow Approach (Yrs 5 – 7)
PROB YEAR 5 YEAR 6 YEAR 7
Black Hole 0.2 0 0 0
____________________________________________________________________________________1,400,000
Living Dead 0.6 2,000 2,000 x γ + 2,000____________________________________________________________________________________
40,000,000Venture Utopia 0.2 x γ + 2,000 0 0
____________________________________________________________________________________Three-Scenario 8,000,000 840,000Mean Flow x γ + 1,600 1,200 x γ + 1,200
25
Three-scenario Mean Flow Approach
%49689.31
1.22
2 x 8,000,000
1.22
1,200
1.22
x 8,000,000
1.22
400
1.22
400
1.22
400
1.22
0 1,000,000
76
54321
26
Internal Rate of Return (IRR)
IRR: compound rate of return that equates the present value of the cash inflows received with the initial investment
Expected RealizedYEAR (Mean) Flows Flows
0 ($1,000,000) ($1,000,000)1 0 02 400 4003 400 4004 400 4005 2,521,351 2,200,0006 1,200 1,2007 265,774 250,000
IRR 22.00% 18.90%
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