Venture Capital/Private Equity

June 2012

Understanding a Basic Venture Capital Formula to acquire stake in a company

 

 “The best reason to start an organization is to make meaning; to create a product or service to make the world a better place.” 

-Guy Kawasaki, venture capitalist, CEO of Garage Technology Ventures

 

Understanding a Basic Venture Capital Formula to acquire stake in a company

The table below illustrates a simple example of how a Venture Capital/PE firm will value the firm, arrive at the current and future stock price, and deduce the % of shares to be acquired in order to meet the expectations of the investment.

It is based on expected rate or return (in this case 50%), number of years (5 yrs), investment amount ($3.5 mn), expected PE ratio of the firm in 5 years (based on comparables), expected cash flows of the firm  in 5 years.

 

Required IRR (%) — a 50.00%
Investment ($) — b 35,00,000
Term (Yrs.) — c 5
Year 5 revenue ($) — d 25,00,000
PE ratio (Year 5) — e 15
# of shares outstanding before investment — f 10,00,000
Terminal value of the firm ($) — (d * e) — g 3,75,00,000
Required future value of  investment ($) — Expected Future Value of Investment — h 2,65,78,125
Final ownership required= h/g=i 70.88%
# of shares to be acquired = f/(1-i)*i=j 24,33,476
New share price ($)=b/j=m 1.44
Post-money value of the firm @ t0 ($)=b/i=k 49,38,272
Pre-money value of the firm ($)=k-b 14,38,272
Share value at exit, for given discount rate=Expected Future Value of Current Share Price 10.92
Firm value at the end of each round = Post Money Valuation 49,38,272
RoI 659.38%

The above basic calculation is done assuming only one round of funding & no further dilution (i.e. no second/third round.. in which case the % of stake would obviously rise).

More on VCPE here

Venture Capitalists: What roles do they actually perform in their portfolio companies….

Venture Capital, Funny, Pictures, Private Equity, Roles, Management, Leadership,

Is value creation by Venture Capitalists a reality or myth?….

Whatever it is… there is no denying the fact that Venture Capitalists and Private Equity players have facilitated creation of industries …. accelerated emergence of new age business and led to creation of new breed of entrepreneurs… Here are some of the roles and responsibilities which a VC typically plays across functional areas of a organization in the hopes of a ‘HOME RUN’ blockbuster exit….

Broad functions Roles and Functions of Venture Capitalist in Portfolio Companies
Formal roles Informal roles
Board of director Member
Sounding board
Observer rights
Strategic functions Formulating business strategy Strategy sessions
Managing crises and problems Business advisor
Boundary spanning Selecting vendors and equipments Developing professional support group
Source of professional contacts
Source of Industry contacts
Finance related Obtaining alternative sources of financing
Interfacing with investor group
HR related Management Recruiter (Interviewing and selecting) Searching for candidates of management team
Negotiating employment terms with candidates Motivating personnel
Replacing management personnel
Marketing related Formulating marketing plans Soliciting customers or distributors
Testing or evaluating marketing plans
Operations related Developing actual product or service
Developing production or service technique
Supervisory Monitoring financial performance Phone calls
Monitoring operating performance Non board meetings
Seeking periodical reports
Interpersonal Friend / Confidant
Mentor / Coach

More on the VC here….