Topic 53
Venture Capital Valuation
Topic 53 explores the goals of venture capital (VC) investors and the fundamental approach often used in the valuation of investment opportunities.
VC INVESTOR INTERESTS, RETURN TARGETS: AN EXAMPLE
- VC investors are concerned with these issues:
- The amount of cash made available by the VC investor to finance a deal in exchange for a percentage of the target's equity and when the investment is expected to be returned resulting from a sale or initial public offering (IPO) of the business.
- The amount of equity placed at risk by the original owner manager to finance an opportunity (and the amount of debt that a deal can attract).
- The VC investor's exit risk, which is the perceived level of attractiveness of the target's marketplace to the public equity or private sale markets.
- The strength of the target's management.
- The marketing, product, and operational effectiveness of the target.
- Depending on risk assessment, VC investors (VCIs) will seek returns on their investments to compensate them for the perceived equity risk undertaken.
- VC returns to equity are often expressed as a range, depending on the stage of financing:1
- First-stage financing is higher risk than financing in subsequent stages because it takes place without any commercial record of success for the target and commands a higher target return and a larger share of the equity. Such returns also reflect the fact that a certain number of investments (in a venture capital investor's portfolio) ...
