Venture Capital and Private Equity Contracting

Chapter 22. Valuation, Returns, and Disclosure

22.1. Introduction and Learning Objectives

Entrepreneurial firms typically do not have significant cash flow to pay dividends on equity or interest on debt. Therefore, venture capital fund investments are valued primarily on the basis of a capital gain upon an exit event. Exits typically occur two to seven years after the initial investment, so it is crucial that venture capital fund managers accurately value a firm, or its potential, prior to initial investment in view of the resources to be expanded by the venture capital fund manager over the investment life. Unlike more traditional investments, the valuation of the initial investment depends primarily on an expected exit value, which is rather ...