Vc Method valuation Template

Valuation: Venture Capital Method get the template at www.gazhoo.com Entrepreneur's Assumptions 3 Number of years until your projected harvest date $90,000,000 Harvestdate value of the venture assuming success 60.00% annual hurdle rate Customary discount rates for Seed to Startup ventures are 50100% per year. Discount rates are lower for more established ventures, declining gradually to tares of 2030% for expansionstage financing. The discount rate for turnaround financing is comparable to that of a startup. $21,972,656 Postmoney valuation of the venture $7,159,376 Amount of financing required 32.58% Fraction of harvestdate equity needed to justify the financing. Venture Capital Method (Single Round Financing) Investor's Assumptions 4 Number of years until your projected harvest date $81,000,000 Harvestdate value of the venture assuming success 60.00% annual hurdle rate Customary discount rates for Seed to Startup ventures are 50100% per year. Discount rates are lower for more established $12,359,619 Postmoney valuation of the venture $8,008,895 Amount of financing required 64.80% Fraction of harvestdate equity needed to justify the financing. Years to complete, successscenario harvest value, and amount of investment as an irrevocable commitment are from figure 4. The hurdle rate is selected by the venture capitalist based on judgment. The entrepreneur's initial valuation can be determined by changing the assumed hurdle rate to 18 percent in the first panel. Venture Capital Method

Staging Staged Investment Decision Model Complete www.gazhoo.com Success Fund Stage 4: Success Boat Owners Success with Fund Stage 3: Success Three Groups Marine OEM Success with Two Fund Stage 2: Success Failure Stop Investing Groups Aircraft Owners Fund Stage 1: Success with One Failure Stop Investing Avionics OEM Group Failure Abandon Failure Financing: Round 1 Round 2 Round 3 Round 4 Harvest Staged investment model of aircraft and marine navigation software venture. The aircraft market is pursued before the marine market, and OEM sales are pursued in each market before end users. Options to invest in development of new markets are exercised only if the prior effort was successful.

Figure 4 Panel (a) Entrepreneur's Assumptions Financial Model Based on Business Plan Conditional Scenario Round www.gazhoo.com Cash Flows Probabilities Round One Two Round Three Round Four Harvest Value Forecast Success with All Groups $90,000,000 20% $18,000,000 $27,692,308 $32,727,273 $51,428,571 Success with Three Groups $60,000,000 15% $9,000,000 $13,846,154 $16,363,636 $25,714,286 Success with Two Groups $25,000,000 20% $5,000,000 $7,692,308 $9,090,909 Success with One Group $15,000,000 10% $1,500,000 $2,307,692 Failure $0 35% $0 Expected Cash Flow at Harvest $33,500,000 $51,538,462 $58,181,818 $77,142,857 Standard Deviation of Cash Flows $34,427,460 $29,896,270 $27,738,448 $14,846,150 Investment Burn Rate per Year $2,000,000 $3,000,000 $2,500,000 $3,000,000 Years 1 0.5 1 0.5 Total Investment $7,500,000 Present Value of Unconditional Total Investment $7,159,376 Present Value of Expected Investment $4,709,907 Panel (b) Investor's Assumptions Financial Model Based on Business Plan Conditional Scenario Round Cash Flows Probabilities Round One Two Round Three Round Four Harvest Value Forecast Success with All Groups $81,000,000 18% $14,580,000 $22,430,769 $31,695,652 $48,600,000 Success with Three Groups $54,000,000 12% $6,480,000 $9,969,231 $14,086,957 $21,600,000 Success with Two Groups $22,500,000 16% $3,600,000 $5,538,462 $7,826,087 Success with One Group $13,500,000 8% $1,080,000 $1,661,538 Failure $0 46% $0 Expected Cash Flow at Harvest $25,740,000 $39,600,000 $53,608,696 $70,200,000 Standard Deviation of Cash Flows $31,047,261 $28,371,817 $25,104,545 $13,227,245 Investment Burn Rate per Year $1,800,000 $2,500,000 $2,000,000 $2,500,000 Years 1.25 1 1.25 0.5 Total Investment $8,500,000 Present Value of Unconditional Total Investment $8,008,895 Present Value of Expected Investment $4,915,176 Figure 4 Panel (a) shows the entrepreneur's expectations of harvest cash flows conditional on each scenario and the entrepreneur's belief of the probability of each scenario. These inputs are used to compute the expected harvest cash flow and standard deviation of cash flows at the time of each investment round. The lower portion of the panel shows the entrepreneur's assumed burn rate from each stage and the entrepreneur's expectation of the duration of the stage. The information is used to compute the total investment, present value of the total as an unconditional investment, and present value of expected investment. Panel (b) shows the same information based on the investor's beliefs.

Figure 5 Valuation of Unstaged Investment Venture Capital Investor Entrepreneur's Investor's www.gazhoo.com Assumptions Assumptions Market and Contract Data Annual Riskfree Rate 4.0% 4.0% Annual Market Rate 10.0% 10.0% Standard Deviation of Market 20.0% 20.0% General Partner's Annual Fee 2.5% 2.5% General Partner's Carried Interest 20.0% 20.0% Correlation of Venture with Market 0.25 0.25 SingleStage Investment and Timing Total Investment Committed $7,159,376 $8,008,895 Years to Harvest 3.00 4.00 Investor Valuation of Harvest Cash Flows Expected Harvest Value $33,500,000 $25,740,000 Standard Deviation of Harvest Cash Flows $34,427,460 $31,047,261 Value of Venture at Time of Investment $18,794,406 $12,456,062 Investor's Required Rate of Return Annualized VC Cost of Capital 21.25% 19.90% Investor Ownership Requirement Ownership Requirement Round 1 Investment $7,159,376 $8,008,895 Value at Round 1 $18,794,406 $12,456,062 Share of Incremental Value Required 38.09% 64.30% Valuation of Entrepreneur's Interest in Venture Entrepreneur's Wealth Entrepreneur's Wealth in Market $1,700,000 $1,600,000 Valuation of Harvest Cash Flows Venture (Entrepreneur's Financial Claim) Expected Harvest Value $20,738,805 $9,189,910 Standard Deviation of Venture Cash Flows $21,312,966 $11,084,752 Market Expected Harvest Value $2,262,700 $2,342,560 Standard Deviation of Market Cash Flows $588,897 $640,000 Portfolio Expected Portfolio Value $23,001,505 $11,532,470 Standard Deviation of Portfolio Cash Flows $21,335,812 $11,119,175 Value of Entrepreneur's Portfolio $9,161,414 $2,866,299 Value to Investment in Market $1,700,000 $1,600,000 Value of Entrepreneur's Interest in Venture $7,461,414 $1,266,299 Entrepreneur's Required Rate of Return Annualized Portfolio Cost of Capital 35.91% 41.63% Annualized Venture Cost of Capital 40.60% 64.13% Figure 5 Singlestage contract based on CAPMbased valuation. Valuations are based on the assumption that all necessary capital to achieve success is committed at the outset and that approaching the venture without staging does not affect conditional cash flows of each scenario outcome, the probability of the outcome or timing.

Figure 6 Valuation Template 8 Valuation of Staged Investment Venture Capital Investor Entrepreneur's Investor's Market and Contract Data Assumptions Assumptions Annual Riskfree Rate 4.0% 4.0% Annual Market Rate 10.0% 10.0% Standard Deviation of Market 20.0% 20.0% General Partner's Annual Fee 2.5% 2.5% General Partner's Carried Interest 20.0% 20.0% Correlation of Venture with Market 0.25 0.25 Staged Investment Timing and Burn Rates Round 1 Aircraft OEM Burn Rate per Year $2,000,000 $1,800,000 Years to Complete 1.00 1.25 Round 2 Aircraft Owners Probability of Stage 1 Success 65% 54% Burn Rate per Year $3,000,000 $2,500,000 Years to Complete 0.50 1.00 Round 3 Marine OEM Cumulative Probability of Stage 2 Success 55% 46% Burn Rate per Year $2,500,000 $2,000,000 Years to Complete 1.00 1.25 Round 4 Boat Owners Cumulative Probability of Stage 3 Success 35% 30% Burn Rate per Year $3,000,000 $2,500,000 Years to Complete 0.50 0.50 Valuation of Harvest Cash Flows Round 4 Expected Harvest Value $77,142,857 $70,200,000 Standard Deviation of Harvest Cash Flows $14,846,150 $13,227,245 Value to Investor at Time of Investment $59,211,238 $53,893,465 Round 3 Expected Harvest Value $58,181,818 $53,608,696 Standard Deviation of Harvest Cash Flows $27,738,448 $25,104,545 Value to Investor at Time of Investment $40,431,577 $36,534,155 Round 2 Expected Harvest Value $51,538,462 $39,600,000 Standard Deviation of Harvest Cash Flows $29,896,270 $28,371,817 Value to Investor at Time of Investment $33,958,352 $23,969,483 Round 1 Expected Harvest Value $33,500,000 $25,740,000 Standard Deviation of Harvest Cash Flows $34,427,460 $31,047,261 Value of Round 1 at Time of Investment $18,794,406 $12,456,062 Investor's Implicit Cost of Capital at Each Round Round 1 21.25% 19.90% Round 2 23.19% 20.03% Round 3 27.46% 24.50% Round 4 69.74% 69.67% Figure 6 Venture capital investor CAPMbased valuation by round. Implicit cost of capital estimates are gross of the venture capitalist's management fee and carried interest.

Figure 7 Valuationbased Contracting Model Ownership Requirement Entrepreneur's Investor's www.gazhoo.com Assumptions Assumptions Investor's Round 4 Investment $1,500,000 $1,250,000 Venture Value at Round 4 $59,211,238 $53,893,465 Incremental Equity Required 2.53% 2.32% Investor's Value from Round 3 $12,577,607 $19,043,975 Investor's Value Required With Investing $14,077,607 $20,293,975 Investor's Required Ownership after Investing 23.78% 37.66% Investor's Round 3 Investment $2,500,000 $2,500,000 Venture Value at Round 3 $40,431,577 $36,534,155 Incremental Equity Required 6.18% 6.84% Investor's Value from Round 2 $6,088,445 $10,409,831 Investor's Value Required With Investing $8,588,445 $12,909,831 Investor's Required Ownership after Investing 21.24% 35.34% Investor's Round 2 Investment $1,500,000 $2,500,000 Venture Value at Round 2 $33,958,352 $23,969,483 Incremental Equity Required 4.42% 10.43% Investor's Value from Round 1 $3,613,666 $4,329,726 Investor's Value Required With Investing $5,113,666 $6,829,726 Investor's Required Ownership after Investing 15.06% 28.49% Investor's Round 1 Investment $2,000,000 $2,250,000 Venture Value at Round 1 $18,794,406 $12,456,062 Investor's Required Ownership after Investing 10.64% 18.06% Required Percentage Increases in Investor's Shares if New Shares are Issued Round 4 New Shares to Investor 15.65% 10.53% Round 3 New Shares to Investor 52.14% 37.14% Round 2 New Shares to Investor 48.87% 80.75% Figure 7 Investor's incremental required ownership for investment at each round and total ownership assuming no dilution of earlier round investments.

Figure 8 Risk and Return of Entrepreneur's Financial Claim Based on Entrepreneur's Projections Ownership by Round Investor Share Entrep. Share Round 4 23.78% 76.22% Round 3 21.24% 78.76% Round 2 15.06% 84.94% Round 1 10.64% 89.36% Venture Entrepreneur's Probability Conditional Scenario Conditional Weighted Harvest Value Forecast Cash Flows Probabilities Cash Flows Cash Flows Success with All Groups $90,000,000 20% $68,602,294 $13,720,459 Success with Three Groups $60,000,000 15% $45,734,863 $6,860,229 Success with Two Groups $25,000,000 20% $19,689,519 $3,937,904 Success with One Group $15,000,000 10% $12,741,204 $1,274,120 Failure $0 35% $0 $0 Expected Cash Flow of Entrepreneur's Claim $25,792,712 Standard Deviation of Entrepreneur's Claim $26,144,060 Based on Investor's Projections Ownership by Round Investor Share Entrep. Share Round 4 37.66% 62.34% Round 3 35.34% 64.66% Round 2 28.49% 71.51% Round 1 18.06% 81.94% Entrepreneur's Probability Conditional Scenario Conditional Weighted Harvest Value Forecast Cash Flows Probabilities Cash Flows Cash Flows Success with All Groups $81,000,000 18% $50,498,863 $9,089,795 Success with Three Groups $54,000,000 12% $33,665,908 $4,039,909 Success with Two Groups $22,500,000 16% $14,549,325 $2,327,892 Success with One Group $13,500,000 8% $9,653,388 $772,271 Failure $0 46% $0 $0 Expected Cash Flow of Entrepreneur's Claim $16,229,867 Standard Deviation of Entrepreneur's Claim $19,311,842 Figure 8 Determination of Entrepreneur's residual harvestdate cash flow based on investor's required ownership at each round and the scenario probabilities.

Figure 9 Valuation Template 9 Valuation of Entrepreneur's Interest in Venture Entrepreneur's Investor's Market Data and Entrepreneur's Wealth Assumptions Assumptions Annual Riskfree Rate 4.0% 4.0% Annual Market Rate 10.0% 10.0% Standard Deviation of Market 20.0% 20.0% Correlation of Venture with Market 0.25 0.25 Entrepreneur's Wealth in Market $1,700,000 $1,600,000 Timing of Staged Investments Round 1 Aircraft OEM Years to Complete 1.00 1.25 Round 2 Aircraft Owners Years to Complete 0.50 1.00 Round 3 Marine OEM Years to Complete 1.00 1.25 Round 4 Boat Owners Years to Complete 0.50 0.50 Valuation of Harvest Cash Flows Venture (Entrepreneur's Financial Claim) Expected Harvest Value $25,792,712 $16,229,867 Standard Deviation of Venture Cash Flows $26,144,060 $19,311,842 Market Expected Harvest Value $2,262,700 $2,342,560 Standard Deviation of Market Cash Flows $588,897 $640,000 Portfolio Expected Portfolio Value $28,055,412 $18,572,427 Standard Deviation of Portfolio Cash Flows $26,297,466 $19,481,699 Value of Entrepreneur's Portfolio $11,029,559 $3,625,754 Value to Investment in Market $1,700,000 $1,600,000 Value of Entrepreneur's Interest in Venture $9,329,559 $2,025,754 Figure 9 CAPMbased valuation of entrepreneur's portfolio and residual interest in the venture.

Selling out cash flows Panel (a) Entrepreneur's Assumptions Financial Model Based on Business Plan Conditional Net Cash Scenario Round Round Round www.gazhoo.com Flows Probabilities One Two Round Three Four Harvest Value Forecast Success with All Groups $80,746,303 20% $16,149,261 $24,845,016 $29,362,292 $46,140,744 Success with Three Groups $50,746,303 15% $7,611,945 $11,710,685 $13,839,901 $21,748,415 Success with Two Groups $17,021,058 20% $3,404,212 $5,237,248 $6,189,475 Success with One Group $9,583,097 10% $958,310 $1,474,323 Failure ($2,632,182) 35% ($921,264) Expected Cash Flow at Harvest $27,202,464 $43,267,273 $49,391,668 $67,889,160 Standard Deviation of Cash Flows $31,935,074 $28,838,037 $27,185,195 $14,846,150 Investment Burn Rate per Year $2,000,000 $3,000,000 $2,500,000 $3,000,000 Years 1 0.5 1 0.5 Total Investment $7,500,000 Present Value of Unconditional Total Investment $7,159,376 Present Value of Expected Investment $4,709,907 Panel (b) Investor's Assumptions Financial Model Based on Business Plan Conditional Net Cash Scenario Round Round Round Flows Probabilities One Two Round Three Four Harvest Value Forecast Success with All Groups $71,746,303 18% $12,914,334 $19,868,207 $28,074,640 $43,047,782 Success with Three Groups $44,746,303 12% $5,369,556 $8,260,856 $11,672,949 $17,898,521 Success with Two Groups $14,521,058 16% $2,323,369 $3,574,414 $5,050,803 Success with One Group $8,083,097 8% $646,648 $994,843 Failure ($2,632,182) 46% ($1,210,804) Expected Cash Flow at Harvest $20,043,104 $32,698,320 $44,798,391 $60,946,303 Standard Deviation of Cash Flows $28,412,132 $26,984,610 $24,556,467 $13,227,245 Investment Burn Rate per Year $1,800,000 $2,500,000 $2,000,000 $2,500,000 Years 1.25 1 1.25 0.5 Total Investment $8,500,000 Present Value of Unconditional Total Investment $8,008,895 Present Value of Expected Investment $4,915,176 Panel (a) shows the entrepreneur's expectations of net harvest cash flows conditional on each scenario and the entrepreneur's belief of the probability of each scenario. These inputs are used to compute the expected harvest cash flow and standard deviation of cash flows at the time of each investment round. The lower portion of the panel shows the entrepreneur's assumed burn rate from each stage and the entrepreneur's expectation of the duration of the stage. The information is used to compute the conditional net cash flows and net present value. Panel (b) shows the same information based on the investor's beliefs.

Figure 10 Valuation of Unstaged Investment Venture Capital Investor Entrepreneur's Investor's www.gazhoo.com Assumptions Assumptions Market and Contract Data Annual Riskfree Rate 4.0% 4.0% Annual Market Rate 10.0% 10.0% Standard Deviation of Market 20.0% 20.0% General Partner's Annual Fee 2.5% 2.5% General Partner's Carried Interest 20.0% 20.0% Correlation of Venture with Market 0.25 0.25 SingleStage Investment and Timing Years to Harvest 3.00 4.00 Investor Valuation of Harvest Cash Flows Expected Net Harvest Value $27,202,464 $20,043,104 Standard Deviation of Net Harvest Cash Flows $31,935,074 $28,412,132 NPV of Venture at Time of Investment $14,869,240 $9,214,753 Valuation of Entrepreneur's Interest in Venture Entrepreneur's Wealth Entrepreneur's Wealth in Market $16,869,240 $11,214,753 Valuation of Harvest Cash Flows Venture (Entrepreneur's Financial Claim) Expected Harvest Value $0 $0 Standard Deviation of Venture Cash Flows $0 $0 Market Expected Harvest Value $22,452,958 $16,419,520 Standard Deviation of Market Cash Flows $5,843,676 $4,485,901 Portfolio Expected Portfolio Value $22,452,958 $16,419,520 Standard Deviation of Portfolio Cash Flows $5,843,676 $4,485,901 Value of Entrepreneur's Portfolio $16,869,240 $11,214,753 Value to Investment in Market $16,869,240 $11,214,753 Value of Entrepreneur's Interest in Venture $0 $0 Entrepreneur's Required Rate of Return Annualized Portfolio Cost of Capital 10.00% 10.00% Calculation of NPV of 100 percent ownership by investor, after providing from conditional investment outlays each round. Entrepreneur's valuation assumes all positive NPV (after investor fees and carried interest are paid to entrepreneur.

Vc Method valuation Template

0 comments

Notes on slide 1

2 Favorites