SlideShare a Scribd company logo
1 of 27
Download to read offline
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Venture Capital: FINAN 6300
Advanced Venture Capital: FINAN 6310
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Recap
Valuation Formula
Agenda
Business is NOT a dirty word
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Technology
An idea
+ execution
Venture Capital: Financing New Ventures: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Course Objectives
NewCo
Company
How do I make my
startup attractive
and fund it?
Investor
Understanding the
psychology and
needs of potential
investors.
Context
Understanding the
playing field and
the rules for funding
your venture.
Deal
What goes into a
successful deal:
terms and
valuation.
Venture Capital: Financing New Ventures: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Income Assets
Market
Valuation Approaches
What is someone willing to pay?
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Private vs. Public
Why is a public company worth more than
a private company?
Liquidity
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Investors care because of the
Opportunity
They ultimately invest because you give them a
Reason to Believe
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
How much equity do we sell?
What’s the right price?
Where do we find buyers?
What are they looking for?
What makes the transaction
good for both sides?
More questions…
Advanced Venture Capital: FINAN 6310
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Recap
Valuation Formula
Agenda
✓
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Valuation Formula & Hurdle Rate
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Mark Zuckerberg
Founder/Entrepreneur
The Valuation Formula
Entrepreneur: Am I giving
up too much equity?
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Investor: How much
equity do I need to get my
required return?
Ben Horowitz
Investor/VC
The Valuation Formula
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
How do these
two get on the
same page?
Mark Zuckerberg
Founder/Entrepreneur
Ben Horowitz
Investor/VC
The Valuation Formula
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
The Valuation Formula
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
(1+IRR)X (Investment)
The Valuation Formula
Numerator: Value at exit to meet required IRR
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
(1+IRR)X (Investment)
The Valuation Formula
Denominator: Value of company at exit
(Multiple) (Exit Value)
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
(1+IRR)X (Investment)
The Valuation Formula
Hurdle Rate: Percent ownership to reach IRR
(Multiple) (Exit Value)
Hurdle
Rate
=
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
(1+IRR)X (Investment)
The Valuation Formula
Terms:
(Multiple) (Exit Value)
IRR: Desired Internal Rate of
Return (use 100% unless
otherwise stated)
X: Time (in years) to exit
Investment: In dollars
Multiple: 1x Revenue, 5x
Earnings
Exit Value: Revenue or
Earnings at Exit
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
The Valuation Formula
Valuation Heuristics
Private Public
Revenue/Sales 1 × 5 ×
Earnings/Profit 5 × 20 ×
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
The Valuation Formula
Other Valuation Metrics
Revenue
P/E (Earnings)
Book Value
EBITDA
EBIT
Market Cap/Net Income
MRR/ARR
Always use an Industry Average Multiple if you have one.
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Private Earnings Valuation
(1+1)3 ($50,000)
(5) ($120,000)
Year 1 Year 2 Year 3 Year 4
Revenue $100,000 $350,000 $1,000,000 $4,000,000
Earnings ($15,000) $30,000 $120,000 $1,500,000
(8) ($50,000)
$600,000
$400,000
$600,000
66.67%
= = Hurdle
Rate
50k investment
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Public Earnings Valuation
(1+1)3 ($50,000)
(20) ($120,000)
Year 1 Year 2 Year 3 Year 4
Revenue $100,000 $350,000 $1,000,000 $4,000,000
Earnings ($15,000) $30,000 $120,000 $1,500,000
(8) ($50,000)
$2,400,000
$400,000
$2,400,000
16.67%
= = Hurdle
Rate
50k investment
Advanced Venture Capital: FINAN 6310
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Recap
Valuation Formula
Agenda
✓
✓
Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.
Venture Capital: FINAN 6300
Nothing in this presentation should be
construed as legal or accounting advice.
© Copyright Chad Jardine.

More Related Content

Recently uploaded

MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...
MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...
MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...
MysoreMuleSoftMeetup
 
SURVEY I created for uni project research
SURVEY I created for uni project researchSURVEY I created for uni project research
SURVEY I created for uni project research
CaitlinCummins3
 
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
中 央社
 

Recently uploaded (20)

Stl Algorithms in C++ jjjjjjjjjjjjjjjjjj
Stl Algorithms in C++ jjjjjjjjjjjjjjjjjjStl Algorithms in C++ jjjjjjjjjjjjjjjjjj
Stl Algorithms in C++ jjjjjjjjjjjjjjjjjj
 
COMMUNICATING NEGATIVE NEWS - APPROACHES .pptx
COMMUNICATING NEGATIVE NEWS - APPROACHES .pptxCOMMUNICATING NEGATIVE NEWS - APPROACHES .pptx
COMMUNICATING NEGATIVE NEWS - APPROACHES .pptx
 
Trauma-Informed Leadership - Five Practical Principles
Trauma-Informed Leadership - Five Practical PrinciplesTrauma-Informed Leadership - Five Practical Principles
Trauma-Informed Leadership - Five Practical Principles
 
Mattingly "AI and Prompt Design: LLMs with NER"
Mattingly "AI and Prompt Design: LLMs with NER"Mattingly "AI and Prompt Design: LLMs with NER"
Mattingly "AI and Prompt Design: LLMs with NER"
 
How to Send Pro Forma Invoice to Your Customers in Odoo 17
How to Send Pro Forma Invoice to Your Customers in Odoo 17How to Send Pro Forma Invoice to Your Customers in Odoo 17
How to Send Pro Forma Invoice to Your Customers in Odoo 17
 
Mattingly "AI & Prompt Design: Named Entity Recognition"
Mattingly "AI & Prompt Design: Named Entity Recognition"Mattingly "AI & Prompt Design: Named Entity Recognition"
Mattingly "AI & Prompt Design: Named Entity Recognition"
 
MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...
MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...
MuleSoft Integration with AWS Textract | Calling AWS Textract API |AWS - Clou...
 
FICTIONAL SALESMAN/SALESMAN SNSW 2024.pdf
FICTIONAL SALESMAN/SALESMAN SNSW 2024.pdfFICTIONAL SALESMAN/SALESMAN SNSW 2024.pdf
FICTIONAL SALESMAN/SALESMAN SNSW 2024.pdf
 
Improved Approval Flow in Odoo 17 Studio App
Improved Approval Flow in Odoo 17 Studio AppImproved Approval Flow in Odoo 17 Studio App
Improved Approval Flow in Odoo 17 Studio App
 
DEMONSTRATION LESSON IN ENGLISH 4 MATATAG CURRICULUM
DEMONSTRATION LESSON IN ENGLISH 4 MATATAG CURRICULUMDEMONSTRATION LESSON IN ENGLISH 4 MATATAG CURRICULUM
DEMONSTRATION LESSON IN ENGLISH 4 MATATAG CURRICULUM
 
ESSENTIAL of (CS/IT/IS) class 07 (Networks)
ESSENTIAL of (CS/IT/IS) class 07 (Networks)ESSENTIAL of (CS/IT/IS) class 07 (Networks)
ESSENTIAL of (CS/IT/IS) class 07 (Networks)
 
male presentation...pdf.................
male presentation...pdf.................male presentation...pdf.................
male presentation...pdf.................
 
When Quality Assurance Meets Innovation in Higher Education - Report launch w...
When Quality Assurance Meets Innovation in Higher Education - Report launch w...When Quality Assurance Meets Innovation in Higher Education - Report launch w...
When Quality Assurance Meets Innovation in Higher Education - Report launch w...
 
Observing-Correct-Grammar-in-Making-Definitions.pptx
Observing-Correct-Grammar-in-Making-Definitions.pptxObserving-Correct-Grammar-in-Making-Definitions.pptx
Observing-Correct-Grammar-in-Making-Definitions.pptx
 
UChicago CMSC 23320 - The Best Commit Messages of 2024
UChicago CMSC 23320 - The Best Commit Messages of 2024UChicago CMSC 23320 - The Best Commit Messages of 2024
UChicago CMSC 23320 - The Best Commit Messages of 2024
 
The Story of Village Palampur Class 9 Free Study Material PDF
The Story of Village Palampur Class 9 Free Study Material PDFThe Story of Village Palampur Class 9 Free Study Material PDF
The Story of Village Palampur Class 9 Free Study Material PDF
 
How To Create Editable Tree View in Odoo 17
How To Create Editable Tree View in Odoo 17How To Create Editable Tree View in Odoo 17
How To Create Editable Tree View in Odoo 17
 
SURVEY I created for uni project research
SURVEY I created for uni project researchSURVEY I created for uni project research
SURVEY I created for uni project research
 
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
 
AIM of Education-Teachers Training-2024.ppt
AIM of Education-Teachers Training-2024.pptAIM of Education-Teachers Training-2024.ppt
AIM of Education-Teachers Training-2024.ppt
 

Featured

How Race, Age and Gender Shape Attitudes Towards Mental Health
How Race, Age and Gender Shape Attitudes Towards Mental HealthHow Race, Age and Gender Shape Attitudes Towards Mental Health
How Race, Age and Gender Shape Attitudes Towards Mental Health
ThinkNow
 
Social Media Marketing Trends 2024 // The Global Indie Insights
Social Media Marketing Trends 2024 // The Global Indie InsightsSocial Media Marketing Trends 2024 // The Global Indie Insights
Social Media Marketing Trends 2024 // The Global Indie Insights
Kurio // The Social Media Age(ncy)
 

Featured (20)

2024 State of Marketing Report – by Hubspot
2024 State of Marketing Report – by Hubspot2024 State of Marketing Report – by Hubspot
2024 State of Marketing Report – by Hubspot
 
Everything You Need To Know About ChatGPT
Everything You Need To Know About ChatGPTEverything You Need To Know About ChatGPT
Everything You Need To Know About ChatGPT
 
Product Design Trends in 2024 | Teenage Engineerings
Product Design Trends in 2024 | Teenage EngineeringsProduct Design Trends in 2024 | Teenage Engineerings
Product Design Trends in 2024 | Teenage Engineerings
 
How Race, Age and Gender Shape Attitudes Towards Mental Health
How Race, Age and Gender Shape Attitudes Towards Mental HealthHow Race, Age and Gender Shape Attitudes Towards Mental Health
How Race, Age and Gender Shape Attitudes Towards Mental Health
 
AI Trends in Creative Operations 2024 by Artwork Flow.pdf
AI Trends in Creative Operations 2024 by Artwork Flow.pdfAI Trends in Creative Operations 2024 by Artwork Flow.pdf
AI Trends in Creative Operations 2024 by Artwork Flow.pdf
 
Skeleton Culture Code
Skeleton Culture CodeSkeleton Culture Code
Skeleton Culture Code
 
PEPSICO Presentation to CAGNY Conference Feb 2024
PEPSICO Presentation to CAGNY Conference Feb 2024PEPSICO Presentation to CAGNY Conference Feb 2024
PEPSICO Presentation to CAGNY Conference Feb 2024
 
Content Methodology: A Best Practices Report (Webinar)
Content Methodology: A Best Practices Report (Webinar)Content Methodology: A Best Practices Report (Webinar)
Content Methodology: A Best Practices Report (Webinar)
 
How to Prepare For a Successful Job Search for 2024
How to Prepare For a Successful Job Search for 2024How to Prepare For a Successful Job Search for 2024
How to Prepare For a Successful Job Search for 2024
 
Social Media Marketing Trends 2024 // The Global Indie Insights
Social Media Marketing Trends 2024 // The Global Indie InsightsSocial Media Marketing Trends 2024 // The Global Indie Insights
Social Media Marketing Trends 2024 // The Global Indie Insights
 
Trends In Paid Search: Navigating The Digital Landscape In 2024
Trends In Paid Search: Navigating The Digital Landscape In 2024Trends In Paid Search: Navigating The Digital Landscape In 2024
Trends In Paid Search: Navigating The Digital Landscape In 2024
 
5 Public speaking tips from TED - Visualized summary
5 Public speaking tips from TED - Visualized summary5 Public speaking tips from TED - Visualized summary
5 Public speaking tips from TED - Visualized summary
 
ChatGPT and the Future of Work - Clark Boyd
ChatGPT and the Future of Work - Clark Boyd ChatGPT and the Future of Work - Clark Boyd
ChatGPT and the Future of Work - Clark Boyd
 
Getting into the tech field. what next
Getting into the tech field. what next Getting into the tech field. what next
Getting into the tech field. what next
 
Google's Just Not That Into You: Understanding Core Updates & Search Intent
Google's Just Not That Into You: Understanding Core Updates & Search IntentGoogle's Just Not That Into You: Understanding Core Updates & Search Intent
Google's Just Not That Into You: Understanding Core Updates & Search Intent
 
How to have difficult conversations
How to have difficult conversations How to have difficult conversations
How to have difficult conversations
 
Introduction to Data Science
Introduction to Data ScienceIntroduction to Data Science
Introduction to Data Science
 
Time Management & Productivity - Best Practices
Time Management & Productivity -  Best PracticesTime Management & Productivity -  Best Practices
Time Management & Productivity - Best Practices
 
The six step guide to practical project management
The six step guide to practical project managementThe six step guide to practical project management
The six step guide to practical project management
 
Beginners Guide to TikTok for Search - Rachel Pearson - We are Tilt __ Bright...
Beginners Guide to TikTok for Search - Rachel Pearson - We are Tilt __ Bright...Beginners Guide to TikTok for Search - Rachel Pearson - We are Tilt __ Bright...
Beginners Guide to TikTok for Search - Rachel Pearson - We are Tilt __ Bright...
 

Lecture 2: Valuation & Hurdle Rate | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–

  • 1. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Venture Capital: FINAN 6300
  • 2. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Recap Valuation Formula Agenda
  • 3. Business is NOT a dirty word
  • 4. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Technology An idea + execution
  • 5.
  • 6. Venture Capital: Financing New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Course Objectives NewCo Company How do I make my startup attractive and fund it? Investor Understanding the psychology and needs of potential investors. Context Understanding the playing field and the rules for funding your venture. Deal What goes into a successful deal: terms and valuation.
  • 7. Venture Capital: Financing New Ventures: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Income Assets Market Valuation Approaches What is someone willing to pay?
  • 8. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Private vs. Public Why is a public company worth more than a private company? Liquidity
  • 9. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Investors care because of the Opportunity They ultimately invest because you give them a Reason to Believe
  • 10. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. How much equity do we sell? What’s the right price? Where do we find buyers? What are they looking for? What makes the transaction good for both sides? More questions…
  • 11. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Recap Valuation Formula Agenda ✓
  • 12. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Valuation Formula & Hurdle Rate
  • 13. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Mark Zuckerberg Founder/Entrepreneur The Valuation Formula Entrepreneur: Am I giving up too much equity?
  • 14. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Investor: How much equity do I need to get my required return? Ben Horowitz Investor/VC The Valuation Formula
  • 15. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. How do these two get on the same page? Mark Zuckerberg Founder/Entrepreneur Ben Horowitz Investor/VC The Valuation Formula
  • 16. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. The Valuation Formula
  • 17. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. (1+IRR)X (Investment) The Valuation Formula Numerator: Value at exit to meet required IRR
  • 18. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. (1+IRR)X (Investment) The Valuation Formula Denominator: Value of company at exit (Multiple) (Exit Value)
  • 19. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. (1+IRR)X (Investment) The Valuation Formula Hurdle Rate: Percent ownership to reach IRR (Multiple) (Exit Value) Hurdle Rate =
  • 20. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. (1+IRR)X (Investment) The Valuation Formula Terms: (Multiple) (Exit Value) IRR: Desired Internal Rate of Return (use 100% unless otherwise stated) X: Time (in years) to exit Investment: In dollars Multiple: 1x Revenue, 5x Earnings Exit Value: Revenue or Earnings at Exit
  • 21. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. The Valuation Formula Valuation Heuristics Private Public Revenue/Sales 1 × 5 × Earnings/Profit 5 × 20 ×
  • 22. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. The Valuation Formula Other Valuation Metrics Revenue P/E (Earnings) Book Value EBITDA EBIT Market Cap/Net Income MRR/ARR Always use an Industry Average Multiple if you have one.
  • 23. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Private Earnings Valuation (1+1)3 ($50,000) (5) ($120,000) Year 1 Year 2 Year 3 Year 4 Revenue $100,000 $350,000 $1,000,000 $4,000,000 Earnings ($15,000) $30,000 $120,000 $1,500,000 (8) ($50,000) $600,000 $400,000 $600,000 66.67% = = Hurdle Rate 50k investment
  • 24. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Public Earnings Valuation (1+1)3 ($50,000) (20) ($120,000) Year 1 Year 2 Year 3 Year 4 Revenue $100,000 $350,000 $1,000,000 $4,000,000 Earnings ($15,000) $30,000 $120,000 $1,500,000 (8) ($50,000) $2,400,000 $400,000 $2,400,000 16.67% = = Hurdle Rate 50k investment
  • 25. Advanced Venture Capital: FINAN 6310 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Recap Valuation Formula Agenda ✓ ✓
  • 26. Venture Capital: FINAN 6300 Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners. Venture Capital: FINAN 6300
  • 27. Nothing in this presentation should be construed as legal or accounting advice. © Copyright Chad Jardine.