VALUATION TECHNIQUES OF VC

1. VALUATION METHODS OF
VC/PE
Ms. Jaya Sharma
Asst. Professor
MMIM

2. MEANING OF VALUATION
 Venture capital valuation is the process of
determining how much a startup is worth
when investors (like VCs) are deciding
whether to invest.
 VCs consider market opportunity, team
expertise, product or service, traction,
competitive landscape, financial projections,
and risk factors when determining whether to
invest in a startup or not.

3.  The two most common VCs use to determine the
value of a startup are the “Venture Capital”
method and the “Berkus” method.
 VCs will conduct thorough research to verify any
estimations and assumptions made during the
valuation process.
 This includes market research, customer
interviews, and financial audits to ensure
your startup’s claims are accurate and
achievable.

4.  Venture capital valuation is the process of
determining how much a startup is worth when
investors (like VCs) are deciding whether to
invest.
 This can be both before and after the
investment (“pre-money” vs. “post-money”
valuation).
 In short, it helps VCs decide how much equity
they should get in exchange for their investment.

5. Throughout the process of pitching VCs and fielding
investment offers, you might come across these
common terms:
Term What It Means Why It Matters
Pre-money valu
ation
The value of
your startup
before receiving
any new
investment
It determines
how much
equity the
investor will get
in exchange for
their money.
Post-money
valuation
The value of
your startup
after the new
investment is
This helps in
calculating the
ownership
percentage of

6. Equity The ownership
interest in your
company,
usually
represented as
shares
You give equity
to investors in
exchange for
funding.
Capitalization
table (cap table)
A spreadsheet
or table that
shows the
ownership
stakes, equity
It provides a
clear picture of
who owns what
percentage of
the company.

7. Term sheet A non-binding
agreement
outlining the
terms and
conditions of an
investment
This serves as
the basis for
drafting the
final, legally
binding
investment
documents.
Exit strategy A plan for how
investors will
eventually sell
their shares and
realize a return
on their
Your exit
strategy outlines
how and when
investors can
expect to make a
profit.

8. 7 Key Factors VCs Consider When Valuing Startups
 Investing in startups is inherently risky, as the
average success rate of a startup is 10-20% .
 VCs also have limited funds which raises their
stakes even higher.
 To make the right investment decisions, VCs
consider various qualitative and quantitative
factors to assess risk, potential rewards, and
future performance of a startup.

9. Common factors VCs consider when determining the value of a startup (and
whether it’s worth investing or not):
 Market Opportunity: The size and growth
potential of the target market. A larger, rapidly
growing market increases the startup’s potential
value.
 Team Expertise: The skills, experience, and
track record of the founding team. A strong,
experienced team boosts investor confidence
and increases the startup’s value.

10.  Product or Service: The uniqueness, quality,
and demand for the product or service. A highly
innovative or in-demand product can
significantly raise the startup’s value.
 Traction and Performance: Metrics like user
growth, revenue, and customer retention.
Positive traction shows the startup’s potential for
success and increases its value.

11.  Competitive Landscape: The number and
strength of competitors. Less competition or a
strong competitive edge can enhance the
startup’s value.
 Financial Projections: Future revenue, profit
potential, and scalability. Realistic, positive
financial projections can boost the startup’s
value.

12.  Risk Factors: Potential risks and how they are
mitigated. Lower risk levels generally increase
the startup’s value.
Based on these factors, VCs determine which
venture capital valuation method(s) are the
most appropriate to come to an accurate value.

13. METHODS WE NEED TO STUDY
 RISK RETURN ANALYSIS
 CONVENTIONAL METHOD
 REVENUE MULTIPLIER METHOD

14. 1. RISK RETURN TRADE OFF
 Risk Return trade off is the fundamental concept
of finance that states that investors demand
higher return for taking on higher level of risks.
 Various valuation approaches of this analysis are
as follows:
 DCF ANALYSIS
 CAPM MODEL
 APT
 RISK ADJUSTED NET PRESENT VALUE
 EXPECTED RETURN

15. STEPS FOR DCF ANALYSIS
 Step 1: ESTIMATE FUTURE CASH FLOW
 Identify the cash flow streams
 Forecast the cash flows
 Consider the growth rate
 Step 2: DETERMINE THE DISCOUNT RATE
 WACC( Weighted Average Cost of Capital)
 Risk free rate
 Risk premium

16.  Step 3: CALCULATE THE PRESENT VALUE OF FUTURE
CASH FLOWS
 Apply the discount rate to each cash flow to determine its PV
 Calculate the Present value
 Step 4: Calculate the Terminal Value using Gordon Growth
Model and then estimate the perpetuity growth rate
 Step 5: Calculate the Enterprise Value by adding the PV
and Terminal value and after that adjust for debt and cash
to determine the equity value

17. Where:
t is the time period (usually years)
r is the discount rate
T is the total number of periods

18. 2. CAPM MODEL
 It describes the relationship between expected return
of an Investment and its systematic risk
 Key components of CAPM
 Expected return
 Risk free rate
 Beta
 Expected Market Return
 CAPM FORMULA
 Expected Return= Risk free rate + Beta* (Expected
Market Return – Risk free rate)

20. ASSUMPTIONS OF CAPM
Investors are rational
Investors are risk averse
Investors have homogeneous
expectations
Investors can borrow and lend at
the risk free rate, without any
restrictions

21.  Markets are efficient
 Investors have access to a risk free
asset
 Investment horizon is infinite
 No taxes on buying & selling of
securities
 All Assets are tradable
 Beta is the complete measure of risk

24. assumptions
 Arbitrage – Investors are free to buy and sell the
assets without any restrictions and there is NO
TRANSACTION COST.
 Risk free Asset
 Linear Relationship

32.  Net Present Value (NPV) is the value of all future
cash flows (positive and negative) over the entire life
of an investment discounted to the present.
 NPV analysis is a form of intrinsic valuation and is
used extensively across finance and accounting for
determining the value of a business, investment
security, capital project, new venture, cost reduction
program, and anything that involves cash flow.

33.  Where:
 Z1 = Cash flow in time 1
 Z2 = Cash flow in time 2
 r = Discount rate
 X0 = Cash outflow in time 0 (i.e. the purchase price / initial
investment)

34. CONVENTIONAL METHOD
 COST TO COST METHOD
 DCF METHOD
 COMPARABLE COMPANY ANALYSIS
 PRECEDENT TRANSACTION ANALYSIS
 VENTURE CAPITAL METHOD
 BERKUS METHOD
 SCORECARD METHOD
 RISK FACTOR SUMMATION METHOD

35. comparable company analysis
 comparable company analysis is a valuation
method that involves comparing the Financial
matrix and ratios of the company belong to same
industries .various steps to Or various steps to
perform the analysis are
 1 identify comparable companies
 2. Gather financial data
 3. calculate financial ratios
 4. compare the calculated ratios
 5. determine valuation multiples and apply them

36. Advantages of CCA
 PROVIDES MARKET BASED VALUATION
 EASY TO UNDERSTAND
 USEFUL FOR PU
BLICLY TRADED COMPANIES

37. DISADVANTAGES
 DIFFICULTY IN FINDING COMPARABLE
COMPANIES
 IGNORES COMPANY SPECIFIC FACTORS
 SENSITIVE TO MARKET CONDITIONS