Question

As an analyst for a local VC firm, you are asked to value a proposed business investment for a startup that expects to earn $200,000 four years from now at expected exit. Most of the firms you analyze are earning roughly $350,000 at exit and are sold for about $1,000,000. Your firm demands that investment return 30% annually.

A) Using the venture capital mehod, what is the present value of this investment opportunity?

B) If your firm decides to invest $100,000, how many shares, and at whatprice, will be issued in the firm? Note- the following team currently holds 100,000 shares.

Answer 1

Using IRR approach

This calculation will have 4 steps-:

Step 1-: We have to calculate the value of investment that will earn $200,000 in four years from now using an IRR rate of 30%

W= (($200,000/(1.30)4) = $70,026

$70,026 will be the value of investment.

Step 2-: Fractional ownership of the VC firm is the expected wealth divided by the exit value:

f= $100,000/$1,000,000 = 0.10, or 10%

Step 3-: Calculate the no. of shares required for its fractional ownership of 10%:

Spe = 100,000 [0.10/(1-0.10)] = 11,111

Step 4-: The share price is the value of initial investment divided by the number of shares requires:

P= INV1/Spe = $100,000/11,111 = $9