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Venture Capital Method

We utilize the VC method to calculate Startup Valuation Companies and we make use of the valuation of any investment into an existing company by using methods of venture capital financing.

In the event of making a new investment into the company the discounted amount of an estimated value of exit, PV(exit value), is known as “the post-money value (after the investment has been made). The value prior to the time that an investment could be calculated as the post-money amount less the initial investment amount which is referred to as “pre-money value”

The purpose of pre-money value  is to determine how much the capitalist  will offer per share for the stock he is purchasing.

To determine the quantity of shares that are given by the venture capital company (shares from Venture Capital owners) for an investment in an existing company We must figure out the proportion of the company valuation (after the investment has been made) which the investment is a part of. Based on the anticipated values for the company (exit value of the company at the end of five years, for example) and the anticipated or expected rate of return on the investment made, here is the procedure.

business plan preparation

The proportion in VC ownership (f ) for the VC investment can be calculated as follows:

In the NPV method

NPV is a way to calculate the current value of all the time ahead cash flows produce by a project, including the first capital investment. It is mainly used in capital budgeting to initiate which projects are likely to turn the huge profit.

Post Money

Post-money = value of post-money after the investment.

Once we’ve determined the value of f, we can estimate the amount of shares that were issued for an VC (shares from VC) in relation to the amount of shares held by the company founders prior the time of investment (shares of Founders).

The shares in VC is the equivalent of shares owned by founders ( 1-1-f )

At the point of purchase (price) is the value of the amount invested divided by the amount of shares that are issued.

price = INV/shares of VC

Importance of Venture Capital Method:

The main pillars of a capitalist economy are entrepreneurship and innovation. New businesses, on the other hand, are usually high-risk and high-cost endeavours. External funding is frequently sought in order to spread the risk of failure. In exchange for taking on this risk, investors in start-up companies can acquire shares and voting rights for pennies on the dollar. As a result, venture capital enables businesses to develop traction and entrepreneurs to achieve their objectives.