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How to do valuation of Venture capital in different stages of funding?


Formula of Venture Capital:

Pre-money valuation: It refers valuation of company assets before financing the assets through investors.
Pre-money valuation:
·         Share Method Calculation
·         Percentage Method

Share Method Calculation:
Number of shares outstanding before investment * Price of new share
Percentage Method:
(Investment amount / Percentage of company for sale) – Investment amount
                           OR
Pre- money valuation = Post-money valuation - money raised

Post-money valuation = It refers valuation of company after investors made an investment in that company.

Post money valuation = Pre-money valuation +money raised

Pre-money valuation:

Example: Company XYZ has outstanding shares of Rs.5, 00,000 of Rs.10 each and it want to raise further capital in the form of 10,000 shares of Rs.8 each. Find out the pre-money valuation.

Solution: 
Share method:
Pre-money valuation = Number of shares outstanding before investment * Price of new share
=50,000*8
= Rs.4, 00,000
Post money valuation = Pre- money valuation + money raised
= 4, 00,000 + 80,000
=Rs. 4, 80,000

Percentage method:
If 25% of company for sale and investment amount is Rs.5, 00,000 then what is pre- money valuation?
Pre-money valuation = (Investment amount / Percentage of company for sale) – Investment amount
= (5, 00,000 / 0.25) - 5, 00,000
= Rs.15, 00,000
Post- money valuation = Pre- money valuation + money raised
= 15, 00,000+5, 00,000
=Rs. 20, 00,000

Example: Company ABC has incorporated with 1, 00,000 shares and the annual sale are Rs.3, 00,000. The annual profit is Rs.4, 50,000 and the price earnings multiple is 20. The venture capitalist invested in following stages of a company.
Ø  In 0 year angel investor invest Rs. 6, 00,000 and the estimated rate of return is 40%.
Ø  In 3 year Venture Capitalist invest Rs. 8, 90,000 and the estimated rate of return is 30%.
The exit period of the investment is 6 year and there is no need for series C round. Find out:
Ø  Total Number of shares
Ø  % equity ownership
Ø  Pre-money valuation
Ø  Post money valuation
In a round A and B financing by Venture capitalist and angel investor.

Solution:
Number of shares incorporated: 1, 00,000
Price Earnings : 20
Net Profit: Rs.4, 50,000
Annual Sales: Rs.3, 00,00
  •   Angel investor invests Rs. 6, 00,000 and required return is 40%
Terminal value = Net profit * Price Earnings
= 4, 50,000*20
= 9,000,000
Post money valuation = 8, 000,000 / (1+0.40) 6
= 9, 000,000 / 7.529536
= 1, 195,293
Pre-money valuation = post money valuation - money raised
= 1, 165,293 - 6, 00,000
= 5, 95,293
Ownership in % of an angel investor = Investment / Post money valuation
= 6, 00,000 / 1, 195,293
= 50.19%
New total number of shares = Investment / (1-ownership)
= 1, 00,000 / (1- 0.5019)
= 2, 00,763
New shares issued = Total number of new shares – old number of shares
= 2, 00,763 – 1, 00,000
= 1, 00,763
Price of per share = Post money valuation / Total number of new shares
= 11, 95,000 / 2, 00763
= Rs. 5.95

Ø  Round B: Venture capitalist invest Rs. 8, 90,000 and required return is 30%
Post money valuation = 75, 00,000 / (1+0.30) 3
= 34, 13,746
Pre- money valuation = 34, 13,746 – 8, 90,000
= 25, 23,746
Ownership of venture capitalist in % = 8, 90,000 / 34, 13,746
= 26.07%
Total number of new shares =2, 00,763 / (1-0.2607)
= 2, 71,558
New shares have been issued = 2, 71,558 – 2, 00,763
=70, 795
Price of per share = 34, 13,746 / 2, 71,558
= Rs. 12.57

 Summary of Round A and B

Particulars
Round A (Rs.)
Round B (Rs.)
Investment
 6, 00,000
 8, 90,000
Year of investment
0
3
Required rate of return
40%
30%
Ownership %
50.19%
26.07%
Number ofvOutstanding shares (pre)
1,00,000
2, 00,763
Number of Outstanding shares (post)
2,  00,763
2,71,558
Shares own by investors
1, 00,763
70,795
Price of per share
5.95
12.57
Pre-money valuation
5, 95,293
25, 23,746
Post money valuation
11, 95,293
34, 13,746

Venture Capital Dilution:
Founder's dilution:
·         After round A founder’s ownership decreases from 100% to 49.81% (100-50.19).
·         After round B founder’s ownership decreases from 49.81% to 36.82% (100 / 2, 71,558).
Investors dilution:
·         After round A Angel investor gets 50.19% ownership in a company.
·         After round B Angel’s ownership decreases from 50.19% to 37.10% (1, 00,763 / 2, 71,558).
·         After round B Venture capitalist gets 26.07% (70,795 / 2, 71,558) ownership in a company.





Comments

  1. Phani KumarJuly 02, 2020 3:51 pm

    Hey, thanks for the information. your posts are informative and useful. I am regularly following your posts.
    Alphalogic Techsys IPO

    ReplyDelete

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