Finance Essay Sample

Venture Capital is financial capital issued to startup companies at the early stages. The Venture capital fund makes money by acquiring equity in the firm it invests. Venture capital is a form of private equity and is popular among IT, software and Biotechnology companies. Venture Capitalism involves offering seed money in various rounds of funding. For most first time entrepreneurs, they cannot tell the worth of their firms. An important component of venture capital is valuation of the business seeking finances. Valuation presents a key component on the negotiation through which a percentage of ownership is determined and funding issues. There are various valuation methods, which include Comparables, The Net Present Value Method and Venture Capital method.

Venture Capital method involves investment at an early stage .However; the company must be showing great promise and the possibility of having very good earnings in the future. The initial years also involve projected losses. The valuation is somewhat realists as it usually takes care of the projected value of the company at the planned exit points. The steps that are involved are Estimation of the terminal Value over a given future point. This is usually determined using multiple price – earnings ratios applied to the projected net income over the exit year. The other involves the calculation of the net present value of the firm. The other involves the need to calculate the ownership percentage.

In the case of Spiffy Term, Inc, the Venture capitalist used the comparables method whereby he estimated the value of the firm based on size, growth, risk profile and the capital structure. However, the founders had used the basic venture capital method, used to determine the post money valuation as well as the pre-money valuation. Next is the determining of the ownership fraction and the number of shares. The final is obtaining the value price of the shares.

1. What valuations do these assumptions suggest?
Valuation is a very important part of the business. The valuation has several assumptions of which include a minimum number of shares that have been set apart for other rounds of financing. The other assumption is that the business will maintain the positive outlook it already has based on the current value.