Valuation Worksheets

For Business Plans

Frank Moyes and Stephen Lawrence

Deming Center for Entrepeneurship

Graduate School of Business Administration
University of Colorado
 Venture Capital Valuation Method

The venture capital method assumes that a firm will undertake an Initial Public Offering
(IPO) at some point in the future. The future value of the firm is determined by
multiplying the earnings of the firm in the year of the IPO by the expected price/earnings
(P/E) ratio that the market will support. (The long-run P/E ratio of NYSE stocks is about
15.) This provides the expected future value of the firm. The present value of the firm is
then calculated using a risk adjusted discount rate. Discount rates of 50 to 100% (and
more) are frequently used in valuing start-up businesses to capture the inherently risky
nature of new ventures. Similarly, venture capitalists frequently demand an Internal Rate
of Return (IRR) of 100% (or more) in order to justify investing in a risky startup. (An IRR
of 100% is equivalent to doubling an investment every year.)

Instructions
Only enter data into green-shaded cells with green type-font
All valuation calculations fall out from these inputs
Company Name
Valuation -- Venture Capital Method

Assumptions Ref

Month of IPO 60 A
Forecast annualized earnings at IPO $ 5,927,400 B
P/E ratio at IPO 15 C

Investment Round First Second Third

Month of Investment 0 12 24 C
Investor required IRR 25% 20% 15% D
Amount of Investment $1,000,000 $1,000,000 $1,000,000 E
Required Monthly IRR 2.08% 1.67% 1.25% F
Duration of Investment 60 48 36 G

Calculations

Market Capitalization at IPO $88,911,000 H

First Second Third

Firm Value at Time of Investment $29,134,356 $42,877,604 $58,460,426
Required FV for Investor at IPO $3,051,758 $2,073,600 $1,520,875 I
Individual Investor's Share 3.4% 2.3% 1.7% J
Individual Investor's ROI 305% 207% 152% K
Individual Investor's IRR 25% 20% 15% L

Investors' Share 7.5% M

Founders' Share 92.5% N

Negotiations

First Second Third

Individual Investor's Share 15.0% 5.0% 3.0%
FV for Investor at IPO $13,336,650 $4,445,550 $2,667,330
Individual Investor's ROI 1334% 445% 267%
Individual Investor's IRR 68% 45% 39%

Investors' Share 23.0%

Founders' Share 77.0%
 Calculation

D/12
A-C

B*C

H/(1+F)^G
E*(1+F)^G
I/H
I/E
(I/E)^(12/G)-1

sum(J)
1-M
Company Name
Valuation -- Venture Capital Method
Years 1 to 5

Assumptions:
Investor required IRR 100% A
P/E ratio at IPO or acquisition 15 B
Initial investment $1,000,000 C

D E F
Market G
Capitalizatio Required Future
Venture Capital Method Year Net Income n Value (Investor)
income stmt B*E FV(F,D)
IPO in Year 1 1 (1,000,000) ### $2,000,000
IPO in Year 2 2 0 $0 $4,000,000
IPO in Year 3 3 1,000,000 $15,000,000 $8,000,000
IPO in Year 4 4 2,000,000 $30,000,000 $16,000,000
IPO in Year 5 5 3,500,000 $52,500,000 $32,000,000

Year
1
2
3
4
5
 4

H I J K
Investor's Investor's Investor's Investor's
Share Return ROI IRR
C/G F*H I/C IRR(I,C,D)
100.0% $0 0% #N/A
100.0% $0 0% #N/A
53.3% $8,000,000 800% 100%
53.3% $16,000,000 1600% 100%
61.0% $32,000,000 3200% 100%

Negotiation Worksheet
Investor's Investor's Investor's Investor's
Share Return ROI IRR
25.0% $0 0% #N/A
25.0% $0 0% #N/A
25.0% $3,750,000 375% 55%
25.0% $7,500,000 750% 65%
25.0% $13,125,000 1313% 67%