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Valuations 101: The Venture Capital Method

Gust

The selling price can be estimated by establishing a reasonable expectation for revenues in the year of the sale and, based on those revenues, estimating earnings in the year of the sale from industry-specific statistics. Based on the Wiltbank Study, investors should expect a 27% IRR in six years. OK…let’s split the difference.

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Flexible VC, a New Model for Companies Targeting Profitability

David Teten

This causes the cost of capital for Flexible VC, often calculated through IRR (similar to an interest rate), can be higher than that of venture debt or traditional RBI. Typically stable, high margins; repeatable sales model; clear path to profitability; and high growth potential. 20-30% is a common target IRR for investors.

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Why Companies are Not Startups

Steve Blank

A consequence of using these corporate finance metrics like RONA and IRR is that it ‘s a lot easier to get these numbers to look great by 1) outsourcing everything, 2) getting assets off the balance sheet and 3) only investing in things that pay off fast. What Does this Mean?

IRR 335
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VC investors: Don’t be greedy even if you can.

Berkonomics

First, the marginal exit event: Sometimes the end game or sale of the company is not a happy event for the early investors, including the entrepreneur or the founders. Most sophisticated investors will take either a promissory note or preferred stock, both of which come before founder or management stock in a sale or liquidation.

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Why you should never have a data room — the most counter-intuitive fund-raising advice you’ll ever…

Both Sides of the Table

Or if you’re a VC raising from LPs you have to list all of your deals, your investment value, your carrying value, your multiples, your IRRs, TVPIs, DPIs, etc along with net cashflows plus your previous LPAs. For starters you have to realize that fund-raising is a sales process. and then asking to take a brochure home with you.

Cap Table 336
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How do VCs measure their success (and why you should care)?

Hippoland

Companies that exit are valued at whatever the sale is. A common intermediary milestone for most investors is IRR (internal rate of return) of the fund. So there are a lot of unrealized gains built into the IRR of an early fund. Company progress on KPIs, including revenue, typically do not get factored into IRR.

IRR 48
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Investors: Don’t believe your ROI projections

Up and Running

I find myself mildly offended by the idea that I’m supposed to give real importance to numbers for five years in the future produced by unbelievably high sales projections coupled with unbelievably high profitability rates and linked with hypothetical valuations based on high multiples of sales or profits.

IRR 71