Conventional Venture Capitalist Valuation Method
This method of valuation of venture capital undertakings (VCIs) in companies (VCIs) takes into account only two points of time in life of the venture capital investment, namely, the starting time of investment and the exit time when the investments would be liquidated through sale to published party and so on. The sequence of steps in the valuation of the VCUs and the determination of the percentage share ownership of the VCIs in the ICs are:
(i) To compute the annual revenue at the lime of liquidation of the investments, the pre annual revenue in the beginning is compounded by an expected annual growth rate for holding period, say; seven years.
(ii) Compute the expected earnings level, that is equal to future earnings level multiplied by tax margin percentage at the time bf liquidation;
(iii) Compute the future market valuation of the VCI that is equal to earnings levels multi by expected P/E ratio on the date of liquidation;
(iv) Obtain the present value of the using a suitable discount factor and
(v) If the present value of the VCU is Rs 50 lakh and the entrepreneur wants Rs 20 lakh as venture. capital from the VCIs, the minimum percentage of ownership required (40 per cent).
The weakness of this method is that it ignores the stream of earnings (losses) during the period and over-emphasizes the one exit date.