The First Chicago Method
This method is an improvement over the conventional method of the extent it gives allowance to the nature of the path between the starting point and exit point date and considers the entire earnings stream. The steps involved in the valuation are:
(i) Three alternative scenarios, are perceived considered, namely, success, sideways and failure. Each one of these is assigned a probability rating;
(ii) Using a discount rate, the discounted present value of the VCU is computed. The discount rate is substantially higher to reflect risk dimension.
(iii) The discounted present value is multiplied by the respective probabilities. The expected rent value of the VCU is equal to the total of these in the three alternative scenarios.
(iv) Assuming expected present value of the VCUat Rs 5 crore and the fund requirement from VCls as Rs 2.5 crore, the minimum ownership required is 50 per cent (half).
Revenue Multiplier Method
A revenue multiplier is a factor that can he used to estimate the value of a VCU. By multiplying that factor the annual revenue of the company is estimated by VCIs. Symbolically,
This method can be used in the case of early stage start-up venture capital investments when after tax profits, may be low negative in early years but there may be revenue. However, the technique requires a wealth of data which may not be available in a e India at this stage of the growth of VCFs. Where it is difficult to estimate the revenue the Chicago method would give better results than the conventional valuation method.