As an entrepreneur, building your business is synonymous with taking a giant leap in your career. However, to run and operate your business optimally sans any complication, you will inevitably require capital. You can accrue capital through a number of techniques, for instance, bootstrapping, taking a loan or by seeking investment from venture capitalists.
Who is venture capital?
Venture capital is a type of financing, which can be offered by individuals or bigger firms to small companies or start-ups that are considered to have high-growth potential or have actually portrayed high growth.
However, before investing capital in a firm, venture capitalists run a comprehensive evaluation of a firm, taking into account risks and opportunities. This is basically a litmus test for any business. Here, let us understand how it is done-
Angel investors, as the title itself suggests, they invest in small companies and start-ups and normally are close friends or acquaintances of the owners or founders of the small company.
This initial investment is generally funded from personal assets and is sufficient enough to cover basic administrative and operative costs of the company.
Exit strategy relates to the owners and investors, assessing their gain and loss of the capital invested. This is usually prepared in advance and communicated through an official business plan.
Pre and Post Money Evaluation
Pre money evaluation refers to the overall value of the company or the asset prior to an investment. Whereas, post money evaluation refers to the value of the company or the asset after it receives the investment.
Venture Capital Method
Also referred to as first Chicago method, it combines discounted cash flow evaluation and multiples based evaluation.
Post Money Valuation
Post money evaluation is basically the same as pre-money evaluation, just with added equity. This does not include the ‘preferred stock’ and cannot be equated with ‘market value’.
Cost to Duplicate
This cost is rather interesting. It entails the expenditure, risk and opportunies to build another start-up company from scratch, just like the already existing one.
Market multiples is a preferred way of evaluation of company. It is exercised by various investors across the world before they invest in a company. This gives them a good indication as to what is the market willing to pay for a company’s assets. It can be compared to recent acquisition of recent companies and how they faired on the compensation scale.
Software as a Sevice
Software companies have an average 3x more value as compared to their revenue. SaaS companies fair a massive 6.5x more than their revenue.