Unit 1 VCPE tybfm (part 1 &2)-2.pptx

Venture Capital and Private Equity
UNIT 1:Conceptual understanding of Venture
Capital and Private Equity

Syllabus
• UNIT 1:Conceptual understanding of Venture Capital and Private Equity
• Venture Capital –Over View of Venture Capital- Definition- Features- Types –
Roles
• Concept of PE and its characteristics- Definition- Difference between PE,VC and
Hedge Funds- Nature of PE Firm- Players in the PE market– Benefit of PE
Finance
• PE Fund –Legal structure and terms- Private Equity Investments and Financing
Private Equity Multiples and Prices- Private Equity Funds and Private Equity Firms-
Investment Feature and Consideration

Syllabus
• UNIT 2: Structure and Valuation approaches
• Structure and Regulation of Venture Capital and Private Equity- Business
Cycle of PE –Structure of VC/PE firms- Limited Liability Partnerships-
Routes of VC/PE investments in India- Regulatory Aspects of VC/PE
investments
• Valuation approaches- Risk and Returns- Analysis of Funds- Conventional
Method- Revenue Multiplier Method

Syllabus
• UNIT 3 :Strategies of Private Equity
• Leverage Buyout, Growth Capital, Mezzanine Capital
• Distressed Debt, other Strategies
• Due Diligence- Procedure and Challenges
• Due Diligence in Emerging PE Market
• Investing in Developing Market
• Past Performance and Strategy

Syllabus
• UNIT 4 Exit strategies for Private Equity
• Modes of exits in Indian Context and Challenges involved-
• IPO, Promoter Buyback
• Sale to Other PE funds
• Sale to other strategic Investors
• Stake Swap
• M & A’s
• Open Market-
• Secondary Market

UNIT 1:Conceptual understanding of Venture Capital
and Private Equity
• Start up companies with a potential to grow need a certain amount of
investment. Wealthy investors like to invest their capital in such businesses
with a long-term growth perspective. This capital is known as venture capital
and the investors are called venture capitalists.
Venture capital, also called VC, refers to the financing of a startup company
by typically high-wealth investors who think the business has potential to
grow substantially in the long run. Typically, VCs only invest in startup
companies up to a certain percentage.

Venture Capital
• VC is used to fund a startup when there is a need to grow the business and realize
an above-average profit. At this stage, a venture capitalist invests in a firm that has a
high growth potential and can generate viable profits in the long-term.
• Usually, venture capitalists invest their money in firms that have limited or no access
to capital markets, thereby fueling their core operations while leveraging risk. From
the business owner perspective, the downside is that venture capitalists are free to
state their opinion and require changes in the company so that it becomes profitable
and they are not losing the invested capital.

Definition of Venture Capital
• A venture capital can be defined as a temporary equity or quasi-equity
investment in a growth-oriented small or medium business managed by a
highly motivated entrepreneur. The investment is combined with managerial
assistance.
• Before going in for venture capital finance, the venture capital institution will
have to assess the potentiality of the borrowing concern by a proper
appraisal. This appraisal will be similar to the project appraisal undertaken by
commercial banks.

Features of Venture capital
• High Risk
• Lack of Liquidity
• Long term horizon
• Equity participation and capital gains
• Venture capital investments are made in innovative projects
• Suppliers of venture capital participate in the management of the company

• 1.High Risk:
• By definition the Venture capital financing is highly risky and chances of failure are
high as it provides long term start up capital to high risk-high reward ventures.
Venture capital assumes four types of risks
Management risk - Inability of management teams to work together.
Market risk - Product may fail in the market.
Product risk - Product may not be commercially viable.
Operation risk - Operations may not be cost effective resulting in increased cost
decreased gross margins.

2. Equity Participation & Capital Gains:
In the early stage of business, because dividends can be delayed, equity investment
implies that investors bear the risk of venture and would earn a return commensurate
with success in the form of capital gains.
3. Participation In Management
Based upon the experience other companies, a venture capitalist advise the promoters
on project planning, monitoring, financial management, including working capital and
public issue. Venture capital investor cannot interfere in day today management of the
enterprise but keeps a close contact with the promoters or entrepreneurs to protect his
investment.

4.Length of Investment :The process of having significant returns takes several years and
calls on the capacity and talent of venture capitalist and entrepreneurs to reach fruition.
5.Illiquid Investment :Venture capital investments are illiquid, that is, not subject to
repayment on demand or following a repayment schedule. Investors seek return ultimately by
means of capital gains when the investment is sold at market place. The investment is realized
only on enlistment of security or it is lost if enterprise is liquidated for unsuccessful working.
6.High-tech: Venture capital finance caters largely to the needs of first- generation
entrepreneurs who are technocrats, with innovative technological business ideas that have not
so far been tapped in the industrial field .

Advantages of Venture Capital
• They bring wealth and expertise to the company
• Large sum of equity finance can be provided
• The business does not stand the obligation to repay the money
• In addition to capital, it provides valuable information, resources,
technical assistance to make a business successful

Disadvantages of Venture Capital
• As the investors become part owners, the autonomy and control
of the founder is lost
• It is a lengthy and complex process
• It is an uncertain form of financing
• Benefit from such financing can be realized in long run only

Types of Venture Capital funding
• The various types of venture capital are classified as per their applications at
various stages of a business.
• The three principal types of venture capital are :
Early Stage Financing
Expansion Financing
Acquisition/Buyout financing.

Six stages of financing
• Seed money: Low level financing for proving and fructifying a new idea
• Start-up: New firms needing funds for expenses related with marketingand product development
• First-Round: Manufacturing and early sales funding
• Second-Round: Operational capital given for early stage companies which are selling products, but
not returning a profit
• Third-Round: Also known as Mezzanine financing, this is the money for expanding a newly
beneficial company
• Fourth-Round: Also called bridge financing, 4th round is proposed for financing the "going public"
process

A) Early Stage Financing:
• Early stage financing has three sub divisions seed financing, start up financing and
first stage financing.
• Seed financing is defined as a small amount that an entrepreneur receives for the
purpose of being eligible for a start up loan.
• Start up financing is given to companies for the purpose of finishing the
development of products and services.
• First Stage financing: Companies that have spent all their starting capital and need
finance for beginning business activities at the full-scale are the major beneficiaries
of the First Stage Financing.

B) Expansion Financing:
• Expansion financing may be categorized into second-stage financing, bridge
financing and third stage financing or mezzanine financing.
• Second-stage financing is provided to companies for the purpose of beginning their
expansion. It is also known as mezzanine financing. It is provided for the purpose
of assisting a particular company to expand in a major way.
• Bridge financing may be provided as a short term interest only finance option as
well as a form of monetary assistance to companies that employ the Initial Public
Offers as a major business strategy.

C) Acquisition or Buyout Financing:
• Acquisition or buyout financing is categorized into acquisition finance and
management or leveraged buyout financing.
• Acquisition financing assists a company to acquire certain parts or an entire
company.
• Management or leveraged buyout financing helps a particular management
group to obtain a particular product of another company.

Venture Capital Funding Process
• The venture capital funding process typically involves four phases in the
company’s development:
• Idea generation
• Start-up
• Ramp up
• Exit

Step 1: Idea generation and submission of the
Business Plan
• The initial step in approaching a Venture Capital is to submit a business plan. The plan
should include the below points:
• There should be an executive summary of the business proposal
• Description of the opportunity and the market potential and size
• Review on the existing and expected competitive scenario
• Detailed financial projections
• Details of the management of the company
• There is detailed analysis done of the submitted plan, by the Venture Capital to decide
whether to take up the project or no

Step 2: Introductory Meeting
• Once the preliminary study is done by the VC and they find the project as
per their preferences, there is a one-to-one meeting that is called for
discussing the project in detail. After the meeting the VC finally decides
whether or not to move forward to the due diligence stage of the process.

Step 3: Due Diligence
• The due diligence phase varies depending upon the nature of the business
proposal. This process involves solving of queries related to customer
references, product and business strategy evaluations, management
interviews, and other such exchanges of information during this time period.

Step 4: Term Sheets and Funding
• If the due diligence phase is satisfactory, the VC offers a term sheet, which is
a non-binding document explaining the basic terms and conditions of the
investment agreement. The term sheet is generally negotiable and must be
agreed upon by all parties, after which on completion of legal documents
and legal due diligence, funds are made available.

Methods of Venture financing
• Equity: All VCFs in India provide equity but generally their contribution
does not exceed 49 percent of the total equity capital.
• Thus, the effective control and majority ownership of the firm remains with
the entrepreneur. They buy shares of an enterprise with an intention to
ultimately sell them off to make capital gains.
• • Quasi Equity: A form of finance that combines some of the benefits of
equity and debt •.

Methods of Venture financing
• Conditional Loan: It is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging
between 2 to 15 percent; actual rate depends on other factors of the venture such as
gestation period, cost- flow patterns, riskiness and other factors of the enterprise.
• • Income Note : It is a hybrid security which combines the features of both conventional
loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales,
but at substantially low rates.
• • Other Financing Methods: A few venture capitalists, particularly in the private sector, have
started introducing innovative financial securities like participating debentures, introduced by
TCFC is an example

Main Role and Importance of Venture Capital
• 1. Promotion of the Enterprise: For it, the entrepreneur carries out various
functions, like – emergence of the business idea, to obtain information about
related facts, selection of the location, preparation of plant layout, registration of
the enterprise and completion of various legal formalities.
• 2. Encouragement to Entrepreneurship
Venture capital is an important tool or method to encourage entrepreneurship, the
reason being that on one side, the venture capital encourages the innovators to
establish the industries/ and on the other side small and medium entrepreneurs and
also encouraged.

• 3. Performance of Economic Activities: Economic activities, like – sale and
purchase for products, purchase of means and machinery for converting raw
material into finished products, carrying out production and its availability to the
consumers may be efficiently performed through venture capital.
• 4. Management and Organization
Management and Organisation of the industry should be efficient for the performance
of various economic activities.
For example, manpower planning, taking work from competent persons, to engage
the service of professionals and maintaining balance therein, for getting economic
activities accomplished.

• 5. Fulfillment of Financial Requirements of High-Risk Entrepreneurs
Use of automatic machines, computers, the latest machinery, robots, new sources of energy, email,
rocket research, etc.Due to scientific progress have not only brought the technical Revolution but
has also increased the risks. The financial requirement of entrepreneurs involving high risks has
been met by venture capital companies.
• 6. Assistance in Strategy Formulation
Today’s age is the age of competitions, which can be seen in all areas, activities, stages, and places.
However, venture capital has to sustain in all types of competition, which enables the entrepreneur
to prepare strategies right from the establishment of the industry to its development expansion.

• 7.Possibility of Rapid Development Expansion:Venture capital includes all types of high
risk and high probable investments.Hence, venture capital is made available to a new
company from the starting stage (promotion of the enterprise) to advance further.As a
result, the possibility of rapid development expansion of the company increases
• 8.Other Roles and Importance
• Investment of venture capital for the purchase of modern machinery establishment of
laboratories, the appointment of scientists and training for new functions and activities, etc.
• Employees’ welfare and amenities.
• Project evolution and reports

Role of Venture Capital
• Making predictions is tough. So is spotting a pattern before it becomes a trend. There are a
bunch of professionals whose job is to do both—venture capital (VC) executives.
Flipkart wouldn’t have possibly happened had someone at Accel Partners not believed that
two young Amazon executives could build Amazon’s bête noire in India. Similarly, Oyo
probably wouldn’t have become a behemoth under Ritesh Agarwal had somebody at
Lightspeed Venture Partners not shown faith in the high school dropout’s business acumen.
• These were risky calls. But, VC is a high stakes job. The pinstriped mavens of the private
market are rewarded for the making the right calls, but failure isn’t taken kindly either.

Private Equity
• Private equity is an alternative investment class and consists of capital that is
not listed on a public exchange.
• Private equity is composed of funds and investors that directly invest
in private companies, or that engage in buyoutsof public companies,
resulting in the delisting of public equity

Features of Private Equity
• Long-term time horizons:
• The optimal strategy for mitigating the volatility of the investment cycle is a
long-term disciplined approach for committing to attractive investment
opportunities every year, for over a three-year period.
• Expertise:
• The talent that your business is provided abundantly by private equity
firms. These are generally hands-on groups that enable the company to
maximize the value of your company and meeting new business goals

• Illiquid asset: As compared to various other alternative investments,
redemption features or investor-driven reinvestment is not available
with private equity investments.
• Active involvement: If we consider other funding options and study them
in detail, we notice that the lenders or investors are minimally involved in the
day-to-day running of the business. On the other hand, PE firms are seen to
be more hand-on, assisting you for re-evaluating each and every aspect of
your business, for the objective of maximizing its value

• Manager selection and due diligence: Achievement of the top quartile
performance does not take place randomly, but rather has a correlation with
the level of access of the partnership to various investment opportunities,
management teams, and strength of entrepreneurial relationships. It depends
on their ability for capturing the highest yielding business plans and tap the
strategic investors, and expert operating experience in strengthening and
building businesses, to mention a few aspects.

• Confirmed returns: For the purpose of value creation, private equity firms are actual
experts. According to researches, at least two-thirds of all private equity deals led to at least
20 percent annual growth for the purchased firm. Thus, in most of the cases, there is a good
rate of return experienced by businesses involved in private equity investments.
• Growth capital: This is a kind of deal of private equity where the firm takes a
comparatively smaller stake, as the prime objective is not a turnaround, but the growth of
the company. Here, it might be just like venture capital, actually venture capital is regarded
usually as a subset of private equity. The prime difference for growth capital private equity if
is more interested in more mature and larger companies, and not the early-stage companies
that are looked for by the venture capitalists

• J-curve phenomenon: A private equity investor needs to be at ease with the J-curve effect in PE
investments. Basically, the J-curve phenomena illustrate the pattern of returns generated by a PE
fund against time, from inception to termination, realized by plotting the returns. The start-up
costs in the initial stakes of a partnership and payment of fees, before any returns to the investor,
results in the finance contributed to be more than the portfolio investments’ book value.
• Therefore, in the early years, a private equity fund might show a negative return in a typical
manner. The other influence on early returns is the portfolio investments’ writing down, under an
investment program of a sponsor, is considered to be the behind strategy. Normally, the
investment gains arrive in far ahead years, as the portfolio companies gain maturity and rise in
value. After the very first realizations are done, the return on funds may rise in a pretty steep
manner and can counterbalance the rest of the capital calls for expenses and investments.

• Success of investment: PE firms have their own conferred interests in ensuring
that your business does well. When a PE firm invests or acquires your company, you
can fully depend on their commitment to ensuring that its future is a success.
• Overall responsibility: The PE investment firms provide a high level of flexibility
and sound financing practices. The cyclical trends are considered in-depth and the
firms are in-tune with the particularities of the particular sectors in which the
investment is done. They do not just concentrate on one aspect of the business,
whereas considering every factor and put in effort and expertise for the
improvement of the same.

• High competition for investment opportunities: The activity of completing,
realizing, and identifying attractive investments is extremely competitive, involving a
high degree of uncertainty. There can be no guarantee or assurance that the fund
will able to consummate, locate, and exit investments that satisfy the rate of return
objectives of the funds, or comprehend upon their values or that it will be enabled
to invest completely to its committed capital finance.
• Systemized approach: For the purpose of counterbalancing the initial fall in cash
flows early in the PE cycle, investors may pick to invest regularly over several years.
Often, investors consider overcommitting to private equity for ensuring that they
have sufficient assets at work. It depends upon the time invested in order to attain
the anticipated exposure to private equity.

Advantages of Private Equity
• Private equity offers several advantages to companies and startups. It is favored by
companies because it allows them access to liquidity as an alternative to conventional
financial mechanisms, such as high interest bank loans or listing on public markets.
• Certain forms of private equity, such as venture capital, also finance ideas and early stage
companies.
• In the case of companies that are de-listed, private equity financing can help such
companies attempt unorthodox growth strategies away from the glare of public markets.
Otherwise, the pressure of quarterly earnings dramatically reduces the time frame available
to senior management to turn a company around or experiment with new ways to cut losses
or make money.

Disadvantages of Private Equity
• Private equity has unique challenges.
• First, it can be difficult to liquidate holdings in private equity because, unlike public markets, a
ready-made order book that matches buyers with sellers is not available. A firm has to undertake
a search for a buyer in order to make a sale of its investment or company.
• Second, pricing of shares for a company in private equity is determined through negotiations
between buyers and sellers and not by market forces, as is generally the case for publicly-listed
companies.
• Third, the rights of private equity shareholders are generally decided on a case-by-case basis
through negotiations instead of a broad governance framework that typically dictates rights for
their counterparts in public markets

Players in Private Equity Market
Issuers Intermediaries Investors
New Ventures Limited Partnership Public pension funds
Private Companies Other Intermediaries like Insurance companies
Small Business Investment Co’s
Public Companies Publicly traded investment Co’s Corporate pension funds
And other companies
Investment Banks,NFC,s

General Partners
• A private equity firm is called a general partner (GP) and its investors that commit capital are called limited
partners (LPs). Limited partners generally consist of pension funds, institutional accounts and wealthy
individuals.
• The general partner invests the fund’s committed capital in public and private companies, manages the
portfolio of investments and seeks to exit the investments in the future for sizable returns. A general partner
may manage one or a few funds that may have different investment restrictions such as geography, industry
or typical size of each investment.
• Each fund generally makes 10 to 12 investments and the life of a fund is usually 5 to 7 years. As a general
partner’s funds become almost fully invested, the firm will need to plan future fundraising to raise new funds
using its proven track record of success in previous funds.
• General partners generally charge both a management fee and a performance fee. While this varies by firm
and its funds, typical management fees consist of 2% of assets under management and performance fees of
20% which are taken from exited investments. Performance fees are also called “carried interest” or “carry”.

Limited Partner
• The limited partnership is that which consists of one or more limited or general
partners. The acronym for the term is LP
The limited partners have limited liability, in that they are only accountable for debts
based on the amount of investment they have brought into the business.
• They also, have no management control and make minimal decisions.
• Their remuneration is a return on their investment which is should be
predetermined in the agreements.
• Profits and losses are shared according to the investment brought in as listed in the
contracts and binding agreements

Private Equity Firms
• Top foreign funds include Blackstone, KKR, Carlyle, TPG, TA Associates, Warburg Pincus,
Barings Private Equity Asia, Apax, Bain Capital, General Atlantic, Advent, etc. Foreign Bank PE
arms such as Goldman Sachs PE, Standard Chartered PE, etc
• Some of the most famous Indian PE funds are Multiples PE, Kedaara, Samara, CX Partners,
Gaja Capital, ChrysCap, Westbridge Capital, True North and PE arms of Indian Banks and
Financial Services companies such as Motilal Oswal PE, Kotak PE, ICICI Ventures, etc
• Everstone Capital (Sameer Sain and Atul Kapur) is one of the most prominent PE funds with
significant Indian Investments but is headquartered in Singapore.
• Other funds that are family offices of wealthy Indians such as Azim Premji’s Premji Invest,
Narayan Murthy’s Catamaran Ventures, Ranjan Pai’s Aarin Capital, etc. These are family offices
and may be more difficult to classify them as PE or VC on the basis of investing styles.

Difference between private equity and venture
capital
c
Private Equity
• PE firms often invest in mature
businesses in traditional industries.
• Using capital committed from LPs,
PE investors invest in promising
companies—typically taking a
majority stake (>50%).
Venture Capital
• VC firms often invest in tech-
focused startups and other young
companies in their seed
• Using committed capital, VC
investors usually take a minority
stake (<50%) in the companies they
invest in.

Difference between private equity and venture
capital
Private Equity
• When a PE firm sells one of its
portfolio companies to another
company or investor, returns are
distributed to the PE investors and
to the LPs. Investors typically
receive 20% of the returns, while
LPs get 80%.
Venture Capital
• Most of these companies are not
fully established or profitable, so
they can be risky investments—but
with that risk comes the
opportunity for big returns

Difference between VC &PE
Parameters Venture Capital Private Equity
Meaning These are small investments used to grow
the company in their primary stage
It is the investments to those firms which are not
listed on any public stock exchange
Investment
Stages
Initial stage Later stage
Fund Invested In a large number of firms In a few companies
Industries Industries such as high technology, energy
conservation, etc. that need initial
investments
All Industries
Focus on Management Skill Corporate Governance
Risk Involved High Low
Capital
Required
For operations growth It is required for business expansion and growth

Key Differences Between Private Equity
and Hedge Funds
• Private equity funds are the investment funds that are typically owned by limited
partnerships to buy and restructure companies that are not traded publicly on the stock
exchange. In contrast, hedge funds are privately held, and these pool investors’ funds and
then reinvest the same into financial instruments that have a complicated portfolio.
• Private equity funds invest in companies that can provide higher profits over a more
extended period. In contrast, hedge funds are used to invest in assets that yield good ROI or
return on investment over a shorter period.
• Investors in private equity funds have the liberty to invest funds as and when required,
whereas, in hedge funds, the investors will need to make investments all in a single go.
• Private equity funds are closed-ended investment funds, whereas hedge funds are open-
ended investment funds.

Key Differences Between Private Equity
and Hedge Funds
• Private equity funds do not have any sort of restriction on transferability over a
specified time frame, whereas hedge funds have restrictions on transferability.
• Private equity funds are less risky in comparison to hedge funds.
• The investors in private equity funds act as active participants, whereas the investors
in hedge funds are vested with the passive status.
• Funds life is contractually defined in private equity funds, whereas there is zero
limitation on funds’ life in the case of hedge funds.
• Investors in Private equity funds have a higher level of control over operations and
asset management, whereas hedge funds have a lower level of control over assets

Private Equity Fund Structure
• Private equity funds are closed-end investment vehicles, which means that
there is a limited window to raise funds and once this window has expired no
further funds can be raised. These funds are generally formed as either a
Limited Partnership (“LP”) or Limited Liability Company (“LLC”).

Private Equity Fund Structure & Terms
• Raising a private equity fund requires two groups of people:
• 1) Financial Sponsor:
• The team of individuals that will identify, execute and manage investments in
privately-held operating businesses. This is generally comprised of a General
Partner and a Management Company.
• General Partner: The entity with the legal authority to make decisions for the fund.
This entity also assumes all legal liability.
• Management Company: The operating entity that employs the investment
professionals responsible for allocating capital and managing investments.

• 2) Investors: The individuals that will provide the capital to make those
investments. Because funds are generally formed as Limited Partnerships,
investors are often referred to as limited partners.
• In raising a fund, the fund founders will reach out to sources of institutional
capital such as pension plans and university endowments, as well as high net
worth family offices and individuals. The commitment to the fund, known as
the “capital commitment,” will be made via a partnership agreement
stipulating that the capital invested or resulting assets will be returned within
a fixed period of time (typically 10 years)

• In most cases this is structured as a limited partnership agreement (LPA).
The LPA will typically include the following:
• Mandate: The partnership agreement may provide parameters for
acceptable investments. These restrictions could relate to scale, geography
and security type, etc
• Fund Term: This defines the time horizons available for investment and
divestment.

• Management Fees: This defines the fee tied to the capital raised, or assets
under management (“AUM”). The Management Company will typically earn
an annual 2% fee on AUM.
• Distribution Waterfall: Distribution waterfalls define the economic
relationship between the general partner (“GP”) and limited partners (“LP”).
This is how the GP earns what is known as a carried interest, which is
typically 20% of the proceeds after the LP has received distributions equal to
the original capital invested plus a defined preferred return.

What are valuation multiples?
• Valuation multiples are financial measurement tools that evaluate one
financial metric as a ratio of another, in order to make different companies
more comparable.
• Multiples are the proportion of one financial metric (i.e. Share Price) to
another financial metric (i.e. Earnings per Share). It is an easy way to
compute a company’s value and compare it with other businesses.

Types of valuation multiples
• There are two main types of valuation multiples:
• Equity Multiples
• Enterprise Value Multiples
• There are two main methods of performing analysis using multiples:
• Comparable Company Analysis (“Comps”)
• Precedent Transaction Analysis (“Precedents”)

Equity multiples
• Investment decisions make use of equity multiples especially when an investor aspires for
minority positions in companies. The list below shows some common equity multiples used in
valuation analyses.
• P/E Ratio – the most commonly used equity multiple; needed data is easily accessible; computed
as the proportion of Share Price to Earnings Per Share (EPS)
• Price/Book Ratio – useful if assets primarily drive earnings; computed as the proportion of
Share Price to Book Value Per Share
• Dividend Yield – used for comparisons between cash returns and investment types; computed
as the proportion of Dividend Per Share to Share Price
• Price/Sales – used for firms that make losses; used for quick estimates; computed as the
proportion of Share Price to Sales (Revenue) Per Share

Enterprise Value (EV) multiples
• When decisions are about mergers and acquisitions, enterprise value multiples are the appropriate multiples
to use. The list below shows some common enterprise value multiples used in valuation analyses.
• EV/Revenue – slightly affected by differences in accounting; computed as the proportion of Enterprise
Value to Sales or Revenue.
• EV/EBITDAR – most used in industries in the hotel and transport sectors; computed as the proportion of
Enterprise Value to Earnings before Interest, Tax, Depreciation & Amortization, and Rental Costs
• EV/EBITDA – EBITDA can be used as a substitute of free cash flows; most used enterprise value
multiple; computed as the proportion of Enterprise Value to Enterprise Value / Earnings before Interest,
Tax, Depreciation & Amortization
• EV/Invested Capital – used for capital-intensive industries; computed as the proportion of Enterprise
Value to Invested Capital

Methods of using multiples
• All of the above metrics can be analyzed with two common approaches to valuation
multiples:
• Comparable Company Analysis – This method analyzes public companies that
are similar to the company being valued. An analyst will gather share prices, market
capitalization, capital structure, revenue, EBITDA, and earnings for each company.
• Precedent M&A Transactions – This method analyzes past mergers and
acquisitions (M&A) for companies in the same industry, which can be used as a
reference point for the company that is being valued

Investment feature and consideration
• How venture capitalists make investment choices?
• Venture capitalists (VCs) are known for making large bets in new start-up
companies, hoping to hit a home-run on a future billion-dollar company.
• With so many investment opportunities and start-up pitches, VCs often have
a set of criteria that they look for and evaluate before making an investment.
• The management team, business concept and plan, market opportunity, and
risk judgement all play a role in making this decision for a VC.

Key considerations for a VC when evaluating a
potential investment
• 1. Management
• VCs invest in a management team and its ability to execute on the business plan,
first and foremost. They are looking ideally for executives who have successfully
built businesses that have generated high returns for the investors.
• 2. Size of the Market
• The bigger the market size, the greater the likelihood of a trade sale, making the
business even more exciting for VCs looking for potential ways to exit their
investment. Ideally, the business will grow fast enough for them to take first or
second place in the market.

• 3. Great Product with Competitive Edge
• VCs look for a competitive advantage in the market. They want their
portfolio companies to be able to generate sales and profits before
competitors enter the market and reduce profitability. The fewer direct
competitors operating in the space, the better.
• 4. Assessment of Risks
• A VC's job is to take on risk. So, naturally, they want to know what they are
getting into when they take a stake in an early stage company

• VCs will want to be absolutely clear about what the business has
accomplished and what still needs to be accomplished.
• Could regulatory or legal issues pop up?
• Is this the right product for today or 10 years from today?
• Is there enough money in the fund to fully meet the opportunity?
• Is there an eventual exit from the investment and a chance to see a return?

Unit 1 VCPE tybfm (part 1 &2)-2.pptx

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Unit 1 VCPE tybfm (part 1 &2)-2.pptx