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Duration: 1 Hour
Level: Advanced
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Evaluating or determining the value of assets is a key business issue. This is especially important in considering an investment in a start-up or early stage company by a Venture Capitalist (VC), Angel, or Private Equity investor, as well as for entrepreneurs seeking capital - outside funding. Venture capital is typically exchanged for ownership in the enterprise, and the key to the structure of the deal is the valuation of the entrepreneur’s business.

This course will provide an in-depth presentation of the Venture Capital Method used by investors and entrepreneurs to establish the terms for fundings. The course will cover topics such as:

  • Cash flow projection methods for early stage companies
  • The discount rate or required rate of return
  • Use these key parameters to apply the valuation method in a step-wise fashion
  • The concepts of pre-money and post-money value
  • Examine Refinements to the deal structure, stage financings and alternate types of securities

An example will show the calculations in detail. Practical negotiating points, a real-world perspective, are also included.

Intro Video Transcript

Valuation Analysis - Venture Capital Method By Peter Freeman Brought to you by Illumeo learning Hello, this is Peter Freeman, and I’ll be speaking to you on behalf of Illumeo learning. To discuss the Valuation Analysis Method for Venture Capital; Valuating and determining the value of an asset is a key business issue that comes up in a lot of different contacts. Now this is especially important in considering an investment in a start-up or an early stage company by a venture capitalist, angel investor or private equity investor. It’s also important for the entrepreneur seeking capital, the seller as well as the buyer and the investors. A venture capital is typically exchanged for an ownership in an enterprise, and the key to the structure, the deal, will include the valuation of the entrepreneur’s business. And this of course comes up when a successful new enterprise grows so that it does need outside capital where the firm and entrepreneur will seek funding from a venture capital in exchange for a partial ownership interest in a firm. So we’ll be examining those in quite a lot of detail throughout this course. So when negotiating the amount of ownership that’s received for the investment, a critical question is the value of the firm or the enterprise. And as you’ll see, this will drive in many ways the way that the transaction or the deal for the investment is structured, involving give and take between the two parties; the Investor and the company seeking funding, the entrepreneur. The Venture Capital Valuation Method • When a successful new enterprise grows so that it needs outside capital, the entrepreneur will often seek funding from a venture capital firm in exchange for partial ownership of the firm. • In negotiating the amount of ownership received for the investment, a critical question is the value of the firm or enterprise. So, looking at the question of value we will see: • This depends on the evaluation of the firm’s future prospects, stage of development, desired rate of return to the investor and other factors. So, we’ll be going over these step by step and in a fair amount of detail so that you can understand how the Venture Capital Valuation Method can be applied. So now I’m going to give you an overview of the topics that we’ll be covering in this course. I’m taking you through step by step: The Venture Capital Valuation Method Overview Apply valuation methods used by Venture Capital and other private investors to early stage companies – start-ups seeking funding. 1. The method requires two primary inputs – estimated future cash flows and an appropriate discount rate. So what we will see is that the future cash flows basically represent the anticipating economic benefits or the return to the investor that will be provided by the early stage company, the entrepreneur that’s seeking capital. That in turn will be combined with the appropriate discount rate or the investor’s desired rate of return and those are the two primary metrics or inputs that we’re going to be applying in this course to come up with the valuations for early stage companies. We’ll also be looking at: 2. Cash flow projection methods will be reviewed for early stage companies. Review this, as they will apply to entrepreneurial ventures or early stage companies. This is in many ways fairly similar to the same kind of methodology that’s used for valuations of other companies, both public and private. But you know, we will look at this in the particular setting for an early stage company or a start-up because it does present some differences that we want to take into consideration in the application of the valuation method that we’re going to be examining. So the next topic that we’re going to examine is: 3. The Discount rate or required rate of return will be thoroughly examined. The second of the two primary inputs that are applied in this Venture Capital Valuation Method, we will examine this very thoroughly because like the cash flow projections, it’s one of the fundamental inputs and is different in many respects from what you may be used to seeing in other kinds of valuation methods, particularly for public companies. It is in many ways similar as you’ll see it represents required or anticipated rate of return to investors but we do find again that it is somewhat different for early stage companies, and we’ll thoroughly examine this so that you can get a pretty solid understanding of how it can be applied for Venture Capital investments. 4. Using these key parameters, the valuation method can be applied in step-wise fashion Then by using these two key parameters, the cash flows and the discount rate will show how the valuation method can be applied. Taking it step by step to walk you through the process so that you can gain a very good understanding of how this can be applied. 5. The concepts of pre-money and post-money value are presented We’ll also present two other very important concepts the “pre-money and post-money” value for early stage companies. This is something you’ll see is very fundamental to Venture Capital Investments and these two concepts Pre-money and Post-money are ways in which the methodology is applied. So, we’ll present this so that you can see how this is an integral part of the Venture Capital Valuation Method. 6. An example will show the calculations in detail And because we will show an example of these calculations in detail so that you can see how it’s applied and examine it so that we so that we gain a real thorough understanding 7. Refinements to the deal structure are examined, stage financing and alternate types of securities And, after we work through the example in detail, we’re going to then turn to some refinements in the deal structure. In particular, stage financing and alternate types of securities. There are certainly opportunities to make refinements in the deal structures, not a case of one size fits all. These two examples, doing financing in stages or more than one phase, and to also look at some alternate types of securities in a preferred stock in particular. So that you can expand your understanding of the Venture Capital Method, as it’s applied in as broad a perspective as might be beneficial and represent what I consider to be very much a real-world kind of application of this methodology. 8. Some practical negotiating points, a real-world perspective, is included And finally, I will give you some practical negotiating points a real-world perspective included in the course. You know, I tell you I am both an investor and angel investor myself as well as an entrepreneur that does have considerable experience in raising funds for early stage companies and to apply the Venture Capital Valuation in negotiating and structuring the transactions that I have been involved with. So, I’ll give you some information from my perspective that I hope will be both relevant and useful in something that you’ll be able to take away and apply in your own situations that can be both, from the investor’s side or from the entrepreneur’s side, someone who is seeking to raise capital and really believe that what we’re showing here should be equally useful looking at it from the two different points of view.

Course Collections

This course is included in the following Course Collections:

Learning Objectives

  • Compile the key information needed to determine the ownership received for an investment in an early stage company.
  • Determine the required rate of return (ROR) or opportunity cost of capital for such investments.
  • Calculate the value of the firm’s equity at the end of the holding or investment horizon, using appropriate financial measures or metrics.
  • Determine the required value of an investment in today’s dollars, based on the present or discounted value.
  • Calculate the ownership share or fraction of the firm’s value that will fulfill the target ROR for the amount invested.
  • Apply the concepts of pre-money and post-money value.  
  • Prepare analyses of alternate deal structures by applying the venture capital method – stage financings and the use of different types of ownership securities.

14 Reviews (39 ratings)Reviews

Anonymous Author
Key concepts covered
Anonymous Author
Good discussion on valuation with examples of the calculations.
Member's Profile
Good overview and intro to someone interested in raising capital via VC
Anonymous Author
Very interesting and informative course
Member's Profile
Could be condensed
Member's Profile
Course content is very good
Anonymous Author
I was able to recalculate the ownership %s during the course but not the during the quiz/final exam. It would be helpful to see the answers and calculations after taking or passing quizzes/exams.
Anonymous Author
The power point is badly made and the presenter is unfocused, rambling, and not very precise. He often mistakes one term for another.
Member's Profile
This was an excellent introduction! Gives a good understanding of the pre- and post-money calculations. Thanks, Steve
Member's Profile
Pretty good, calculations could have been explained better
Member's Profile
I think an introduction to constructing a capitalization table would be helpful for the beginners.
Anonymous Author
The instructor went quickly. I had visions of "Shark Tank" throughout the presentation.
Anonymous Author
This was more geared to start ups. Was hoping that there would be more on late stage funding but some of the information was applicable.
Anonymous Author
Thorough overview of the DCF model and what VCs are looking at in valuing companies.


Prerequisite: Experience with business valuation and a general understanding of basic accounting methods and discounted cash flow calculations is important. 

Advanced Preparation: None


Education Provider Information

Illumeo, Inc., 75 East Santa Clara St., Suite 1215, San Jose, CA 95113
For more information regarding this course, including complaint and cancellation policies, please contact our offices at (408) 400- 3993 ext. 106, or send an e-mail to .
Course Syllabus
Venture Capital Valuation Analysis Method
  13:19DCF Valuation
  7:09Valuing a VC Investment and Structuring the Deal
  13:40Pre and Post Money Value of a Firm's Equity
  11:24Refining the Deal Structure and Course Conclusion
  PDFSlides: Valuation Analysis
  PDFValuation Analysis Glossary/Index