Examples of Equity Valuation Techniques - Essay Example

Venture Capital Valuation TechniquesSophisticated investors such as VCs, institutional investors, and corporate investors generally begin the valuation analysis by examining management's cash flow projections to test the underlying assumptions and business model. Once the investor has developed a certain comfort level in the projections, a variety of techniques are used to determine the percentage ownership the investor will require.

Each of these methods starts with the management's projections under the DCF technique but ignores management's application of its assumed discount rate to the present to value the Company. Instead, the VC investor imposes its ROI, as indicated in each of the methods described below - to meet its investment parameters irrespective of management's analysis of the cost of capital. By applying its ROI, the investor can then determine the percentage ownership it will require to reach this ROI assuming a certain market valuation for the Company.

Where these VC valuation methods differ from the DCF method is in (a) the difference. Once the investor has developed a certain comfort level in the projections, a variety of techniques are used to determine the percentage ownership the investor will require. Each of these methods starts with the management's projections under the DCF technique but ignores management's application of its assumed discount rate to the present to value the Company. Instead, the VC investor imposes its ROI, as indicated in each of the methods described below - to meet its investment parameters irrespective of management's analysis of the cost of capital.

By applying its ROI, the investor can then determine the percentage ownership it will require to reach this ROI assuming a certain market valuation for the Company.

Where these VC valuation methods differ from the DCF method is in (a) the difference in the discount rate, or ROI applied by the Company and by the investor, and (b) the use of all VC methods employ of P/E ratios to determine the market valuation of the Company at the end of the projection period (equivalent to the methods used under the DCF technique to determine the terminal or residue value of the Company).