Venture capital

CFA Level II
#1

Charlie is an entrepreneur who founded ToysBargain.com, an online retailer of children’s toys, in early 2014. On ToysBargain.com website customers can choose from a large range of products from a variety of manufacturers. Last month the company generated $19,000 revenue and made a loss.

You are working for VC firm, and you have been approached by Charlie who is seeking series A VC funding. Until now Charlie has invested $100,000 in the business from family and friends.

Charlie is prepared to offer 10,000 shares in ToysBargain.com for $2.0 million in VC funding. There are currently 12,000 shares on issue.

Comparable businesses have been sold on a valuation of 2.5x annual revenue. How much annual revenue will ToysBargain.com need to generate in order to give VC company a 5x return on its investment?

How do approach this question?

I first calculated the VC ownership in the company after funding, which is

The value of each share is $2m/10000 = $200.

The PRE-money valuation existing shares market cap = $200 * 12,000 = $2.4 m

The Post-money valuation is the entire market cap = $200*(12,000+10,000)=$4.4m

Vanilla Venture will gain 10,000/(12,000+10,000) = 45.45% of the company after funding.

Then I don’t know how to approach the question.

#2

Ask again if and when you’re a Level II candidate.

#3

Would you please tell me the answer do this one? I’m really stuck, once I understand this, I will go back to Level 1.

Thanks S2000, you’re the best asset on AF.

#4

http://financialexamhelp123.com/venture-capital-method-funding/

#5

I already did that part, I need to find answer to.

Comparable businesses have been sold on a valuation of 2.5x annual revenue. How much annual revenue will ToysBargain.com need to generate in order to give VC company a 5x return on its investment?

something to do with multiple?

#6

I’ll make you a deal: find an avatar that isn’t intended to provoke people, and I’ll help you with the question.

#7

Don’t be mean, my bootie call is not provoking.

#8

There I’ve changed to harvey specter, hope he’s not provoking.

#9

The question is poorly worded, but it appears that they want the value of the company to be five times its current value:

Value = 5 × (10,000 + 12,000) = $110,000

As this would be 2½ times its annual revenue, its annual revenue would have to be:

Revenue = $110,000 ÷ 2½ = $44,000.