FREE online courses on Venture Capital Funding - Major Sections of a Business Proposal - Return on Investment and Exit

 

Discuss how the venture capital investor will eventually receive cash for his investment in the company. Remember the Venture Capitalist wants to end up with all cash and no investment in your company. There are three generally accepted methods of giving the Venture Capitalist liquidity. You should cover all three, indicating which one is the most likely exit for your investor.

 

Public offering

The first possibility is a public offering; that is, the company could go public by offering its shares to the public. Part of the shares or all of the shares owned by the Venture Capitalist would be sold in the public offering.

 

Sale

Second, the company could be sold to a large company usually a conglomerate. In the case of this option, you should actually mention some conglomerates or large companies that you believe would have an interest in acquiring your company.

 

Buyback

Finally, you may offer the Venture Capitalist a “put” according to which your company will be required to buy the equity owned by the Venture Capitalist on the basis of a predetermined formula.

 

Return on Investment

Return on Investment (ROI) will be important to the Venture Capitalist. You need to show what return he can expect if he invests the amount you are requesting. For example you could say:

 

“If you buy 30 per cent of the company for 300,000, and after four years the company is a public company with pretax earnings of 3 million, then 3 million times a price earnings multiple of 8 for our particular industry is 24 million as a value for the company. Take 30 percent of that and you have 7.2 million for 300,000 investment. Assume that the 30 per cent is sold after four years, then the ROI is 7.2 million divided by 300,000 divided by four years which is an ROI of 400 per cent per year.”