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Appraisal Venture Capital
The funding process through a venture capital investment is rather complicated. Once the idea presented in the pitch is chosen by investors, another very complicated step follows, as venture capitalists decide to valuate the company in order to appraise the value of the equity ownership held by them. This part of the deciding process must be fulfilled as investment plans are very risky due to the early stage of development of the company that needs funding, to the innovative character of the products they want to impose on the market and to the fact that the market’s demands cannot be correctly evaluated in such short time. But, this valuation needs to be done in order to establish the percentage of shares investors will receive in return for the invested money. This is the only way in which they can calculate their final returns. Let’s not forget that this valuation is important for the demanding company as well as this is the moment in which their amount of shares is determined.
You are maybe wondering how this venture capital appraisal is calculated. Well, the process is contained of three steps:
- First of all, a team of appraisal experts will gather information about the company in order to estimate its earning power, both in the past and in the future. It is at this point that investors try to gather as much information as possible about the project, the market and, most importantly, about the management and the qualifications of the members of the team.
- Secondly, the appraisal experts evaluate the risk of the venture and the returning rate. They will calculate the rate of earnings that the company is likely to produce in the following years and they will deduct all additional costs from that amount in order to estimate their return rate according to the potential future cash flows and profit.
- Lastly, these experts will combine the figures determined in the previous steps and will be able to give the final expertise concerning the risk elements, profits and cash flows the company is likely to generate, establishing thus not only the return rate, but also the success rate of the specific business.
You should know that investors care a lot about these figures, as they are the only guarantee they can have for their money, but they can also neglect them to a smaller or larger matter as they know that many of the start-ups are based on new products for which the market cannot be established precisely and, in this case, estimations are more difficult to be made. It also happens, in these cases, for investors to go with their instinct.