Valuing your business
If you're going to land a deal you'll need to know the value of your company
In order to receive funding, you should be aware of how valuable your company is. Calculate the value of the company in comparison with similar companies on the stock market.
The key to calculation is to establish an appropriate price/earnings (p/e) ratio for your company. The p/e ratio is the multiple of profits after tax attributed to a company to establish its capital value.
The calculated value of a company will give the venture capital firm their required rate of return over the period they anticipate being shareholders. For their part, venture capital firms think in terms of a target overall return from their investments.
Generally return refers to the annual internal rate of return (IRR), and is calculated over the life of the investment. The returns required would depend upon several factors, such as the perceived risk, length of time the money will be tied up, how easily the investment will be realized and how many other venture capital firms are interested in the deal. As a rough guide, the average rate of return will exceed 20% per annum.
For your part, you must have already invested or be prepared to invest some of your own capital in the company to demonstrate a personal financial commitment to the venture.
The calculated value of a company will give the venture capital firm their required rate of return over the period they anticipate being shareholders.