Venture capital

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.

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

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.

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

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?

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

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

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

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.