Investment Liquidity and Valuation

Abstract

Investors value the venture based on the risks and challenges they f oresee. The venture valuation depends on the likelihood of investor exit at the investor’s anticipated exit valuation. Investors would like to see a clear path to liquidity prior to investing in a venture. Successful investors are proactive in planning an exit strategy at the time of investment. Most investors are very good at conducting due diligence and managing their investments, but they are not so good at exiting their investments. A framework is presented to develop an investor exit plan, including selecting potential strategic acquirers and developing an investment t hesis for the acquirers that would then guide the venture development. Valuing a venture too high or too low may foreclose future financing options for the venture. Several venture valuation methods are presented, including the venture capital method, prior-round-plus method, milestone-based valuation method, valuation multiples method, risk-adjusted investor equity method, and simulation method. The simulation method determines the maximum investment available to a startup and the minimum percentage of equity required by the investor. The venture valuation may be based on the economic value of the startup’s intellectual property.