Entrepreneurship: Investment Of Venture Capitalist Essay

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Question:

Discuss about the Entrepreneurship for Investment of Venture Capitalist.

Calculating value of Reach with the help of Multiplies method:

 Multiple Valuation Method 2009 2010 2011 2012 2013 EBITDA (1,180,000) 437,000 4,674,000 9,025,000 14,143,000 Market value of invested capital - 6,573,976 70,312,966 135,766,906 212,759,152
 Particulars Virtual Radiological NightHawk Radiology Sales 93,280,000.00 166,752,000.00 EBITDA 17,576,000.00 24,824,000.00 MVIC 255,014,704.00 386,698,137.00 MV-to EBITDA 14.51 15.58 Average MV-to EBITDA 15.04

Calculating value of Reach with the help of DCF method:

 Enterprise Valuation Based on Free Cash Flows from Operations 0 7-Year Competitive Advantage Period (CAP) Post-CAP 1 2 3 4 5 6 Revenues \$ 1,678,384 \$ 3,704,000 \$ 8,917,000 \$ 16,850,000 \$ 26,102,000 \$ 36,214,000 Net Operating Profit \$ (1,180,000) \$ 437,000 \$ 4,674,000 \$ 9,025,000 \$ 14,143,000 Income Taxes \$ (14,278) \$ 5,288 \$ 56,555 \$ 109,203 \$ 171,130 Net Operating Profit After Taxes \$ (1,165,722) \$ 431,712 \$ 4,617,445 \$ 8,915,798 \$ 13,971,870 Investments \$ 240,000 \$ 240,000 \$ 240,000 \$ 240,000 \$ 240,000 Depreciation \$ 60,000 \$ 60,000 \$ 60,000 \$ 60,000 \$ 60,000 Change in Working Capital \$ 321,000 \$ 823,000 \$ 819,000 \$ 1,314,000 \$ 1,255,000 Free Cash Flows to the Firm \$ (1,666,722) \$ (571,288) \$ 3,618,445 \$ 7,421,798 \$ 12,536,870 \$ 13,790,557 Residual or Terminal Value \$ 50,257,130.72 Discounted Annual Free Cash Flows \$ (1,307,848) \$ (351,757) \$ 1,748,254 \$ 2,813,754 \$ 18,680,536 Present Value of Free Cash Flows to Equity \$ 21,582,938 Less: Marketability Discount \$ 6,474,881.47 Intrinsic Value of Equity \$ 15,108,057

Conducting scenario analysis:

 Assumptions Box 5-Year Competitive Advantage Period (CAP) Post-CAP Year 1 Year 2 Year 3 Year 4 5 Sales growth rate 100.0% 100.0% 100.0% 30.0% 15.00% 0.0% Operating Profit Margin 2.0% 2.0% 22.00% 31.0% 37.0% 44.00% Intrinsic Value of Equity \$7,213,676 Assumptions Box 5-Year Competitive Advantage Period (CAP) Post-CAP Year 1 Year 2 Year 3 Year 4 5 Sales growth rate 140.0% 140.0% 140.0% 70.0% 55.00% 40.0% Operating Profit Margin 7.0% 7.0% 27.00% 36.0% 42.0% 49.00% Intrinsic Value of Equity \$(33,847,790)

From the decline in sales growth rate the intrinsic value of equity mainly increases, while the increment in sales growth rate it declines. In addition, the sensitivity analysis indicates that revenue growth rate needs to be adequate for improving the intrinsic value of equity.

Why high growth companies need venture capital and not bank loans:

Rapid growing companies such as Hotmail seek venture capital rather than bank loans, as venture capital does not who's the company to pay annual interest on the investment amount. However, taking a loan from Bank would eventually increase pressure on Rapid growing business, as the profits will be eroded from the interest payments conducted to the bank. Moreover, using savings fund in the capital venture is highly risk, as rapid growing companies would consume the savings capital fast. Therefore, rapid growing companies relatively use venture capital to support their capital requirements, as they need investor for the organization who believe in the objective and future scope of the company (Kirzner 2015).

Why DFJ was chosen instead of Asian investors by JavaSoft:

 Stock Holder Number of shares Percentage ownership Owner 1 4,000,000 32% Owner 2 4,000,000 32% Employees 2,490,272 20% DFJ 1,867,704 15% Total shares 12,357,976 100%
 Stock Holder Number of shares Percentage ownership Owner 1 4,000,000 26.7% Owner 2 4,000,000 26.7% Employees 2,490,272 16.6% Asia 4,500,000 30.0% Total shares 14,990,272 100%

From the evaluation of above table, changes in ownership can be identified as the main reason, which motivated the founders of JavaSoft to accept original investments from DFJ, while rejecting the proposal of Asian investor. After the inclusion of venture capital from DFJ, the owners share in the company was at 32%, which was highest in percentage, while after allowing the investment from Asian investors the change in percentage of ownership was not favorable for the JavaSoft founders. This was the main reason behind the selection of DFJ as the venture capital and ignoring the proposal of Asian investors (Dees 2017).

Stating the clause of father’s investment in the company:

The inclusion of the provision for the founder’s father to invest \$15,000 in the company is proposed by DFJ on the grounds of trust that fathers have on son’s project. This provision was mainly conducted to increase trust of DFJ on the idea and business of JavaSoft.

Advantages of investing in stages rather than all at once:

The main advantages of funding or a young firm like Hotmail in stages rather than all at one is to identifying the progress that is made by the organization. The funds provided in stages would eventually secure investment of venture capitalist, while increasing the number of ownership portion in organization. Conducting investments all at once is a risky endeavor, which might backfire if the company is not able to achieve targeted goals (Drucker 2014).

Depicting why Microsoft bought Hotmail:

The main reason behind the buying of Hotmail by Microsoft was to counter the move of Yahoo one of the leading competitors in the industry. Yahoo had previously bought 11 Corporation which were the biggest competitor of Hotmail that allowed the organization to acquire the market with additional subscribers (Brenkert 2017). However, Microsoft bought Hotmail the biggest and foremost performer and market leader in this segment to reduce the influence of Yahoo on the market. this move mainly costed Microsoft 395 million and generated 9.5 million subscribers for the organization.

References:

Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press.

Dees, J.G., 2017. 1 The Meaning of Social Entrepreneurship. In Case Studies in Social Entrepreneurship and Sustainability(pp. 34-42). Routledge.

Drucker, P., 2014. Innovation and entrepreneurship. Routledge.

Brenkert, G.G., 2017. Entrepreneurship, ethics, and the good society. In Entrepreneurship (pp. 85-128). Routledge.