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Venture Capital Funding/Valuation

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You are an entrepreneur whose business requires $10 million in investment. A venture capital organization undertakes due diligence and offers to provide the funds in exchange for 50% ownership of the company. From discussion, you learn that the venture fund believes your company will be maturing in three years. You also learn that the fund typically applies a 40% expected return to its venture investment analyses.

You agree that $10 million is required. You think that the venture fund has correctly estimated the future value of your company, but that it will take 5 years rather than 3 years to get there. You also think there is less risk, so you think a 30% return target is more appropriate.

What should you do?

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Solution Summary

The solution answers what one should do with a venture capital funding/valuation problem.

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There are two choices. First, do nothing and accept the proposal of the venture capital organization since they have done their due diligence. Second, given that the venture capital organization correctly estimated the future ...

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