Venture Capital Valuation Method-A venture capitalist firm wants to invest $1.5 million in your NY Deli internet venture that you started six months ago. You do not expect to make a profit until Year 4 when your net income is expected to be $3,000,000. The common stock of Bio Systems, a comparable firm, currently trades in the over the-counter market at $30 per share. Bio Systems' net income for the most recent year was $300,000 and the firm has 150,000 shares of common stock outstanding.
A. Apply the VC method to determine the value of the NY Deli at the end of four years.
B. If venture capitalists want a 40 percent compound annual rate of return on similar investments, what is the present value of your NY Deli venture?
C. What percentage of ownership of the NY Deli dot-com venture will you have to give up to the VC firm for its $1.5 million investment?