Praveen B a Ph D in molecular biology, is working as a professor in the International Science Institute. Based on this research work,he has developed an enzyme which he believed has commercial potential. Praveen B has set up Enzy Laboratories to commerciallydevelop the product. Enzy Lab. Has approached Gamma Venture Capital with a funding request for Rs 200 million by way of equity.
Gamma requires a rate of return of 30 per cent from its equity investment in Enzy and its planned holding period is 5 years. Enzy hasprojected an EBITDA of Rs 300 million for year 5, which Gamma considers to be credible. Gamma believes that an EBITDAmultiple of 6 for year 5 to be reasonable. At the end of year 5, Enzy is likely to have a debt of Rs 200 million and a cash balance ofRs 80 million.
Answer the following question.
Q1. What share in equity of Enzy will Gamma ask for?
Q2. What factors generally influence valuation of VC deals?
Q3. What incentive mechanisms are usually incorporated in VC deals?
Q4. Discuss the considerations an entrepreneur like Praveen B should bear in mind while approaching a VC Fund?