Financing Business Initiatives: Valuation, DCF, and Venture Capital

This report delves into the intricacies of financing business initiatives, focusing on venture capital as a crucial funding source. It begins with a seven-domain analysis of Green Newit, examining its target market, market and industry attractiveness, sustainable advantages, and operational capabilities. T...Read More

FINANCING BUSINESS INITIATIVES

TABLE OF CONTENTS
INTRODUCTION.......................................................................................................................................................................................3
1 Seven domain analysis..........................................................................................................................................................................3
2 Stages of venture capital investing and its characteristics and practical challenges to venture capital valuation................................6
3 Role that venture capital firm can play in creating value for the GreeNEW it owners........................................................................7
4 Calculation of the discount rate and reason due to which discount rate used by VC firm is higher than CAPM model.....................8
5 Comparison of valuation method........................................................................................................................................................10
6 DCF and venture capital valuation.....................................................................................................................................................11
7 Return percentage...............................................................................................................................................................................16
8 Sources of finance and recommendation............................................................................................................................................16
CONCLUSION..........................................................................................................................................................................................17
REFERENCE............................................................................................................................................................................................18

INTRODUCTION
Corporate finance is one of the vast field in the finance domain. The main problem that firms face in their business is that they
does not have sufficient amount of fund in their business. Thus, they raised a fund from the sources like venture capital etc. Venture
capital is assumed as important source of finance because through same huge amount of fund can be raised for the business. In the
current report, discounted cash flow valuation method is used to compute fair value of shares. Apart from this, venture capital
valuation method is also used to do valuation of the business firm. At end of the report, conclusion section is prepared.
1 Seven domain analysis Target segment benefits and attractiveness: The main target market of the Green Newit is the local people and utility
companies. Currently, the mentioned business firm main customers are the local people and utility firms. Currently, business
firm is giving due to consultancy to the local people and utility firms in respect to energy efficiency. In order to serve target
customer in better way firm is conducting energy star energy audit under which audit of energy consumption is done in the
homes (Hull and White, 2010). Under this energy efficiency, durability, and safety of the people in respect to energy efficiency
is ensured. Guidance is given to the people under the energy audit program in respect to saving of program. It can be said that
general public is the one of the important stakeholder of the business firm. Business firms operating in the energy sector are
another customers of the business firm because Green Newit provide consultancy services to these firms in varied areas that
are related to the energy. In order to ensure that people will be guided in systematic way by the government utility firm’s
employees training is given to them. Thus, it can be said that government and local people both are the target group of the
business firm. There are number of benefits that are available to the business firm for operating in the relevant sector. There is
a great demand of energy and efficiency in respect to its use. Firm is operating in number of verticals to give consultancy
services from where it is earning huge amount of revenue in its business. This is the one of the attractive point of the domain in
which firm is operating. It can be said that firm is operating in the highly profitable industry.

 Market attractiveness: There is a huge number of factors that make relevant market attractive in nature. Some of the attractive
factors are that consumption of energy is increasing consistently. The elevation in production of energy is not so high and due
to this reason it become very important to make efficient use of energy in the nation. This need is full filled by the Green
Newit and in this regard it is delivering good consultancy services to the relevant entities. By doing so it giving service in the
area where there are few players in the competition (Richardson, Champ and Loomis, 2012). Presence of less number of
players and demand of service provided by the firm is the one of the main reason that make this market more attractive. Industry attractiveness: There are lots of factors that make this industry attractive. Entire industry can be divided in to two
parts namely power generation and distribution as well as providing consultancy services to the people and the business firms.
Green Newit is providing consultancy services to the people and business firms. There are number of factors that makes this
industry attractive. One of them that there are less number of rivals in same and due to this reason there is less competition
from the competitors. Currently, there is a huge demand of the energy checkups form the homes and other properties. Firm
analyze the energy consumption and do checkup of same and on that basis identify the areas where energy can be used
efficiently and its consumption can be reduced to some extent which will lead to saving to the business firms. Mentioned firm
is earning good amount of revenue in its business by providing services to the people. This make the industry attractive and on
this basis it can be said that there are huge opportunity of earning of revenue in this industry. It must be noted that electricity
bill cover a large proportion of the household expenses (Block, J.H.. and et.al., 2014). If same get reduced then to some extent
money is saved at home. Such kind of service demand will increase at fast rate across the globe and on this basis it can be
said that industry is very attractive Sustainable advantage: There are sustainable advantage of the mentioned business because the services that are provided by
the business firm will remain in demand in the upcoming time period. This is because currently demand of energy is increasing
consistently and in future also same trend will remain in existence. In future also people will become more aware about the
energy efficiency and due to this reason demand of the mentioned service will increase in the upcoming time period. It can be

said that demand of these services in the upcoming time period will lead to sustainable advantage in its business. It can be said
that there are huge business potential in the business firm. Mission, aspirations and propensity for risk: Main mission of the business firm is to achieve huge percentage of market share
in the industry. In this regard it is offering wide variety of services to the local people and other firms. This factor will help
business firm in achieving its mission. Main aspiration of the business firm is to enhance its customer base. By doing so
business firm can expand its business at rapid rate and it can be said that firm is in safe zone in its business (Lew and Wallmo,
2011). There is a very high propensity of risk in this business because with passage of time new technology is invented and
existing technology base is updated and due to this reason it is very important for the business firm to evaluate its technology
infrastructure. By doing so it can remain ahead of competitors. If same will not be done then in that firm may lagged behind its
competitors. It can be said that there is a very high propensity of risk in the business. Ability to execute critical success factors: Firm have a very huge ability to execute its critical success factor in its business.
Critical success factor refers to the factors that are core competency of the business firm. It is the core competency factor on
the basis of business firm compete with its competitors. Critical success factor of the business firm is that it is not sticking to
specific type of service and it is providing wide variety of services in its business. Firm is fully capable to execute its critical
success factor John have a broad experience in the formulation of the business strategy, performing business operations,
accounting and finance. Apart from this, he is also a member of the Mid Atlantic chapter of efficiency first (Monjas-Barroso
and Balibrea-Iniesta, 2013). Thus, it can be said that John already have a relevant industry experience and along with this he
have wide knowledge of the different domains. He well known about the way in which operations can be performed. Thus, it
can be said that John have a full capability to make business successful and organization have the ability to execute its critical
success factor. Connectedness up, down across value chain: There is a very strong structure that is followed by the firm in its business.
Under this structure strong value chain is developed. The way in which there will be a top down communication in the

business firm is clearly defined. Thus, it can be said that on happening of certain event who will communicate to whom is
already determined. Thus, it can be said that there is a huge developed value chain and top down structure in the organization
that is followed to perform business operations. It must be ensured that there are right candidates in this structure. This is
because if same will be done then in that case better decisions can be taken by the business firm (Pizzol, Weidema, Brandão
and Osset, 2015). Thus, there is a significant importance of the value chain and structure for the business firm. There are
number of factors that must be considered while determining organization structure of the business firm. This is because it is
the organization structure that determine the flow of information in the business firm. If same will not be designed in the
systematic manner then in that case flow of information will not take place in the systematic way in the business and delay will
occur in the business decisions. It can be said that value chain play a very huge role in making any business successful. If same
will not be done in the systematic way then organization cannot function properly and it may face huge problem. Thus, time to
time evaluation of the organization structure and value chain must be done in the business. By doing so it can be said that
business performance can be improved to great extent and firm can remain ahead of its competitors in the industry.
2 Stages of venture capital investing and its characteristics and practical challenges to venture capital valuation
Venture capital is the one of the important source of finance and stages of venture capital investing are given below. Seed: Under this stage small amount of funding is done by the venture capital firm. Initially, some of the amount is provided
for the market research and building management team etc. There are number of stages in which investment is made by the
venture capital firm (Donohoe and McGill, 2011). But because in the initial stage business operations are commenced at small
level and due to this reason low amount of funding is done in the business project. Early stage: Early stage is the stage of the venture capital finance under which firm is not performing any product
development or marketing operations but need huge amount of fund to develop its capability. In order to ensure that sufficient
infrastructure is build up funding is done by the venture capital firm at this stage.

 Formative stage: In this stage production get started and firm start selling its product in the market. In this stage entire
business operations are financed by the venture capital firm. It can be said that it is the one the crucial stage of the venture
capital financing. Later stage: This is the final stage of the venture capital financing and under this when business firm intends to launch its IPO
in the market venture capital firm finance entire project. Thus, these are the stages of the venture capital financing.
One of the main characteristics of the venture capital financing is that under this in a sequence investment is made by the venture
capital firm in different stages of the business (Rehm and Frick, 2010). The other main feature of the mentioned source of finance is
that VC firm become shareholder of the firm and it acquire 30% stake in the business firm. It can be said that it is the one of the most
important characteristics of the mentioned source of finance. There are some challenges that are faced in the venture capital valuation.
In the mentioned valuation model terminal value need to be calculated. It is very difficult task to make prediction of cash flows. Thus,
if cash flow will be estimated wrongly then accurate valuation cannot be done and it is the major limitation of venture capital
valuation method.
3 Role that venture capital firm can play in creating value for the GreeNEW it owners
Venture capital can play a very important role in creating value for the GreeNewit. This is because by making investment in the
business firm venture capital firm representatives become shareholder in same. It must be noted that venture capital firm makes an
investment in varied companies in the single time period. Thus, there members have vital business experience and same give sufficient
amount of guidance to the owners of the business firm in terms of business expansion. The main benefit that through the relevant
source of finance firm obtained is that it get additional human resources which are intellectual and have wide experience. By using this
intellectual human resources in best way business firm like GreeNEWit can accelerate its business growth rate. Hence, it can be said
that in this way venture capital firm play an important role in creating value for the owners of the mentioned firm. It must also be
noted that venture capital firm provide sufficient capital to the business firm and help it in opening and expanding business at rapid
rate.

4 Calculation of the discount rate and reason due to which discount rate used by VC firm is higher than CAPM model
Table 1Input data
Enterprise Value
(EV)
Price in the market -
Shares issued -
Value of shares in the market 979,385
Long Term Loan 201,000
Less: values of cash and
security 139,226
Enterprise Value 1,041,159
Table 2CAPM model
CAPM
Assumptions
K(e) 2.38%
RFR 0.8%

Beta 0.50
Rp 4%
Table 3Cost of capital
Debt Equity Weightage
Weight of equity 82.97%
Weight of debt 17.03%
Finance cost (%) 8%
Tax Rate (@) 30%
WACC Calculation
Weighted average cost of
capital 2.90%
Assumptions
Some of the assumptions that are taken in to account are as follows.
 It is assumed that beta value is 0.50 which reflects that it is assumed that security is moderately affected by the changes that are
taken place in the market.
 Risk free rate of return is 0.71% and it is assumed that investor can expect to earn 0.71% on the invested amount.
 Return on market is assumed that market will generate return of 4%. This is assumed because currently economic condition of
the nation is not good and in that situation market cannot generate sufficient amount of return. Thus, it is assumed that in
upcoming time period market can be able to generate only return of 4%.

It is observed that venture capital firm keep its discount rate lower then CAPM model. This is because in the CAPM model
beta value is taken in to account. It can be observed that beta value is computed by using index value and specific company
shares data. If firm is newly opening its business it cannot list its shares in the market. Thus, it is not possible to estimate
accurate beta value. Venture capital firm usually take high discount rate because firms get debt at very high interest rate and
CAPM model does not reflect overall cost of capital. Hence, investors usually take high discount rate then CAPM.
5 Comparison of valuation method
DCF
Advantages
 The main advantage of using DCF model is that in same cash flows are taken in to account in order to compute fair value of
shares (Ozmel, Reuer and Gulati, 2013).
 The other main advantage of using DCF is that it take in to account capital expenditure in order to compute free cash flow.
Disadvantages
 The main disadvantage of this model is that same is very complex and it is very difficult to apply this model on cash flow.
Venture capital
Advantage
 Main advantage of using venture capital valuation model is that it is very simple use this model because calculation process is
simple.
 The other main advantage of using venture capital method is that in same value of the firm is computed.
Disadvantage

 Negative point of the valuation method is that in same terminal value is taken in to account. If wrong estimation is made about
the cash outflow then in that case wrong terminal value will be calculated. Thus, wrong valuation can be done in case of
venture capital valuation method.
6 DCF and venture capital valuation
Table 4Free cash flow model
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Terminal
year
Revenue 17250 84573
17031
9
33398
3
407282
3
504907
4
673947
1
772110
0
1144578
9 36737518
COGS 0 5444 840 49842
105950
2
123310
2
161862
8
185024
1 2766745 8817004
Gross profit 17250 79129
16947
9
28414
1
301332
1
381597
2
512084
3
587085
9 8679044 27920513.88
Cost
Accounting expenses 235 759 3942 3613 43623 44932 46280 47668 49098 49098
Depreciation 0 5843 4895 1305 27444 30188 37736 49056 68679 68679
Administration expenses 5167 12501 23870 46166 132547 139174 148917 159341 175279 175279
Small tools 66 59 0 0 0 0 0 0 0 0
Marketing and sales 7264 13752 10524 26628 149416 161369 174279 191707 210872 210872
Insurance 694 1679 2785 3113 23103 24258 25471 26745 28082 28082
Payroll 0 30729 81055 10099 129738 140117 154129 169542 1864964 1864964

3 4 5 2 1
Travel and rent and other 4307 10535 17054 16486 274029 287730 302117 317223 333084 333084
Executive team expenses 297 2425 6467 7394 138568 142725 147007 151417 155960 155960
Processing 79 153 0 0 1577 1609 1641 1674 1703 1703
Total operating
expenses 18109 78435
15059
2
20569
8
208769
1
223316
0
242474
0
264025
2 2887721 2887721
Total operating profit -859 694 18887 78443 925630
158281
2
269610
3
323060
7 5791323 25032792.88
Depreciation 0 5843 10738
12043
3 39487 69675 107411 156467 225146 225147
Net working capital 9931 15227 43182 74873 803755 907822 963973
172063
8 2116446 2116446
Capital expenditure 13682 16401 63397 30187 184930 40851 197473 56626 217507 56626
Free cash flow (FCF)
-
24472
-
25091 -76954 93816 -23568 703814
164206
8
160981
0 3682516 23084867.88
Table 5Growth rate of revenue
200
8 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Terminal
year
Growth rate 390.28 101.39 96.09 150.00 190.00 240.00 280.00 320.00 220.97%

% % % % % % % %
Table 6Cost sheet of cash flows
Cost sheet 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Terminal
year
Accounting expenses 1% 1% 2% 1% 1% 1% 1% 1% 0% 0%
Depreciation 0% 7% 3% 0% 1% 1% 1% 1% 1% 0%
Administration expenses 30% 15% 14% 14% 3% 3% 2% 2% 2% 0%
Small tools 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Marketing and sales 42% 16% 6% 8% 4% 3% 3% 2% 2% 1%
Insurance 4% 2% 2% 1% 1% 0% 0% 0% 0% 0%
Payroll 0% 36% 48% 30% 32% 28% 23% 22% 16% 5%
Travel and rent and other 25% 12% 10% 5% 7% 6% 4% 4% 3% 1%
Executive team expenses 2% 3% 4% 2% 3% 3% 2% 2% 1% 0%
Processing 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Table 7Disocunting of cash flows at discount rate of 2.94%
PV at 2.94%
WACC
Present year 1 2 3 4 5 6 7 8 9
Discounting factor 0.97143967 0.9436950 0.916742 0.890560 0.86512563 0.8404173 0.81641476 0.793097 0.7704465

4 4 8 3 4 6 9 7 7
PV of cash flows -23773.1 -23678.3 -70547.0 83548.8 -20389.3 591497.5 1340608.6
1276736.
6 2837181.8
Table 8Terminal value and other calculation
Terminal Value
Total value of free cash flow 5,991,186
Weighted average cost of capital 2.90%
Long term growth in Revenues 320%
PV (689,341)
Terminal Value as % of Total Value -13%
Table 9Equity value
Equity Value
EV 5,301,845
- Loan 201,000
+ Cash

139,226
Net Debt 340,226
Value of
shares 5,642,071
Table 10Fair value of shares
Intrinsic Value
Value of shares 5,642,071
Issued shares 97,939
Intrinsic Value 58
Assumptions
 It is assumed that beta value will be 0.50. This is because 0.50 reflects the moderate risk on the investment. By using same cost
of capital computed which is 2.16%.
 It is assumed that face value of shares is 10 and by dividing shareholder equity by 10 overall issued shares are computed at
97939.
Interpretation
On analysis of figures it can be observed that sales value of cash flows is increasing consistently. Along with this, on year on
year basis expenses are also increasing. In order to compute cash flows depreciation is added to cash flows and from same capital

expenditure is deducted (Valuation method, 2017). By doing so free cash flow is computed and its value converted from negative to
positive which reflects that free cash flow increased at rapid rate which is good for the business. It can be said that firm is expected to
be performing well in its business. Intrinsic value of shares is 58 and this means that real value of each unit of shares is 58. This means
that venture capital firm must purchase shares at value of £58 per unit from the business firm.
Table 11Venture capital valuation method
Post money valuation
Terminal value 5991186
Anticipated ROI 30%
Post money valuation 19970619
Post money valuation 19970619
Investment amount 5000000
Pre money valuation 14970619
Assumption It is assumed that venture capital firm wants to earn 30% return on the invested amount.
Interpretation
Venture capital valuation method is another approach that is used to do valuation of the business firm (Martin, McNally and
Kay, 2013). In order to compute valuation of the business firm first of all terminal value is computed whose value is 5991186.
Anticipated return on investment is 30% which reflects that return on investment is 30%. In order to compute post valuation terminal
value is divided by the anticipated return on investment. From post money valuation investment amount is deducted in order to
compute pre money valuation.

7 Return percentage
Table 12Return on percentage
Investment 5000000
Shares 200000
Value 0.04
Number of years 4
Return percentage 16%
Interpretation
In order to earn sufficient return 16% return must be earned by the venture capital firm. By earning mentioned percentage of
return cost can be covered by the firm and sufficient profit can be earned by the venture capital firm. Thus, it can be said that venture
capital must return 16% on invested amount.
8 Sources of finance and recommendation
On analysis of the facts and figures it can be said that finance from the venture capital will be sufficient for the business firm.
This is because in the mentioned source of finance entire funding is done in different sequence. In various stages entire investment is
made by the venture capital in to the business firm (Monjas-Barroso and Balibrea-Iniesta, 2013). It must be noted that huge amount of
money is invested by the venture capital company in the any business firm. Thus, business firm on which investment made cannot
face problem of scarcity of finance. It must be noted that there are many other sources of finance like bank loan that can be used to
finance the project. Under bank loan business firm can take any amount of bank loan from the bank at the specific interest rate and can
finance its project. It can be used by the business firm as the last option to finance projects. Because huge amount of capital is supplied
by the venture capital firm there is no need to raise finance from the any other source. In this way it is justified that venture capital will
sufficient for the business firm.

CONCLUSION
There are number of valuation methods like discounted cash flow model and venture capital valuation model. It must be noted
that under discounted cash flow model first of all cash flows are estimated and then same are discounted at specific rate. By using
same intrinsic value of shares is computed. There is a great importance of the mentioned method because by using same varied
decisions are taken by the investor. Venture capital valuation approach is another important method by using which decisions are
taken by the investors. It can be said that there is a huge significance of the both methods for the investors.

Reflective statement
In order to finance the project there are number of sources that are available to the business firms. I approach banks and other
financial institutions for financing my project. It was very difficult for me to finance the current proposed project because currently
economic condition of the nation is not good and due to this reason banks are not making available finance easily to the business
firms. It is very difficult task for me to finance business project because there is a very high level of risk that is associated with the
current project. If business project will be failed then in that case bank entire debt amount may be blocked. Thus, due to this reason
most of banks deny from financing my current proposed project. There were low amount of personal saving in my bank account and
due to this reason it was very difficult task for me to finance project from internal source of finance. Venture capital is the source of
finance that was available to me in such kind of situation from where I can finance my entire project. It is was very difficult to get
funds from these firms. This is because venture capital firms have a portfolio of 10 firms out of which many already run in loss and
due to this reason venture capital firms try to recover majority of amount from few firms that are in profit in the portfolio. Always,
venture capital firms evaluate proposed investment project in detail and after considering number of factors investment is made in the
specific project. Thus, it was very hard for me to get approved my project from the venture capital firm. Often the main issue that
comes in the venture capital is the growth rate of cash flows. I project cash flows at the rate which I find most suitable and realistic.
But in their opinion growth rate of cash inflows was wrong and modifications in same were needed. Hence, I carried out various
stages of dialogue with the venture capital firm. During dialogue I try to make venture capitalist believe that projections that are made
in the discounted cash flow model are correct. I have to present some valid logic in front of the panel of members that are employed in
the venture capital firm. In the preliminary stage representatives of the venture capital firm assume my assumptions wrong and state
that I assume wrong growth rate. In order to solve this problem I take support of the forecasted economic growth rate data of the
nation and try to make venture capital firm understand about the way in which economy may go and extent to which it may affect
project revenue. After making all these efforts finally finance is obtained from the venture capital firm.