 In order to receive funding, you should
be aware of how valuable your company is. Calculate the value of the
company in
comparison with similar companies on the stock market.
The key to calculation is to establish an appropriate price/earnings
(p/e) ratio for your company. The p/e ratio is the multiple of profits
after tax attributed to a company to establish its capital value.
The calculated value of a company will give the venture capital firm
their required rate of return over the period they anticipate being
shareholders. For their part, venture capital firms think in terms of a
target overall return from their investments.
Generally return refers to the annual internal rate of return (IRR),
and is calculated over the life of the investment. The returns required
would depend upon several factors, such as the perceived risk, length
of time the money will be tied up, how easily the investment will be
realized and how many other venture capital firms are interested in the
deal. As a rough guide, the average rate of return will exceed 20% per
annum.
For your part, you must have already invested or be prepared to invest
some of your own capital in the company to demonstrate a personal
financial commitment to the venture.
 Article reprinted with kind permission of startups.co.uk.
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