EBV is considering an investment in Softco, an early-stage software company. If Softco can execute...

Question

EBV is considering an investment in Softco, an early-stage software company. If Softco can execute on its business plan, then EBV estimates it would be five years until a successful exit, when Softco would have about $75M in revenue, a 20 percent operating margin, a tax rate of 40 percent, and approximately $75M in capital. Subsequent to a successful exit, EBV believes that Softco could enjoy seven more years of rapid growth. To make the transaction work, EBV believes that the exit value must be at least $400M. How does this compare with the reality-check DCF? How much must the baseline assumptions change to justify this valuation?

Robert · Accepted Answer

Rationale: 
Any investment decision is based on the fair value of the designated investment. Fair Value 
can be explained as the right target price that is envisaged by the investor to be worthy for the 
investment based on the Discounted Cash Flows (Returns in a broader sense) he would 
expect from the investment. Discounted Cash Flow analysis in simple terms is the method of 
estimating the value of a company in today’s terms based on discounted the future cash flows 
from the company with a suitable discount factor which normally tends to be the expected 
rate of return. Every venture capital investment has a venture period followed by an exit.

EBV is considering an investment in Softco, an early-stage software company. If Softco can execute on its business plan, then EBV estimates it would be five years until a successful exit, when Softco...

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