While the first case to manage the issue of double valuation within private equity, that is the equity value at time 0 and the exit, is based on the existence of a very solid and robust business plan, the second case is related to stories in which the business plan is not robust or solid. This generally happens in any kind of venture capital deal where the future of the company is very hard to be predicted, for example, in seed financing or startup financing where, in some cases, it's honestly very difficult to predict the future of a company. In this case we have to manage the issue of double evaluation in a very different way. While in the fist case the pillar of the process was based on the fact that equity value at time 0 was calculated using the DCF, in this the second story it’s not possible to apply the DCF since, as we said before, the business plan is not robust is not solid enough to apply and announce the DCF process. In this case we have to apply the so called VCM or venture capital method, where there are two pillars of the venture capital method. The first one is that the IRR of the investor is not an output of the evaluation, but is one of the inputs and the other pillar is related, like in the first case, on the amount of money the PEI has to invest. The venture capital method is a process which is based on five different steps. The first step is the terminal value calculation. That means that we have to imagine what could be the holding period for the PEI and the first issue is to calculate the terminal value. In this case, we cannot use the DCF as happens in the first case, and as it happens in the first case, we again, have to use multiples. In many cases we don't use the multiple related to enterprise value divided by EBITDA. But in most of the cases we use enterprise earnings which is the most suitable way to use multiples. the second step is related to a future value of the investment calculation. That means we already know what is the amount of money the PEI is going to invest, and we calculate what would the future values of the investment be using, on one hand, the IRR we want and expect, and on the other hand, the holding period. The data step is related to the percentage of shares. The calculation of the percentage of shares in this case is relatively easy because we have to divide the future value of the investment by the terminal value we have calculated before using the comparables and multiples. Step number four, is related to the calculation of the number of new shares to issue. In this case, we have to apply the formula where the percentage of shares we have to issue is equal to the new shares to issue divided by the new shares plus the old share. That means, in this case, since we probably know what is the number of all the shares, the unknown variable is represented by the number of new shares we have to issue. The last step, is represented by the value of new issued shares, where in this case, we have to divide the future value of the investment by the number of new shares. These are the five steps we have to apply every time we don't have a business plan that’s solid enough as I said before, in many venture capital deals. Now it is very interesting to apply these five steps to an example, to real numbers. Let's consider, for example, an investment of 4.5 million. This is the amount of money the company needs to be financed. And let's imagine, also, that the expected IRR for the venture capital investor is 45%. The other assumptions we need are related to the holding period: five years, that however, is enough for many seed financing and startup financing deals; the terminal year net income, which is the variable fundamental to calculate the equity value of the exit which is 3.5 million; the multiple we need is a price-earning comparable ratio, let's imagine this number is a 12; and last, the number of existing shares which is 100,000 shares. Now we have all the inputs and using these inputs we have to use the five step approach to get to the equity value today of the company. First of all we have to calculate the future value of the investment. In this case, it's easy because we have the value of the investment, 4.5 million, and we have to multiply by one plus 45%. To the power of five, where five represents the holding period. The second element is related to the terminal value calculation and in this case, we have to multiply 3.5 million by 12. That means that the terminal value of the company at the year 5 is 42 million. Now, that's great because we have the terminal value of the company, we have the future value of our investment today, and it's possible to calculate what is the percentage of shares for the venture capital investor where the percentage of shares is 68.68%. This percentage is relevant, because using this percentage and knowing the number of existing shares, which is 100 thousand shares, it's possible to calculate what is the number of new shares to be issued. This is the last calculation because if you have the number of new shares to be issued and we know what is the future value of the investment, it's possible to calculate what is the price per share and the price per share is 20.53 euros. That's great, Because it is exactly the number we need to calculate the equity value of the company today. Of course knowing also, what the number of new shares to be issued is, it's possible to calculate what the number of shares after the investment of the venture capital investor is.
