PE: the venture capital method and contractual schemes

Question 1

What problem does the venture capital method solve?

Answer 1

• You have to decide the price to pay in order to acquire a certain equity stake in an unlisted firm, but venture capital investments are characterized by extremely high uncertainty and traditional valuation methods fail to recognize the fair value of a very risky asset.
• In the world of PE/VC investments it is very frequent that a firm passes through more than 1 stage of dfunding, so to maintain a certain % of the equity of the investee firm the investor must take into account the future dillution effects