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Private Equity and Venture Capital in Europe by Stefano Caselli

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13.6. Venture Capital Method

The venture capital method focuses on the relationship between the expected IRR, the growth of the firm, and the percentage of shares to buy. Its use depends on the definition of the participation price and the return required for the single investment. This approach is typically used when the price setting is dominant and during seed or start-up deals where there are negative cash flows and earnings with high uncertainty but potentially substantial future rewards.

The venture capital method asks a very simple question: What amount of shares does the investor buy based on the amount of money needed to invest and the expected IRR? To answer this question valuation of cash flow is considered the final expected value ...

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