Venture Capital Valuation: Case Studies and Methodology, + Website

CHAPTER 2

Should Venture-Backed Companies Even Consider a DCF Model?

Introducing the Life Science Valuation Case: Zogenix

It might seem like almost every company we will use as a case in this book is going to be an Internet-related company. Although not completely true, the reality is that Internet-related VC investments account for 40% of all venture investments today, as illustrated in Exhibit 2.1.

Perhaps more important than the previous statistic is that these investments account for far more than their fair share of VC returns, both in terms of exits and unrealized gains. That being said, it's critical to examine how conventional practices in venture-capital valuation span all industry categories. For that reason, we start our first in-depth case in this book outside of the Internet space, using a life science company, Zogenix.

In this case we will briefly review the major theoretical and practical valuation methods Zogenix used prior to, and after, filing its registration statements with the SEC. As you can imagine, we will likely come up with results that are different than what the investors, founders, auditors, underwriters, and accountants came up with along the way. That's perfectly OK, assuming you (the reader) can distinguish if our differences were due to variations in data quality, differences in assumptions, or differences in the application of business logic. I will try to highlight those differences when available so that you can readily tell when the results ...