IMPORTANCE OF VENTURE VALUATION

Valuing a new venture is an important aspect in seeking financing for the enterprise. A
Venture Capitalist will emphasize the venture valuation process as it will indicate how much
share he will receive for investing in the venture.

Venture Valuation is the process of determining the worth of a business. Valuation is a

subjective process as each business owner may have different ideas of what is “Value”
Valuation gives an indication of the venture’s profitability and expectations of the investor.
In relation to the entrepreneur the valuation puts a financial statement to the inputs into the
business. Key Points on the importance of Venture Valuation includes:

- Knowing the real value of the venture ( to track increases and decreases in business
value
- Buying or selling the business (major asset)
- Raising growth capital through IPO (initial public offering) or sale of stocks,
- Establishing an ESOP (employee stock option plan/employee stock ownership plan)
that is creating a share option incentive plan that allows the employees to acquire
ownership in the company without investing their own finances. A stock option is
therefore a legal contract giving the owner the right to buy or sell a quantity of stock
at a set price on or before a specific date.
- Meeting tax obligations and tax management – valuating the venture provides a basis
for calculating taxation obligations if the business is to be sold.
- Structuring a buy, sell or joint venture agreement with stock holders eg. Mergers and
acquisitions. A valuation helps the entrepreneur to consider which strategy is most
feasible eg. Exit planning.
An exit strategy entails actions to “bail out” the business at some point before it
declines. This is important as external investors want to collect a rate of return on
their investment. Exit strategies includes mergers and acquisitions which entails
joining with a similar entity or being purchased by a larger company or initial public
offering (IPO)
- Attempting to buy-out a partner or shareholder.