Raising funds: how to ascertain?
I'm new to PE/VC and I've been assigned a case to ascertain the amount of capital to be raised by the management of the target.
I've done the projection for 5 years, building the financial statements (IS, BS and CFS) of the $50 million private limited organization under "base case". I've also arrived at the EV and equity value through DCF and comparable company analysis.
Now, how do I determine the amount of funds they need to raise (from venture capital)? Should I just add the working capital, expenses (COGS + SG&A) + tax + the funds required to build a new facility and run it for the next 5 years?
Is there a better way to do it? Am I wrong in my approach. Suggestions welcome!
Any suggestions?
Um, how much money is the company starting with and how much does it need to spend? The math is really that simple...
I'm new. So, pardon me, if I ask you silly questions.
Let's say, I constructed a projection for 5 years as follows (these are of course not the actual numbers). These are the sum of the projections for a total period of 5 years (starting with Year1). Year0 is today.
(A) Sales (Y1 - Y5): $100 (B) COGS (Y1 - Y5): $15 (C) SG&A (Y1 - Y5): $40 (C) Interest + Tax (Y1 - Y5): $10 (D) Working Capital (Y1 - Y5): $20
(E) Fund need to start the new plant at Y2: $300 (all expenses and CapEx included) (F) Working Capital (Y2 - Y5): $30
Now, can I say -
(Total expenses = total capital)
Hence, the firm needs to raise for both the plant and facilities = A+ B + C + D + E + F = $415
Is this approach correct?
Do we need to add the working capital (of the existing and new plant) as well?
You need to set a desired IRR or Cash-on-Cash return which would typically be set by the investing firm (example: we only do deals where our base case will net us 3.0x cash on cash return). PE investors typically look at cash flows generated while you own the business and the amount you can sell at a specified date in the future. If you expect the company to generate $100M in attributable cash flow, a firm that invests $20M would expect at least a $60M in cash flow in order for them to do the deal. Based on the investing firm's 3.0x coc desired base case return requirements, the investing firm would would need to own greater than 60% of the business if they invested $20M.
CoC return = (cash generated / equity investment)
I don't think that at all addresses the question being asked
"Based on the investing firm's 3.0x coc desired base case return requirements, the investing firm would would need to own greater than 60% of the business if they invested $20M."
How would they own 60%? Are you referring to LBO?
Just ignore what he said.
Look, you should have a cash flow model for the company. Just look at: Starting Cash + OCF - Capex. If that is
Agree with the above.
Depending on the VC round (angel/seed, series A, etc.) you should determine your key milestones over a 12-24 month period, your burn rate, and your intended uses of capital.
Once you list the uses of the capital: fund working capital for two years, hire new CTO, build new plant, etc. you simply add those all up. Most startups spend twice as much and take twice as long as intended so build in a cushion. You never want to go back to the well in a time of distress but it is expected that you will raise subsequent rounds so project 5 years but understand that you are looking to raise capital that will sustain the company for 12-24 months.
Offered Silver Bananas!
Is there anything else that I should take precaution on while building the cash flow model? Have you come across any challenges while presenting your thoughts to the Company Management (read CEO/CFO/COO)? What type of responses do you usually receive from them (good, bad and worse)?
We prepared to discuss a pro forma capitalization table depending on the terms and conditions of the raise. What type of round are you doing?
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