Which would have a lower EV: a software start-up or an industrial firm? Please explain your answer. Thank you!
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Probably the start up.
Enterprise value is the total value of the equity + debt - cash. The software start up would probably have a low amount of all 3. Maybe cash would be higher, if for example, they had a VC round and raised $10mm. That amount would be subtracted from the enterprise value.
Not 100% sure what you mean by "industrial" firm, but I'm assuming you're trying to compare a company that has been in business for 25 years, as opposed to a start up. You could easily assume the industrial firm has more debt than cash, and is just larger in general than a start-up.
I think the point at which the question is aiming is that businesses with significant fixed assets (i.e. industrial firms) generally are able to issue greater amounts of debt by collateralizing. Even if the software startup has a much higher equity value and great growth prospects, its EV is going to be lower due to less debt on the B/S.
If a VC had a round and puts up 10 mil for a percentage of equity, wouldn't equity increase as a result? So even though cash would go higher, so would equity, correct?
No, unless the VC's $10mm put a higher implied valuation on the total equity value. If the VC bought $10mm shares at the prevailing valuation, your company would be issuing stock, diluting current owners, and raising $10mm in cash, which would decrease enterprise value.
This is easiest to understand via an example:
Say I own 20% of a $1,000mm EV company, the other 80% owned by my business partners (thus, a 100% equity financed company). We raise $500mm in equity from a VC fund. In your scenario, our equity value would be raised by $500mm, which would be offset by an increase in cash, producing a net zero effect on enterprise value (still $1,000mm, comprised of $1,500 in equity value and -$500mm in net cash).
Now imagine that instead of putting that cash on the balance sheet, we used it to pay a special dividend to current shareholders. In that case, I'd walk away with $100mm (20% of the $500mm proceeds) AND my equity stake would still be worth the same $200mm. Somehow, my $200mm stake just became worth $300mm just by raising equity capital.
any answer other than "it depends" is wrong. Sure, industrial firms are more likely to have a higher EV due to industry characteristics, but it is impossible to give an answer without more information. Absolutely provide further color and explain why an industrial firm is likely to have a higher EV than a software start up, but there is no absolute answer without more information.
So equity would still go up right?
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