Question $1.$

What is the difference between investment and valuation? Provide a numeric example.

Question $2.$

As of the beginning of $2016,$ VSCO has $30$ million users. From these users, it generated $$3\mathrm{.}5$ million in revenue and an operating profit of $$1\mathrm{.}5$M$.$ The company is considering a Series B funding round before $2017.$

In $2012,$ Instagram had a Series B funding round when the company had $40$ million users, $$5$M in revenue and no operating profit. The company sold $10\%$ of their company for $$50$M $($a $$500$M valuation$).$

Using this information:

Provide a range of valuations for VSCO at its Series B round.

Assume the company is willing to sell $15\%$ of their company in this round. How much money should be $$raised$?$

Do you have any problems using information from Instagram$$s fundraising to justify your pricing? If so$,$ why?

Question $3.$

Suppose you are a potential investor and are unsatisfied with the valuation from Question $2$ because you feel the growth pattern at Series B is much different than Instagram$$s$.$ Instead, you want to focus on the exit$/$terminal value of the company. You note that Facebook acquired Instagram for $$1\mathrm{.}01$B$,$ when they still had $40$ million users. Assume that VSCO makes approximately the same amount of revenue per user as Instagram, but because it is a niche product, they will cap out at $35$ million users.

Provide an exit valuation for VSCO.

Given this exit value, compute the appropriate range for what the Series B valuation should be$.($Hint: Series B investors will only be interested if they can secure a $6-8$X return on their investment$)$

Again assuming the company is only willing to sell $15\%$ of their company in this round, how much money should be $$raised$?$

Question $4.$

The fact that VSCO will cap out at $35$ million users indicates that most of their growth is over. As such, it may be appropriate instead to use the traditional VC method in pricing the exit$/$terminal value. Using the details in question $1,$ and assuming a P$/$E ratio of $45$:

What is the terminal value of VSCO?

Given this exit value, compute the appropriate range for what the Series B valuation should be$.$

Assuming the series B milestones will cost $$2\mathrm{.}2$M$,$ how much of the company$$s equity $($what percent$)$ will be sold?

Question $5.$

As the managers of VSCO you find all the prior valuations to be unsatisfactory low. You attempt to utilize the scorecard method to justify how you$$re different than your peer firms. In your industry, you have the following importance weighting of factors:

Management $30\%$

Size of Opportunity $10\%$

Competition $10\%$

Products$/$Services $25\%$

Marketing$/$Sales $25\%$

Your company$$s top management team has been together for several years and each have extensive experience in both the industry and also as successful entrepreneurs. Because you are dealing with a niche product, the size of the opportunity is small but so is the level of competition. VSCO$$s filters and technology receive numerous industry awards, indicating their products$/$services are vastly superior to anything else on the market. You also point to the fact that you$$re generating healthy sales and profit $($$$3\mathrm{.}5$M$,$ $$1\mathrm{.}5$M respectively$)$ as evidence that you have a well$-$oiled marketing and sales team which is more established than most peer firms at their Series B$.$ If the median Series B valuation in the industry is $$150$M$,$ how much should VSCO be worth?

$($Hint: The actual weightings that you use don$$t matter as much as the application of the technique$).$