Suppose you have a great new idea for a technology business. You have done an analysis (correctly) that shows that the NPV of the idea is $100M. It is, however, highly uncertain whether the new venture will succeed. While the NPV of the idea is clearly positive to you and everyone in the capital market, the idea will require an upfront (i.e. time 0) investment of $20M. Assume that you do not currently have $20M. Businesses with similar risks have expected rates of return in the capital market of 25%. Treasury bills have a rate of return of 3%. The yield on CCC corporate bonds is 12%. Cedar crest Venture Partners, a local venture capital group, sets a goal of 40% annual returns on its investments.
Suppose you are seeking equity financing for the business from a venture capital funds (a part of the capital market). Suppose (as is true) that the market for venture capital is very, very, very competitive.
Suppose you succeed (immediately) in getting financing from a venture capital group and they have provided your company with the $20M in financing. How much is the company worth?