It’s Gonna Be Big (IGBB)
It’s Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.

-Suppose the venture capital investor's share of the equity in IGBB is 25%,and that in four years at the IPO the firm is valued at $120 million.What annual (compounded)return did the venture capital investor earn?

Question

It’s Gonna Be Big (IGBB)
It’s Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.

-Suppose the venture capital investor's share of the equity in IGBB is 25%,and that in four years at the IPO the firm is valued at $120 million.What annual (compounded)return did the venture capital investor earn?

Quizplus · Accepted Answer

- The venture capital fund is investing $8 million for a 25% share of the equity in IGBB, which implies that the initial valuation of the firm is $32 million (i.e., $8 million / 0.25).
- The expected return for the venture capital investor is 35% compounded annually.
- In four years, IGBB is expected to be valued at $90 million, but if it is actually valued at $120 million, then the increase in value is 275% (i.e., $120 million / $32 million - 1).
- The annual compounded return to achieve a 275% increase over four years is approximately 39% (using the formula: (1 + r)^4 = 2.75, where r is the annual compounded return).
- Therefore, the correct answer is B) 39%.