Cash Management · Venture capital

NPV @ 25% for 5 years is slightly above 0. is this an attractive business model for VC funding in India

Anonymous

Last updated on June 5th, 2018

I have prepared a financials for a business model and the NPV for 5 years @ 25% rate is slightly above 0. would this be attractive enough for the investors? in my view they get a business model which would generate a robust 20+% PAT levels


Further updates

Cash flow mentioned is Free cash flow. It does not have any exit take away. Basically it means that if the free cash flows are returned back to the investor they would have earned annualized return of 25% on the business and also would have the stake in the business which has now started generating a PAT of 20+%.

Mekan Bashimov Cofounder

June 6th, 2018

“NPV @ 25% for 5 years is slightly above 0.” Your statement is not complete and could be misleading.


First, if you talk about Net Present Value (NPV) of a particular investment then NPV value never represented in percentage terms. Basically, NPV represents dollar value of cash today generated by investment after subtracting initial investment. In case your NPV is positive value, then the business generates positive cash flow and it could be interesting for investors.


You mentioned “NPV @ 25%”. I am assuming you wanted to say that you used discount rate of 25% for your NPV calculation and you got the NPV value of slightly above zero. If your NPV value is close to zero for 5 years of estimated operation then most investors will avoid such investment. It might not be attractive for investors for simple reason that expected return on investment is very low. In other words, you would have to ask an investor to invest into your idea for instance USD 200K and after 5 years, you promise to return back USD 200K plus 70 cents. People with sane mind will not invest into such project, unless you provide some additional benefits for investors such as patent rights of some promising technology or your project will have extraordinary user growths. Thus, it will be hard to attract any investor with such low NPV value.


For future exercises, I would recommend you not only rely on NPV value, but also recommend you to calculate returns on investment (i.e. ROI and IRR). You can then compare your discount rate (e.g. 25%) with ROI and IRR rates. Your rate of return should always have to be higher than the discount rate (the higher the better) for the project to be attractive for investment. Please, also do not forget that in tech industry, VCs are primarily attracted to user growths, R&D, technology or business model of your project. You cannot fool them easily with fancy financial models or exceptionally projected returns. They always look for a proof that your models make sense. I hope it clarifies your situation; else, you can provide more details. Good luck!

Sheikh Sheraz Ali Chief Executive Officer (CEO)

June 2nd, 2018

Hi


The NPV equates to zero states that the project is viable and the project is having an IRR of 25% over the period of 5 years. The annualized IRR would be 5%.


Please note that the NPV or IRR has their own limitation which need to be considered.


As your topic state that the the profit level should be above 20% (Profit after taxes.). Please note that the both the method either NPV or IRR rely on the future cash streams to evaluate the project. The profitability and the free cash flows are totally different basis of evaluation.


Plus, The NPV give the amount in $ (Currency) and the IRR give the amount in %age.


The 20% earning basis is a different method of evaluation based on earnings.


Another method can be looked i.e. the payback of the investment this is normally checked in conjunction with the NPV.

Marian M Interdisciplinarian. Bayesian. Probably optimist.

June 4th, 2018

I am not an expert about India but feel a little bit lost about the information given. Your IRR is around 25%? Is that right? (By the way, the statement below that an "IRR of 25% over 5 years means that the annualized IRR would be 5%" doesn´t make sense, this statement is a misconception).


Would you provide the net cash-flows for the 5 years and maybe their sources, especially stating whether or not the CF stream includes an exit at the end of Y5?


And which type of investor are you looking for? VC is a broad field ... I personally feel that 25% IRR is not too high for a risk-seeking VC but it depends on the risk associated with the investment (and type of investor you seek, and your estimations, ...).


As much as I would like to comment on that in more detail I feel limited with the provided information. Probably one needs to see your entire financial model before one can form an opinion.

Jenny Kwan Co-Founder and Technical Lead of Woodlamp Technologies

June 2nd, 2018

I'm confused. What kind of funding are you looking for? I don't know India. In Silicon Valley, VCs want an exit at some multiple after a number of years. Profitability projections are necessary to show viability, but do not imply exit opportunity. A boring business growing at a predictable modest pace won't get VC funding here.