"New Recipes for Success" : Recognizing the Value of Corporate Venture Capital Investments in the Consumer Packaged Goods Industry

Abstract

This project discusses traditional valuation methodologies as they apply to private equity and the venture capital industry. Valuation theories have evolved overtime to fit the nature of the business world and have long been applicable to various industries. Though valuation theories were established long ago, certain methods have managed to stay relevant, receiving more recognition than their alternatives. This paper begins with a literature review detailing the components of various traditional valuation methodologies associated with private equity: the income approach, the market approach, and the cost approach. Then, the principles within the venture capital industry are outlined, and important factors that affect the valuation process are discussed. The connection section of this study introduces the corporate venture capital ("CVC") industry by outlining the various structures that exist and detailing the history of CVC activity in the United States. It proceeds to discuss the drivers of investment activity in the food industry and discuss the strategic benefits of CVC. Once this background is established, this project uses proxies to display how fund managers conduct a portion of the due diligence process by valuing small publicly traded companies that would represent investment opportunities for the venture arm. The discounted cash flow ("DCF") valuation method is applied to two companies: 1) Lifeway Foods Inc. 2) Amplify Snack Brands Inc. This project also emphasizes the flexibility of the DCF method through sensitivity analysis. Three cases are specifically highlighted: the base case, the downside case and the upside case. The study concluded the total equity value, determined its share price and then compared it to its current market price. Given reliable information and valid assumptions, the DCF method proved to be an efficient tool in forecasting the value of a company.