Suppose they are using the money for real estate? The $70 million substitutes for mortgages and construction loans and the real estate acts as an asset securing the transaction via a liquidation preference. In other words, the downside would basically be the risks associated with writing a series of mortgages on the new locations. The potential upside would be equity that turns into an IPO or a big acquisition in lieu of ordinary interest spread out over 30 years.

The key to understanding the valuations used for Venture Capital investment is that the risks are offset by liquidation preferences. A $10 million investment for 10% equity with a 1x preference in a company with $18 million in assets is not as risky as the headline grabbing $100 million valuation might make us believe.