How do you value venture capital investments?

1 Pre-money and post-money valuation

One of the basic concepts in venture capital valuation is the distinction between pre-money and post-money valuation. Pre-money valuation is the value of a startup before receiving a new round of funding. Post-money valuation is the value of a startup after receiving a new round of funding. Post-money valuation is calculated by adding the amount of new funding to the pre-money valuation. For example, if a startup has a pre-money valuation of $10 million and raises $2 million in a new round, its post-money valuation is $12 million. The pre-money and post-money valuation determine the ownership stake and the dilution effect of each round of funding.

2 Cost-to-duplicate method

The cost-to-duplicate method is a simple and conservative way to value a startup based on its tangible assets. It estimates how much it would cost to recreate the startup from scratch, including the expenses for acquiring the equipment, technology, licenses, and other assets. The cost-to-duplicate method does not account for the intangible assets, such as the brand, the team, the customer base, or the growth potential of the startup. Therefore, it may underestimate the value of a startup that has a strong competitive advantage or a large market opportunity.

3 Market multiple method

The market multiple method is a relative way to value a startup based on the valuation of comparable companies in the same industry or sector. It uses multiples, such as revenue, earnings, or users, to compare the performance and growth of different companies. For example, if the average revenue multiple of similar companies is 10x, and a startup has a revenue of $1 million, its valuation based on the market multiple method is $10 million. The market multiple method requires finding relevant and recent data from comparable companies, which may be difficult or unavailable for some startups. It also assumes that the market conditions and the growth prospects are similar for all the companies.

5 Venture capital method

The venture capital method is a specific way to value a startup based on the expected return of the venture capitalist. It works backwards from the exit scenario, where the venture capitalist sells or liquidates its stake in the startup, and calculates the present value of the investment. The venture capital method uses two key inputs: the expected exit value and the expected exit multiple. The expected exit value is the projected value of the startup at the time of exit, which can be based on the market multiple method or the discounted cash flow method. The expected exit multiple is the ratio of the exit value to the invested capital, which reflects the desired return of the venture capitalist. For example, if a venture capitalist invests $2 million in a startup and expects a 10x exit multiple, it implies an expected exit value of $20 million. The venture capital method then discounts the expected exit value to the present value using a discount rate, which is usually higher than the market rate to account for the risk and the illiquidity of the investment. The present value is then divided by the ownership stake of the venture capitalist to get the post-money valuation of the startup. The venture capital method is useful for estimating the value of a startup from the perspective of the investor, but it may not reflect the true value of the startup or its potential for growth.