The Venture Capital Valuation Method (VCM) is a useful valuation method for establishing the pre-money valuation of a pre-revenue startup.
If your startup has not achieved revenues yet, the venture capital method is well suited. You use it for calculating a pre-money valuation. The venture capital startup valuation reflects the view of an investor. He or she is looking for a high exit to reward him or her for the risk taken when investing in the startup.
Please note: Calculating a valuation using the venture capital method involves many assumptions. This is the reason why there is not one truth to the valuation. There are too many assumptions involved, which opens a space for discussion. For you, as a founder, it is important to understand the basic mechanism. You can discuss different scenarios and assumptions with your investors.
Example valuation venture capital method and the investor’s share
Let’s look at an example: We assume, our startup is in the clean-tech industry. Our investor will exit after 7 years (in 2024). She expects an internal rate of return of 30%. Our own estimated revenue in 7 years is around 6 million.
Using the venture capital valuation calculator in the Raising Money from Investors Course, we get these results for our valuation:
- Exit value: 24.6 million
- Post-money valuation of 3.9 million
- Pre-money valuation of 3.2 million
- Investor’s share: 17.9%
As we mentioned before, these are not exact on the point values. As a result, you should rather understand them as part of a range of possible valuations. Variations in the input parameters define the range. So do the revenue multiples, the investors’ ROI and your revenue projection for the year of the exit.