The VC Method for Valuing Startups

Start a valuation made simple by serious funding Type-B. Today the VC method. You have a great start up. But when it comes to raise some funding from a VC you also want a great valuation so you better understand how VC guys value companies like yours. Let's start with their first method which they call the VC method. The secret of this method is that it works backwards. Imagine that your business plan shows a turnover after three years of 80 million dollars. The VC guy thinks that at this time he will be able to solve your startup for 10 times the turnover to competitors like Google or Facebook. So he then values your startup in year three out of smashing Eight hundred million dollars. All well that's in three years time. But a VC is an ambitious guy. He wants to double its investment each year. That means a 100 percent return on investment every year. So if your company is valued at a 100 million in year 3 by discounting at 100 percent you can calculate that it's worth 400 million in year to 200 million in year 1 and 100 million today. When the VC invest his money. So if you ask 25 million to the VC you will get 25 out of 100 million. So that gives him 25 percent of the company. Simple.

Now to summarize let's do a little bit of vocabulary the 800 million that Google or Facebook will pay for your company in three years time is called the exit value the 10 factor that multiplies your eighty millions of revenues to get the exit value is called the exit multiple. The 100 percent return rate expected by the VC guy is called the IRR by the way. This I R R is not always 100 percent. It depends on many factors such as the maturity of the company the quality of the management the competition etc. and finally the 100 million valuation of today is called the Post money valuation. If you deduct the 25 millions of investment done by the VC the resulting seventy five millions is called the pre-money valuation. Now you can say that you master the VC method. However if you don't want to bother please visit serious funding.

StartupRunner Team

August 5, 2017

Channel: Finance