Startup Valuation made simple by Serious Funding: The VC Method 2 years ago

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Hello,

You have a great startup but you also want a great startup valuation.

You have to understand how VCs work when they value companies.

Let’s start with their first startup valuation method which they modestly called the VC method .

1. The startup Valuation VC Method

The VC method helps you understand how VCs value the money they are about to put in your startup.

Basically let’s say that one VC imagines that he should at least double the value of its investment every year (yeah you read me right…that means +100% each year). As he knows that your startup will probably not be sold in one year time, the VC imagines how much money he will make in 3 years (when you will sell your startup to Google…).

To do that, he takes your financial projections (or his financial projections if he estimates that your figures are grossly overestimated) and he multiplies your year-3 figures by a selected multiple. He calls that the EXIT value.

Example

Your year 3 turnover is estimated at USD 100 m (by the way, well done and please allow me to invest…). The VC will imagine that at this time he will be able to sell your startup for 10 times the turnover to Google (in his dreams if actually thinks about 50 times but today he decided to be reasonable). He then values your startup (In year 3) at a whopping USD 1 billion.

WOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOW !!!!!!!!!!!

Hum, well, that’s in 3 year time…

And remember he wants to double its initial investment every year. That’s where the infamous discount rate gets on stage. The VC will then do a backward valuation and says : “If year 3 valuation is USD 1bn, that means that year 2 valuation should be USD 500m, year 1 startup valuation should be USD 250m and year 0 valuation should then be USD 125m once I have put my money”

So if we are on year 0, you ask for a USD 25m to the VC he will then tell you : “OK buddy, I will give you USD 25m in exchange for 20% of your company (25/125)”. Simple, no ? (and the good news is that you still have 80% of the billion (well in 3 years…))

3 concepts to resume it:

The Exit value and the exit multiple: what the VC thinks the company will be valued when he will sell it (generally a multiple of something like turnover, EBITDA, EBT etc…)
The discount rate: the rate of growth the VC is expecting on his investment (generally varies from 20% to 100% depending on maturity of company, quality of management, competition etc.)
The postmoney valuation : your present startup valuation including the money of the investor.
I am now sure that you master the startup valuation VC method. However, if you do not want to bother, please visit seriousfunding.be and they will do the work for you.

Have a nice funding and see you later for alternative valuation methods (that will allow you to value no-revenues startups).

Bye