how does a VC value a start-up

[anitsh]

This will give an excellent idea about startup valuation.

The most common VC Valuation Approach which is called Venture Capital Method, developed by Bill Sahlman.

There are other methods as well for valuing startups like-

• Berkus Method
• Scorecard Valuation Method
• Comparable Transactions Method
• Cost to Duplicate Approach
• Risk Factor Summation Method
• DCF Method/ First Chicago Method
• Book Value Method

Among these, the Venture Capital method is a go-to for venture capital firms, and it's another option to consider if you need a pre-revenue valuation.

It also reflects the mindset of investors who are looking to exit a business within several years.

Venture Capital Method comprises 6 steps:

1. Estimating Capital Requirements of the start-up
2. Financial forecasting
3. Timing of VC Exit
4. Multiple at Exit
5. Desired Rate of Return of VC
6. Ownership Stake of VC

Example:

• Suppose a start-up is looking to raise $5 M and it has a total of 1 million shares outstanding

• Based on the Financial forecasting, the start-up’s EBITDA after year 5 is $12m

• VC Firm will exit after year 5

• EBITDA Multiple= 7

• Start-up Value at Exit= $12m*7= $84m

• Next, let’s consider the VC Firm’s desired rate of return= 30%

• Future value of Investment= $5m* (1+30%)^5= $18.6m

• Required Ownership by VC Firm= $18.6m/ $84m= 22.1%

• Post-money Valuation of the company= $84m/ (1+30%)^5= $22.6m

• Pre-money Valuation of the company= $22.6m- $5m= $17.6 M

• Total number of shares outstanding= 1m

• Share Price= $17.6m/ 1m= $17.6

• Total number of Shares Post-money= $22.6m/ $17.6= 1.28 M

If you have come this far, here is some more information about valuation.

It is important for entrepreneurs to know at which stage their startup is.
Depending on the stage of the startup, the founders can expect lower or higher offers from the investors

• Startup Stage- Concept/ Business Plan

• Investors- Self or Family & Friends

• Valuation- $250K to $1m

• Stage- Technology Developed

• Investors- Angels, Seed VCs

• Valuation- $1m to $5m

• Stage- Launch/ Early Customer Traction

• Investors- Seed VC, Series A VC

• Valuation- $5m to $15 m

• Stage- Scaling & Adoption (cash flow negative)

• Investors- Series A/B/C VC

• Valuation- $15m to $30 m with outliers to $100m

• Stage- Rapid/ Mass Expansion (cash flow positive)

• Investors- IPO or Exit

• Valuation- $100m to $1 b, average IPO of $500m

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html
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