What is the Venture Capital Method?
The Venture Capital Method (VCM) is a useful method for establishing the pre-money valuation of a pre-revenue startup.
If your startup has not achieved any revenues yet, the venture capital method is well suited for calculating a pre-money valuation. Through the specific way this method calculates the valuation of a startup, it reflects the view of an investor who 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 with the venture capital method does not give you an exact, fixed value. There are simply too many assumptions and estimates involved, which open a space for discussion and interpretation. For you as a founder it is important to understand the basic mechanism, so you can discuss different scenarios and assumptions with your investors.
Example valuation and the investor’s share
Let’s look at an example: We assume our startup is in the clean-tech industry and 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 method calculator tool on key2investors.com 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. You should rather understand them as part of a range of possible valuations. The size of the range is determined by the variations in the input parameters: The revenue multiples, the investor’s ROI and your revenue projection for the year of the exit.