What is the Venture Capital Valuation Method?
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 with 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 open a space for discussion. 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 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 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. 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 investor’s ROI and your revenue projection for the year of the exit.