How do VCs value a company? There is a scientific process that goes into the valuation, but it is not a perfect science. Many VCs are biased toward higher valuations over lower ones because they’re interested in the selling price, not the intrinsic value. That’s one reason why you should never take a VC’s valuation as gospel. In reality, the process is based on educated guesses, according to James Faulkner, managing director of Vala Capital.
The key to raising a VC’s valuation is increasing the perceived value of the company. To raise a company’s valuation, a VC needs to increase its perceived value, just like any other investor. That means finding ways to boost perceived value. VCs may not find a company’s intrinsic value, but they’ll try to get it to a point where investors can justify a higher valuation.
If a company is pre-revenue, its pre-money valuation is $2 million. It received seed capital of $750,000. The angel investor would own 27.3% of the company, thereby giving him a 27.3% stake. The pre-money valuation is a metric that changes with the company’s growth. In determining a post-money valuation, the founder and VC must first determine the company’s pre-money value. Once this number is determined, it can be used to calculate the post-money valuation.
VCs often base their valuations on similar public companies. It’s important to remember that private companies rarely release their accounting records to the public. The public’s perception of a company’s future value often determines the company’s market value. Whether a company has a competitive advantage or not is also important for its valuation. Companies with a competitive advantage are worth more than those without. If a company’s competitive advantage is strong enough, it can command a higher valuation.
VCs can use one of three methods of valuation. They can also use a combination of both approaches. If multiple methods are used for a company, they can calculate an average for the value. While price is one factor, intrinsic value is another. Another measure of a company’s value is its price to earnings per share (P/E). If it is too high, it could be undervalued.
VCs use the VC Method to value companies, which was developed by Professor Bill Sahlman in 1987. A VC can calculate the future value of an asset by multiplying its current revenue by its margin and P/E ratio. However, VCs can vary this method according to their investment philosophies. For example, Andreessen Horowitz uses average revenue per user, which is a better indicator of the future value of a company than average sales.