Startup Valuation Types
Valuation is the quantitative and analytical process of finding out a business’s current or projected worth. It is mainly based on several factors, such as how the company is being managed, its capital structure, its projected future earnings, and the market value of its assets.
What are the Types of Valuation?
- Pre-Money Valuation
- Post-Money Valuation
What are the Main Differences Between Pre and Post-Money Valuation?
They differ in timing. The pre-money valuation happens before any external capital is injected into the business. The post-money valuation happens after new investors have already joined the company. They are both essential measurements in finding out how much a company is worth.
For example, if the business owner and a venture capital investor both agree that the company is worth €1 million and the investor is willing to put up €250.000, the €1 million amount is considered pre-money valuation. Then, when the €250 thousand is added totaling €1,25 million, it is now regarded as post-money valuation (that is, investor’s money already injected).
Pre-money valuation pertains to the current monetary value of a company that hasn’t had external funding yet. In most cases, the company is a startup that hasn’t begun to receive any investments outside of the company. In addition to that, a pre-money valuation provides investors with an idea of the current value of the business and the value of each issued share.
Pre-money is commonly used in the primary market by private equity investors, venture capitalists, corporate, and angel investors.
Conversely, post-money valuation is how much the company is already worth after the round of intended funding has taken place. There will be significant change since the investors have received a percentage of the company’s value. In post-money valuation, the amount becomes the true money worth of the company, as it is already set and with no other potential factors.
What are some of the factors that affect the valuation process in general:
- Valuation is flexible. It can be speculative and can change depending on the situation.
- The valuation can be influenced by the market and players’ opinions in the game.
- High valuation is an entrepreneurs’ and existing investors’ expectation and goals.
How to Calculate Post-Money Valuation
Post-money valuation = Investment amount in divided by percentage that the investor receives
Investment: €2 million
Therefore: €2 million divided by 10% = €20 million
€20 million = post-money valuation with investment injected.
How to Calculate Pre-Money Valuation
Remember that Pre-money valuation is the value before investment, and you will only be able to get it after post-money valuation:
Pre-money valuation = Post money valuation – investment amount
Therefore: €20 million – €2 million = €18 million
€18 million = pre-money valuation.
The valuation process helps determine how much equity they will get when they invest in a company. This type of valuation is calculated on a fully diluted basis. This is in consideration of factors like warrants and options that are issued also taken into account. Note that the pre-money valuation of a company will shift over time, for example. Valuation is going to be different before a Series A vs. initial funding.
One of the important uses of pre and post-evaluation is helping the startup company owner decide what type of investor they will be taking on.
What is Startup Valuation, and Why Is it Important?
Startup valuation is the process of quantitively determining the value of a startup company. This method is essential because it is often applied to startup companies that have yet to generate revenues. Unlike Mature Business Valuation, which already has a track record of facts and figures, it makes it easier to calculate its value.
On the other hand, A pre-revenue startup valuation has to rely on other factors such as:
- Founding Team
- Supply and Demand
- Upcoming Industries and Trending Products
- High Margins
These factors will have to suffice as a basis for the business’s potential since hard numbers are yet to materialize.
What Are the Expectations of Existing Investors?
They are already sold out on the idea, and they want their shares to not go down in value when new funding comes in.
What New Investors Expect
New Investors want to be assured that the risks will be managed well and that they will be made aware of it too. They don’t like overpaying and being presented with an overvalued valuation and end up risking their portfolio.
Your knowledge as a founder of the business and its pre and post-evaluation value serves as the key to a lasting relationship with your investors. A good profit with a reasonable percentage in company shares is your ticket to a continuing and successful enterprise.