Series A valuation: The Venture Capital Method

Raising a Series A funding round is usually a turning point for a startup. At this stage, it is not just about a brilliant idea. Investors now look for healthy revenue streams that will ensure that the startup grows and they make a profit. Investors are looking for startups that combine their ideas with strategies that have the potential to transform their businesses.

Once a startup has come out of the pre-revenue stage, it is important to build a robust monetization plan that will generate significant long-term revenue. To accurately predict when a startup is ready to undergo a series A round, they usually talk to their seed investors to get feedback and come up with strategies to increase the revenue growth.

Before raising Series A, startups will have to set their valuation based on factors like the proven track record, management, market size and risk. Sadly, there is not a standard methodology for valuation. However, blindly following one can cause damage to a startups funding goals. A valuation much lower than the company’s actual value will lead to giving away much more equity to the investors and a much higher valuation can cause a roadblock to future funding rounds.

While there is no single accepted methodology, many investors use the VC method.

The VC method

This method starts with the equation for a post-money valuation. It estimates the exit value of the company at the end of the forecast horizon and ignores the intermediate cash flows. The exit value is calculated by taking the EBITDA of the last projected year and applying the EBITDA multiple.

Pre-money Valuation + Investment = Post-Money Valuation

You first work out the post-money valuation and then find the pre-money valuation.

Post-money valuation = Exit value ÷ Expected Return on Investment

Where, Exit value = Expected price the startup would be sold for.

Since at least 50% of startups fail, venture capitalists expect a high return on investment from startups in their portfolios. It is thus suggested that the figure should be between 10X and 30X ROI, within a 10-year time frame.

The startup valuation company Equidam also uses the VC Method which works as follows:


Note: This method doesn’t work well with early-stage startups without much financial data and few companies to compare to.  

We stress on an accurate valuation as it is a reflection of the milestones attained by your startup and its future performance. But one has to also make sure to strike a delicate balance between the new investors’ ownership interests and existing shareholders’ perception of value and growth expectations for a successful Series A round.

For more extensive analysis and Market Intelligence reports feel free to approach us or visit our website: Venture Capital Market Intelligence Reports | VCBay.

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Komal writes about the startup ecosystem on VCBay. She is an Economics Hons. graduate from Miranda House, Delhi University, and is passionate about the world of entrepreneurship and finance.


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