Startup Valuation VC Method + excel Spreadsheet

Excel template made to understand how VCs value the money that will be used to invest in a startup

by Serious Funding
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Description
For a great start up, you want a great start up valuation. For that reason, you have to understand how VCs work when they value companies. Hence, this tool firstly utilizes a startup valuation method which they modestly called the VC method.

1. The startup Valuation VC Method: What is it?

The VC method helps you understand how VCs value the money they are about to invest in your startup.

Basically let’s say that one VC imagines that he should at least double the value of its investment every year (in other words: that means +100% each year). As he knows that your startup will probably not be sold in one year time, the VC will begin to think in three years time (technically saying, when you will sell your startup to Google).

To do that, he takes your financial projections (or his financial projections, if he figures that your figures are grossly overestimated) and he multiplies your year-3 figures by a selected multiple. He then calls that the EXIT value.

For example:

Your year 3 turnover is estimated at USD 100 m. The VC will imagine that at this time he will be able to sell your startup for 10 times the turnover to Google. He then values your startup (In year 3) at a whooping USD 1 billion.

Impressive. Considering that it is actually in 3 years time.

Also, remember he wants to double the initial investment every year. That’s where the infamous discount rate comes in. The VC will then do a backward valuation and say : “If year 3 valuation is USD 1bn, that means that year 2 valuation should be USD 500m, year 1 startup valuation should be USD 250m and year 0 valuation should then be USD 125m once I have put my money”

So if we are on year 0, you ask for a USD 25m to the VC he will then tell you : “OK, I will give you USD 25m in exchange for 20% of your company (25/125)”. Simple, right? (and the good news is that you still have 80% of the billion (Remember, in 3 years…).

However, this has been condensed into 3 points:

1/ The Exit value and the exit multiple: what the VC thinks the company will be valued at when it is sold (generally a multiple of something like turnover, EBITDA, EBT etc…).

2/ The discount rate: the rate of growth the VC is expecting on his investment (generally varies from 20% to 100% depending on maturity of company, quality of management, competition etc.)
The postmoney valuation : your present startup valuation including the money of the investor.

However, if you do not want to bother, please visit seriousfunding.be and they will do the work for you.

You can quickly test your startup valuation using the excel available for download below.

- Raphaël Abou, 15 april 2016

(Raphaël Abou is the founder and the Chief Funding officer of Serious Funding)

www.seriousfunding.be

This Best Practice includes
1 Excel Model