VC method valuation

This is the “VC method”, a quick way many early-stage investors check a price. They start from what they think your company could sell for, then work back to what they can afford to pay today.

• Exit value = revenue in the exit year × revenue multiple (or the exit value you enter).
• Required multiple = the target multiple you enter, or (1 + target IRR) ^ years to exit. For example, 40% a year for 6 years is 1.4^6 ≈ 7.5×.
• Max post-money today = exit value × (1 − dilution) ÷ required multiple. Later rounds shrink the VC’s stake, so the stake they buy today must be bigger to end up with enough at exit.
• Max pre-money today = max post-money − amount raised. If this is zero or less, the round does not work at these numbers.
• Stake the VC needs now = amount raised ÷ max post-money.
• At your asking price: post-money = asking pre-money + amount raised; VC stake = amount raised ÷ post-money; VC’s money back at exit = exit value × (1 − dilution) × that stake; multiple = money back ÷ amount raised; IRR = multiple ^ (1 ÷ years) − 1.
• Verdict: “Fits the VC’s maths” if your asking pre-money is at or below the max; “Stretch” if it is up to 1.5× the max; “Hard to justify” above that. These bands are rules of thumb.

Assumptions: one exit, all proceeds shared by ordinary shareholding, no dividends, and a single dilution figure for everything between now and exit. Real investors also know most of their deals will fail, which is why target multiples look so high: one big win has to pay for the rest.

Real valuations also reflect competition between investors, the strength of the team, traction so far and the terms of the deal. Terms such as liquidation preferences, participation and anti-dilution can matter as much as the headline price, so a higher valuation with tougher terms is not always the better offer. The benchmark ranges here are rules of thumb, not market data.