Venture capital method

A valuation approach that estimates a company's exit value, divides by the return multiple an investor requires and adjusts for expected dilution to find the price that can be paid today.

Example

A 200,000,000 exit, a 20x target and 50% retention support a 5,000,000 post-money.

Important

The result is highly sensitive to the exit value assumed.

Related terms

• Target return multiple — The multiple of invested capital an investor aims to receive from an individual investment, set high enough to compensate for investments that fail.
• Retention ratio — In the venture capital method, the share of an investor's current ownership expected to remain after dilution from future funding rounds.
• Post-Money Valuation — A company's agreed value immediately after a financing round's new money has been added, equal to the total resulting share count multiplied by the round's price per share.

Lessons that explain it

• The VC method works backwards from the exit — The venture capital method starts from a plausible exit value, divides by the return an investor needs, and adjusts for future dilution to reach what the company can be worth today. (11 min)

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