Valuation is a critical part of your fundraise and is determined by a number of factors within and outside your control. We have explained in another article why it is so critical to get the right balance of valuation to risk and stage (here).
In this article, we are digging into the pre and post-money valuations and the key differences. The first question is pre and post what? They relate to the value of your business before and after the investment is made.
It is important to distinguish between these two types of company valuations because the differences between the two values have a direct effect on the percentage of shares owned by both entrepreneurs and investors.
This is the value of your business before any capital investment is made. This valuation is based on some financial factors such as the state of the balance sheet (assets and liabilities), health revenue and profit margins and the ability of the company to generate or potentially generate cash. Other business factors are also taken into account such as the team who will deliver, the defensibility and the plan. This valuation is also based on other external factrors such as the size of the market, the position within the market and the timing.
All the above is built in to one valuation figure - an investor is balancing up the potentail with the risk.
The post-money valuation looks at the valuation following the investment.
Let's work a quick example
So, if an investor is putting £2M into a Series A round in exchange for 25% of your company, your startup’s post-money value would be £2M divided by 25%, or $8M.
In this case, your pre-money valuation should be £6M.
It is important to understand that your company isn’t really worth this £6M, unless you get the funding. You are riding on an idea, and without actually getting the funding, you may have no real tangible value.
When deterining your valuation, a key driver is what you need to raise (normally linked to how your burn rate) and to deliver what milestone, the ideal situation is that your valuations increase each funding round (if you are expecting more than one) - this shows potentail investors that you are hitting your business plan, ticking off those milestones and growing. Though there can be legtimate reasons, you want to avoid a "down round" where your valuation goes down. Hence, where you set the valaution bar for each fundign round is important - bigger valuations is not always better!
In the numberslides model, you can input the equity that you will award the investors for making the investment and from this you can determine your pre-money valaution. Therefore it is worth focussing on the equity given away to determine whether your valuation is realistic and investable. You will also find our pretty quickly from any savvy investor what they think!