The Venture Capital (VC) Method values an early-stage company by looking at it the way a venture investor does. It estimates what the company could be worth at a future exit, then discounts that exit value back at the investor's target rate of return to arrive at today's post-money valuation and the stake the investor needs.
When to Use the VC Method
- Seed to Series B fundraising, when the company has little revenue history
- Term sheet negotiations: linking valuation, investment amount and ownership
- Testing whether a round's pricing is consistent with a credible exit outcome
- As a cross-check to the First Chicago method and to recent comparable rounds
How the VC Method Works
- Project the exit-year metrics: revenue or EBITDA in year 5 to 7, based on a realistic plan.
- Estimate the exit value: exit-year metric × an exit multiple from comparable listed companies or acquisitions.
- Apply the target return: post-money value today = exit value ÷ (1 + target IRR)n. Target returns are typically high, reflecting stage risk.
- Adjust for dilution: allow for future funding rounds and option pools that will reduce today's investors' ownership.
- Derive the pre-money value and ownership: pre-money = post-money – new investment, and investor stake = investment ÷ post-money.
- Test sensitivity to the exit multiple, exit timing and target return.
Example
A projected exit value of US$250 million in five years, discounted at a 40% target return, gives a post-money value of about US$46.5 million today. A US$10 million investment therefore implies around 21.5% ownership, before allowing for future dilution.
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