Tag Archives: valuation

Series A Pre-Money Valuations Down 25 to 50 Percent

Connie Loizos of Private Equity Hub interviewed Bob Ackerman, co-founder of Allegis Capital, regarding the current state of the VC industry. Ackerman made a few quasi-dire statements for both startups seeking capital and firms looking to provide capital, most notably:

In response to the current state of Series A pre-money valuations, Ackerman said:

Depending on the situation, you’re seeing pre-money valuations come down from 25 percent to 50 percent [for Series A deals].

According to Ackerman, there’s bad news for those you planning a Series B or C deal:

Bs and Cs have collapsed entirely because the capital in the pipeline isn’t moving.

And finally, Ackerman made a prediction about the future of the venture capital industry:

[F]rankly a lot of VCs are going out business — I’d say 25 percent of them will disappear.

Read the full interview here.

(Apparently) The Startup Lawyer is worth $2,340,000

I thought I’d take Younoodle’s Startup Predictor for a test drive and therefore I had it value this blog. Younoodle is an online entrepreneur community and its “Startup Predictor” estimates what a startup company’s value will be in 3 years. (Hey if blog networks are getting VC funding, this blog is practically a “startup.”)

I had to fill out a somewhat lengthy questionnaire to get the valuation estimate. The questions seemed to be heavily focused on the education and experience of the startup’s team. Of course, it’s proper to do that since the team implements the startup’s idea (and ideas alone are worthless). But I felt that questions about revenue, market segments, web traffic, etc., were either not asked or asked without detail.

In the end, the Startup Predictor estimated that this blog would be worth $2,340,000 in November 2009 (as I started this blog in November 2006). If that’s the case, I have a lot of work to do.

What is a Pre-money and Post-money Valuation?

pre-money and post-money valuation

When your startup company raises capital, valuation is a key question that must be tackled Rey Maualuga style. (If you are unfamiliar with “Rey Maualuga style,” click here for a Youtube example.) The two main valuation concepts in a venture capital financing are pre-money and post-money valuation.

In a venture capital transaction, the venture capital firm invests cash in the startup company in exchange for newly-issued (preferred) stock. The startup company’s value immediately before the funding is called “pre-money valuation” while the startup company’s value immediately after the transaction is called “post-money valuation.” (Technically, pre-money and post-money are more about price than a startup company’s valuation.)

Pre-money Valuation and Post-money Valuation Equations

(1) Pre-money Valuation = Post-money valuation – Venture Capital Investment

(2) Post-money Valuation = Venture Capital Investment/Venture Capital Ownership Percentage

You can determine share price by the following equation:

(3) Share Price = Pre-money Valuation/Number of Pre-money shares.

You can determine how many shares to issue the venture capital firm by this equation:

(4) New Shares Issued = Venture Capital Investment/Share Price

Pre-money Valuation and Post-money Valuation Examples

Example 1

Let’s say Google’s new venture fund comes to you and offers to invest $3MM into your startup for 30% of the company. Plugging the numbers into equation (2), we get:

Post-money valuation = $3MM/.30 = $10MM

Thus, to calculate pre-money valuation, we use equation (1) as we now know the post-money valuation and the investment amount:

Pre-money valuation = $10MM – $3MM = $7MM

Example 2

Now let’s say a venture capital firm offers your startup company a $4MM investment at a $6MM pre-money. To determine how much your startup would give up in exchange for the $4MM, we use equation (1) and get:

$6MM = Post-money valuation – $4MM, and solving for Post-money valuation (Post-money = Pre-money + Investment) gives us $10MM

Next, we use equation (2) to find the Venture Capital firm’s percentage:

$10MM = $4MM/Venture Capital Firm Ownership Percentage (VCFOP), solving for VCFOP (VCFOP = $4MM/$10MM) we get 40%.