Venture firms valuation

Valuation Methods

Early stage investing is far from an exact science. Early-stage companies are often comprised of little more than an entrepreneur with an idea. Valuations at the "seed stage" are generally driven by factors that by their nature are subjective. These include appraisals of the CEO and management team, novelty of the value proposition, evaluation of intellectual property, expected time-to-market, expected path to profitability, estimated capital needs and burn rate, syndicate risk, sector volatility and deal structure. In post-seed investing, intermediate data points such as events demonstrating proof of principle and product validation will factor strongly in valuation determinations. As a company matures to a revenue stage, more quantifiable data is produced in the form of operating statistics and performance indicators. Actual results allow investors to more accurately model quarterly and annual revenue, EBITDA, cash burn, pipeline close rates, backlog, bookings and enterprise valuation.

Valuation by Stage

Financing	Company Stage	Data	Risk/Uncertainty	Value* (MM)
Seed	Incorporation; early development	Soft data; value propositioned.	Extremely high	$1+
Series A	Development	Validation, time to market	Very high	$3+
Series B	Shipping Product	Prelim revenue	High	$7.5+
Series C+	Shipping Product	Predictive revenue	Moderate	$10+
Later-stage/ Mezzanine	Shipping Product, Profitable	Hard data; EBITDA, net income	Lower	$20-50+

Based on 2003 market information.

Seed Financing: The seed financing will provide the capital needed to support salaries for founders/management, R&D, technology proof-of-concept, prototype development and testing,etc. Sources of capital may include personal funds, friends, and family and angel investors. Capital raised is limited due to its diluting impact at minimal valuations. The goal here is to assemble a talented team, achieve development milestones, proof of concept and anything else that will enable you to attract investors for your next financing.

Series A Financing: Typically the Series A is the company’s first institutional financing—led by one or more venture investors. Valuation of this round will reflect progress made with seed capital, the quality of the management team and other qualitative components. Generally, a Series A financing will purchase a 50% ownership stake. Typical goals of this financing are to continue progress on development, hire top talent, achieve value-creating milestones, further validate product, initiate business development efforts and attract investor interest in the next financing (at an increased valuation).

Series B Financing: The Series B is usually a larger financing than the Series A. At this point, we can assume development is complete and technology risk removed. Early revenue streams may be taking shape. Valuation is gauged on a blend of subjective and objective data—human capital, technical assets, IP, milestones achieved thus far, comparable company valuations, rationalized revenue forecasts. Goals of this financing may include operational development, scale-up, further product development, revenue traction and value creation for the next round of financing.

Series C Financing: The Series B may be a later-stage financing designed to strengthen the balance sheet, provide operating capital to achieve profitability, finance an acquisition, develop further products, or prepare the company for exit via IPO or acquisition. The company often has predictable revenue, backlog and EBITDA at this point, providing outside investors with a breadth of hard data points to justify valuation. Valuation metrics, such as multiples of revenue and EBITDA, from comparable public companies can be compiled and discounted to approximate value.