We use methods such as Venture Capital Method, First Chicago Method,Asset Valuation, Disocunted Cashflows, and Relative Valuations.

Feel free to contact us if you want to get valuation of your business before approaching a VC for seed capital.

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What I observed in various start ups is this …

Investors protect themselves for the worst case scenarios better than the founders. Investors have tools and leverage like preferred shares, liquidation preference multiples, controlling stakes etc. So in many situations bottom for their investment is protected. Investors by nature are skeptical and factor in the worst case in their calculations better.

However, founders leave their worst case scenarios exposed – which get further aggravated when u raise too much money and financial worth is outrun by valuations in early rounds. Reasons include high adrenalin rush in early days / years of starting up, religious belief in your idea, momentary suspension of touch with reality from getting to such a high valuation (typically in MNs in Series A in just 12/18 months), planning for the best case, thinking of how YouTube or Hotmail exited etc. (Ironically … the positive thinking qualities that keep you going thru hell and fine in starting a business … are probably not the best ones to use in financial planning !)

None of this is a science … so advice like “raise as little money as possible” is easier to give then to execute.

One interesting thing a wise man once told me is … think of equity investment like you would look at raising a loan … put a notional interest rate of 20-25% p.a. typical expected VC rate of return) … and always remember you will need to pay it back … like with a loan. Then would u raise that money and invest in the business … is there an ROI?

p.s. Leave boundary conditions like Boo.com and Twitter

@Sridhar Turaga … i actually read the same somewhere else as well… but could not understand how getting more money invested decreases money for the founders at the time of exit? It is understandable that the next round
will become tough if over-evaluated.

That would be very important info for founders (may be separate post will
help with some example numbers ).

In fact there is a case to be made that … barring boundry conditions (leaving out twitter and boo.com) … increasing valuations un-related to real financial worth … to get better terms or to get more money invested decreases the chances of any money for the founders and comapny in the event of an exit.

The gap between valuation and real financial worth eventually comes back to bite non-preference shareholders (and VCs too) in many cases.

So,as ironical and counter intuitive it may sound … there is a case to be made for not seeking unjustified valuations as a company !!

p.s. It’s in many ways like with movie stars … one big hit can easily be wiped out by a flop that followed … and then it can turn off producers for ever

Important things to consider (other than valuation) include liquidity preference, option pools, blocking rights, board control. It is important for founders to understand these in context of exit

VCs use these as levers to negotiate a better deal for themselves.