VC Math – Part II

Part II… ValuationWe are fortunate to operate in Alberta where there is allegedly lots of cheap capital available at high valuations. But, entrepreneurs need to be cautious about raising money at high valuations because it seriously impacts the exit and return profile.Consider this example.

Let’s say your start-up raises $8M at $12M pre-money and your post-money valuation is $20M (Pre-Money + Investment = Post-Money). Your investors now need to sell your company for $200M to see a 10X return. No small achievement.

Now consider that if you raise $2M at $4M pre-money (=$6M post), your investors get that same rate of return if you sell for $60M. And a $60M exit is 10X more likely than $200M.

Most first-round entrepreneurs try to negotiate the highest price possible for their financing, however with IPOs few and far between and acquisitions over $100M tough to come by, accepting an inflated valuation can price you out of the market very quickly.

November 29, 2007 | Unregistered CommenterKerri Knull


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