Calculating Pre-money and Post-money valuations for impact startups
Valuation methods and tools
Startup valuation is a fundamental step one should consider before carrying on any fundraising. Whether you’re a profit-oriented startupper, or an impact-driven one, startup valuation is key for approaching potential investors the right way.
As a matter of fact, startup valuation is the process of quantifying the value of your startup (“how much it’s worth“) and, from there, being able to determine the equity shares you have to – or want to – give to investors in exchange for their money.
But how to evaluate your startup? In this article, we’ll see the hows of calculating pre-money and post-money valuations for impact startups, as well as couple valuation methods used by many. So, without further ado, let’s begin!
First, what do we mean by “startup valuation”?
At the early stages of your impact startup, the company is likely to have little value. However, the more milestones it accomplishes (in terms of traction, product development, etc.) the higher its value will be.
To expand even further your business and scale your impact, it’s likely you’ll need to raise extra funds at some point. And that is the time people will ask for your “startup valuation”. While dealing and negotiating with investors, you may often hear two different versions of this concept: “pre-money valuation” and “post-money valuation“.
On one hand, pre-money valuation is the value of a startup before a new equity investment. On the other one, post-money valuation is the value of the company after having considered new funds coming from investors. If we want to put it into a concise, easy-to-remember equation:
Post-money valuation = Pre-money valuation + investment
As you may guess, post-money valuation is higher than pre-money, since it adds new investments flowing into the startup. Furthermore, remember that neither valuations can present a negative value, as it’s impossible for a startup to be worth less than zero.
Most common startup valuation methods
There’s no fixed formula for estimating startup valuations, but rather plenty of methods to choose among. Yet, regardless of the valuation method you use – we’ll cover couple of the most common ones shortly – there is one golden rule for you to always keep in mind: your impact startup is worth whatever you and investors agree it’s worth.
In fact, investors usually aim for lower valuations, which result in higher shares in exchange for the funds they may be willing to invest. Conversely you, as founder, will seek higher valuations to avoid diluting and giving up too much equity. As a consequence, negotiating (sometimes even forcefully) a reasonable halfway point will be needed.
Although no valuation method will spare you from spending time negotiating with investors, we’ll now introduce two of the most well-known frameworks used by startuppers, business angels as well as VCs. The Berkus Method and the VC Valuation Method. Let’s briefly check them out in the next section!
Method #1: Berkus Method
Developed by Dave Berkus in the early 90s, the Berkus Method is typically used to define the valuation of early-stage startups, including pre-revenue ones. It’s comprised of 5 different value drivers, which represents core areas for startup survival and growth:
• Management team (quality and composition)
• Prototype or MVP already on the market
• Partnerships and strategic relationships
• Business traction and existing sales
Each area usually gets assigned a value up to $500K, for a maximum pre-money valuation of $2.5M. However, depending on the industry or geographical region, the theoretical maximum may be changed.
Overall, Berkus Method is a quick, straightforward, easily-adjustable model, that considers qualitative aspects of your (even early-stage) impact startup. Still, the flip side is that it provides rough valuation estimates and doesn’t take into account growth nor financial projections.
[ If you want to understand more about this valuation method, check this video by Dave Berkus himself! ]
Method #2: VC Valuation Method
The second framework we present is the VC Valuation Method. Here, the core idea is to derive the post-money valuation of an impact startup (and, from there, its pre-money) based on the expected ROI sought by those angel investors or venture capitalists you are in negotiation with. Unlike Berkus, calculations are based on long-term assumptions and projections, rather than past accomplishments or ongoing ones.
According to this method:
Post-Money Valuation (Pre-Money Valuation + Investment) =
Exit Value (in 5 to 7 years) / Investor Expected ROI Multiple
Exit Value = Exit Multiple (based on industry trends) * Exit Year Revenue
As you see, this method combines together several financial assumptions, ignoring factors such as traction or founder experience. Also, it strongly relies on highly uncertain hypothesis, such as the exit year revenue or the exit multiple (which is often replaced by Price / Earnings multiples .. but we won’t go through that now!). Because of that, the VC Valuation Method can be a delicate framework to use for some, but definitely one to experiment with in order to better understand the VC mindset.
[ If you are interested in learning more about this valuation method, we suggest checking out this article by SharpSheets. ]
Truth to be told, there are plenty more methods startup founders can get acquainted with. Discounted Cash Flow, Risk Mitigation, Scorecard, Cost-to-Duplicate.. and the list goes on and on! Some focus on current results and milestones, some on future ones to achieve. Again, as said before, we recommend experimenting and combining several ones in order to find solid valuation ranges that may satisfy both you and the investors.
Calculating pre-money and post-money for impact startups: a tool for you!
In order to help you more easily negotiate with potential investors, we developed a friendly calculator to determine pre-money and post-money valuations for your impact startup.
Please be aware that the tool doesn’t focus on the reasons behind a given valuation, but rather it does simple, multi-directional math, based on different inputs.
Interested in adding our calculator to your toolbox? If so, fill in the form below 👇
PRE-MONEY & POST-MONEY VALUATION FREE CALCULATOR!
As you’ll see, the tool contains five different tabs.
The first one is a template containing standard formulas to get your numbers right. By providing two inputs only (investment and desired equity), the tool will automatically calculate your pre-money and post-money valuation, allowing you to run this process easily and smoothly.
The second tab shows you couple of examples to better understand how the math actually works. For instance, let’s imagine a startup accelerator decides to invest $100.000 for a 6% stake in your company. What would your valuation be? The calculator will tell you that, according to the potential investor, your startup before the investment is roughly worth $1.5M (“pre-money valuation”) and will be worth $1.6M afterwards (“post-money valuation”). Do you think it’s a fair valuation? Or you think it’s wrong? Well’, up to you to negotiate that, but at least you now have a quick tool for doing your math! 😁
In the third tab, you’ll then find a comparison checker that will help you determine which out of multiple investment scenarios provides your startup with the higher valuations. As founder, you probably seek higher valuations for your impact startup. This tab will tell you which scenario is more convenient for you.
And finally, the last two tabs include templates to estimate pre-money and post-money valuations using the two methods discussed before, Berkus and VC.
In this article, we began exploring the notion of “startup valuation“.
As seen, the process of calculating pre-money and post-money valuation for impact startups is key for any social entrepreneur eager to raise funds for its socially-oriented projects. Startuppers can use several methods for this purpose, including the Berkus Method and VC Method, briefly discussed above.
Whichever method or tool (including ours, hopefully 🙂 ) you’ll choose to use for startup valuation, keep in mind that the true value of a company lies at the intersections of potential investors’ and founders’ believes. Because of that, we suggest to avoid head-on collisions and crashes with investors, but rather negotiate reasonable, fair startup valuation ranges that can represent a win-win deal for you both!
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