Valuation calculation


The Way VCs Actually Calculate Your Valuation (But Never Say Out Loud)

The quiet math that decides your valuation before the meeting even starts.

Is your round fundable?

There is a moment every founder faces during a fundraise.

The investor asks, “So, what valuation are you raising at?”

Most founders freeze.
Some guess.
Some anchor high and hope the investor buys the confidence.

Investors are not guessing. They are running a model.
A simple return based framework that has quietly shaped venture for decades. It is called the Venture Capital Method.
And if you do not understand it, you are negotiating blind.

This guide explains the method in the clearest possible terms and walks you through the template that lets you run the same maths investors do.

Whether your round is fundable or not depends on:

  • Valuation assumptions which set the baseline for how you price the company today

  • Exit year and multiples define the long term outcome an investor is underwriting

  • Revenue and EBITDA at exit map the scale you need to reach for the maths to work

  • Expected dilution adjusts the model to reflect the reality of future rounds

  • Optional preferred terms show how the structure can shift returns even when valuation does not

  • Scenario factors to stress test outcomes

VCs also have a dashboard that shows how an investor thinks through your company:

  • IRR tells them if the return profile justifies the risk.

  • MOIC shows the total value they can extract from their cheque.

  • Holding period anchors the timeline and signals how long capital is committed.

  • Exit enterprise value and exit equity value reveal what the business must be worth for the maths to work.

  • Ownership today and ownership at exit highlight dilution, trajectory, and whether your cap table supports meaningful upside.

  • Required ownership shows the stake an investor needs to hit their return target.

  • Implied valuation today shows the price your current metrics justify rather than the price you hope for.

However early stage companies cannot be valued the way mature companies can.
There is no reliable EBITDA. No cash flow. No forecast anyone believes.

So investors flip the question. Instead of asking: “What is this startup worth today?”

They ask: “What could this company be worth at exit and what return do I need to justify investing today?”

Then they reverse engineer your valuation from that future point. The method unfolds in six clear steps, as below.

The Venture Capital Method

Step 1: Estimate Your Exit Value

Investors choose a realistic exit year and apply a multiple to a metric that can scale over time. Typically:

  • Revenue at exit multiplied by an exit multiple

  • Or EBITDA at exit multiplied by an EBITDA multiple

Example:

  • Exit revenue: $40M

  • Revenue multiple: 5

Exit Value = $40M * 5 = $200M

This becomes the anchor for everything that follows.

Step 2: Calculate the Return the Investor Needs

Every fund has a return target. It often looks like:

  • 25% to 40% IRR

  • Holding period of 7 to 10 years

That target determines how much their investment must grow.

Example with a 30% IRR over 8 years:

Required Future Value = $5M * (1.3)^8 = $43M

If they invest $5M, they must receive $43M at exit.

Step 3: Convert Required Return into Required Ownership

If the company exits for $200M and the investor needs $43M:

Required Ownership = $43M / $200M = 21.5%

This is the real number investors anchor on. Not pre money. Not post money. Ownership.

Step 4: Convert Required Ownership into Today’s Valuation

If the investor needs 21.5% ownership and is investing $5M:

Post Money = $5M / 0.215 = $23.3M
Pre Money = $23.3M − $5M = $18.3M

This is the valuation that satisfies the return requirement.

If you ask for a $35M post money instead of $23.3M, the investor cannot accept it because the math no longer hits their targets.

Step 5: Adjust for Dilution Over Future Rounds

This is where founders get caught out. Even if an investor enters at 21.5%, dilution erodes that stake over time.

Example with 40% cumulative dilution:

Exit Ownership = 21.5% * (1 - 0.4) = 12.9%

But if they need 20% at exit:

Entry Ownership = 20% / (1 - 0.4) = 33.3%

This is why investors sometimes ask for more ownership than founders expect. They are pricing future dilution in advance.

Step 6: Check IRR, MOIC, and Holding Period

Once ownership is set, investors test:

  • Does the IRR exceed their hurdle

  • Does the MOIC make sense for the stage

  • Does the holding period kill the return

If these line up, the valuation works.
If not, the deal breaks.

Two Concepts That Change How Founders Think

These are the pieces that founders rarely understand and investors never say out loud.

Time to Exit Drives Valuation More Than Anything Else

Change the exit year by two or three years and the valuation can double or collapse.
This single variable creates most valuation disagreements.

Investors Negotiate Ownership, Not Valuation

You can debate the story, the momentum, the traction.
But if the investor needs 20% to hit their return target, no argument will convince them to take 10%.

Understanding this changes the entire dynamic of a negotiation.