The VC Brief

Educational only — not investment, legal or tax advice.

Founders often build a detailed five-year model, then watch an investor skip straight past it. That is not rudeness. Many early-stage investors value companies with a much simpler tool, usually called the VC method, and it starts at the end of the story rather than the beginning.

The idea in one sentence

Estimate what the company could be worth when the investor sells, decide what return the investor needs, and work backwards to what the company can be worth today.

The four steps

1. Exit value. What could the company plausibly sell for, or be worth at IPO, in five to ten years? Investors anchor this on comparable companies and on the size of the market.
2. Target return. Early-stage funds need a few big winners to pay for all the companies that fail, so they look for each investment to be able to return a large multiple. The earlier the stage, the higher the multiple they ask for.
3. Post-money value today. Divide the exit value by the target multiple. That is the most the company can be worth right after the investment for the deal to make sense to the fund.
4. Adjust for future dilution. The investor’s stake will shrink in later rounds, so they need a bigger slice today to end up with the slice they want at exit.

Pre-money valuation, the number founders usually quote, is simply the post-money value minus the new money coming in.

Worked example

Example, hypothetical numbers.

• A fund believes your company could be worth $500 million at exit in about seven years.
• For a seed investment, it wants the deal to be able to return 20x.
• It plans to invest $5 million.

Without dilution: $500M ÷ 20 = $25M post-money. The $5M check buys 20%, so the pre-money is $20M.

With dilution: the fund expects later rounds to cut its stake roughly in half before exit. To own 20% at exit, it needs about 40% today. A $5M check for 40% means $12.5M post-money, or $7.5M pre-money.

Same company, same exit story, and the valuation falls from $20M to $7.5M once dilution is counted. This is why two investors who like your business equally can offer very different prices: they disagree on the exit, the return they need, or how much dilution is coming.

What this means for your pitch

• The exit story drives the price more than the spreadsheet. A credible path to a bigger outcome (larger market, stronger margins, a clear reason you win) moves the number more than polishing year-three revenue.
• Raising more money at once is not free. A bigger check at the same post-money means selling more of the company.
• Know your comparables. If you can point to real acquisitions or public companies in your space, you are arguing on the investor’s terms.
• Read the terms, not just the number. A high valuation with heavy terms can be worth less to founders than a lower one with clean terms. See our breakdown of liquidation preferences.

From the investor’s side of the table. I teach valuation under uncertainty to founders and finance professionals in the venture capital and private equity course at Universidad San Francisco de Quito. Before that, as an Investment Manager at Ocean Capital in Lisbon, I applied valuation frameworks across funding rounds from €3M to $18M. The VC method is the backbone. Comparable companies and, for more mature businesses, discounted cash flow are the tools used to test it.

I once worked with an AI startup that changed its business model, from selling software to running its own clinics, but wanted to keep its software valuation. The investors I brought were ready to put money in, but not at that price. We proposed a valuation that would rise if the clinics reached the margins the technology promised. The company didn’t make it. The lesson: when your business model changes, your valuation changes with it, and you should be the first to see that.

The short version

Your valuation is the investor’s estimate of the exit, divided by the return they need, shrunk by the dilution they expect. Change any of those three beliefs and you change the price.

Sources

• Cooley GO glossary: Pre-money valuation
• Cooley GO glossary: Liquidation preference

Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.