Whenever a startup closes a new funding round you practically immediately read and hear a lot about it on various websites like TechCrunch, Newsletters, or your personal LinkedIn, however, the underlying valuation at which VCs and other investors value the company is basically never disclosed in more detail. There are a number of reasons for this information disparity - among others, funding is a vital marketing tool for startups and their valuation is always evolving and built on confidential information. Therefore, it is of great importance when trying to break into VC, to understand how to value a startup when looking outside-in and to be able to assess current valuations.

But how do you actually do that? Do you actually use the valuation methods that are taught in university? To answer these questions, we will outline the most common methods used in practice to value startups from Seed to Late-Stage in the following.

đź“ŠValuing a Startup

Basics

Pre-Money vs. Post-Money

Pre-money valuation

As the name suggests, pre-money valuation does not include "new money" as in the latest round of funding. It can be seen as the valuation of a startup before investments are made. The pre-money valuation is that portion of the post-money valuation attributable to stock held by founders, employees, and previous investors.

Pre-money valuation = Post-money valuation - Investment

Post-money valuation

Contrarily, post-money valuation refers to how much the startup is worth after it received the "new money".

Post-money valuation = Investment / % stake received

Metrics

Comparing metrics is vital in assessing a startup's potential and health. While some are more useful than others, a16z compiled a list of the most common misconceptions and metrics used to analyse the state of a startup and its Product/Market fit, some of which can also be used as standalone proxies for valuation.

Business and Financial Metrics