What is Venture Capital Valuation?
In Venture Capital Valuation, the most common approach is called the Venture Capital Method by Bill Sahlman, which we’ll provide an example calculation in our tutorial.
Venture Capital Valuation Tutorial
In the following example tutorial, we’ll demonstrate how to apply the VC method step-by-step.
Valuation is perhaps the most important element negotiated in a VC term sheet.
While key valuation methodologies like discounted cash flow (DCF) and comparable company analysis are often used, they also have limitations for start-ups, namely because of the lack of positive cash flows or good comparable companies. Instead, the most common VC Valuation approach is called the Venture Capital Method, developed in 1987 by Bill Sahlman.
Venture Capital Valuation Six-Step Process
The venture capital (VC) method is comprised of six steps:
- Estimate the Investment Needed
- Forecast Startup Financials
- Determine the Timing of Exit (IPO, M&A, etc.)
- Calculate Multiple at Exit (based on comps)
- Discount to PV at the Desired Rate of Return
- Determine Valuation and Desired Ownership Stake
