Hello everyone…. So…I’m studying for an interview and I came across the pre/post money valuation for venture or growth transactions. But…why don’t we use Comps or DCF in growth or VE ? On what basis is the premoney valuation determine since the company has not been valued already ? Thank you for your help
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You can think of pre-money valuation as Enterprise Value and the standard valuation techniques still apply. For example in the plant-based dairy world, financing rounds are typically raised at around 3x revenue. Looking at a financing round, you would set the pre-money valuation at ~3x trailing 12 month revenue.
Post-money valuation is not what the company is worth right now but rather an indicator of how much the company's valuation must grow in the subsequent financing round in order for you to break-even on your investment.
For example. Plant-based dairy brand does $10M of revenue in 2019. You invest $5M at a $30M pre-money valuation ($10M rev at 3x valuation), which gives you 14.3% of the equity ($5 / $35M post-money valuation).
It's now 2021, the company has burned off all its cash and needs to raise another $5M. Now its revenue is $15M. Pre-money valuation would be $45M ($15M rev at 3x valuation). Your equity is now worth $6.4M ($45M pre-money valuation * 14.3%) or a gain of 28% ($6.4M equity value / $5.0M invested capital - 1)
The value of the company has gone from $30M to $45M (50% gain) but because the company burned all its cash, the actual gain on the equity value is only 28% ($45M / $35M - 1). This way of speaking about valuation in terms of pre- / post- money valuation is helpful because most companies in the growth / venture world are burning cash and raise capital as they approach $0 in cash
Thank you so much for such an elaborate answer.
Wouldn’t it be easier to think of PRE money being the CSE value implied by the issuance price and post money just adding the cash proceeds ?
Question on this: What if the investor wants to invest $5M for 15% ownership - but there are other investors investing as well with no confirmation on the amounts and total round size. How would this be done?
Or essentially are you saying that an investor has to choose between investing for ownership or investing for amount? (Yes I know both are similar and related but it seems you can't pick both? Unless the round size is fixed.)
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