Hey Guys,
I have an upcoming interview with a Series A /B venture fund. I am going to present investment ideas which is great and why I like certain startups. However I am totally lost in regards to how you approach it if they ask you about how to value the business when you are providing funding? both pre and post money? How do real VC funds approach this?
Valuing a Series A or Series B investment tends to be less of a "science" than with more mature deals.
The levers to worry about are a) ownership threshold b) projected exit and c) projected capital need. I've outlined them below. You should have points related to these in your argument so that the interviewer can see that you know all the incentives at play in a deal.
At this stage, you are likely taking a board seat, so you want your fund to have adequate skin in the game. This varies across deals, but 25-40% ownership depending on the company is ideal.
Regarding exit, they'll probably want to see how you think about market potential and the ultimate potential of the company. Does this grow to a $200M revenue business? How big is the overall market and how much of that do you think your company will penetrate? What kind of multiple do you value this off of? Then what kind of Cash on Cash return are you looking for? I think with early stage, you want to target 5-10x, but maybe someone from an early stage fund can back me up or correct me on that one.
Projected capital need is also important, since the company will likely need more money going forward, and that will dilute your position, factoring into your returns. In your case, there is no sense in trying to project capital need for a hypothetical idea, but mentioning that you thought of it is important. So, in your valuation you might say that I'm targeting 35% ownership and expect 10% of my position to get diluted, so on exit I will hold 31.5%.
Again, the above is very subjective but showing that you thought through these points will be helpful.
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