It is an art rather than a science, but an art within everyone's reach. Although at the beginning we will feel as if we were standing on a precipice surrounded by impossible gusts of wind, we will learn to decipher the key points to take into account when evaluating the valuation of a company that is just starting up its business.

The pre-money valuation of a company is what it is worth before closing an investment round; therefore, the post-money valuation is the sum of the pre-money valuation plus the new investment.

The pre-money valuation determines the percentage of equity an investor receives in return for his investment. For example, for an investment of €500,000, a pre-money valuation of €2M would give the investor a 20% stake in the company (€500,000 out of a final value of €2.5M); this percentage is reduced to around 14% if the pre-money valuation were €3M (€500,000 out of a final value of €3.5M).

In turn, the percentage of shares you hold in the company will determine the size of the return you could earn later in the event of an exit. The more shares you can sell in the future, the higher the return you will achieve. Therefore, the investor's objective will be to maximize his percentage of shares for a given amount of investment, while the entrepreneur's objective will be to minimize as much as possible the percentage he will give to the investor in exchange for his money.

Why is it so difficult to assess the pre-money valuation of a company? Data, numbers, track record... in a startup, most often this information does not yet exist or is very superficial, which makes it difficult for the investor to make an informed decision about the company's future prospects. But let's start with the simplest cases in which the company already has a turnover.

For companies with invoicing

In this case, the investor has two ways of making a decision when valuing a company.

Discounted cash flow: Discounted cash flow (DCF) analysis determines the pre-money valuation of a company based on the money it is expected to earn in the future. For this, the current cash flow is taken into account to predict the future, so this method is not reliable in the context of the early stages of a company that does not yet have revenues.

First Chicago method: this valuation method combines the comparative method (below) and the DCF and provides three possible scenarios (pessimistic, realistic, optimistic) that are weighted by the investor according to the probability of their occurrence. Finally, the final valuation is the weighted sum of the probabilities of the three scenarios.

Do you want to know how to assess the valuation of a company that has not yet invoiced or is just starting to do so? Here you have all the information.