Your Business’s Value versus Valuation Timing
Table of contents
- Your Business’s Value versus Valuation Timing
If you own a startup, you have considered obtaining a business valuation of your enterprise. Doing so may offer insight into how the business enterprise is faring and where its operational effectiveness can improve moving forward.
However, the outcome of such a business appraisal or valuation will depend on when you seek to have it done or the timing of a business appraisal.
What is a pre-money valuation?
A pre-money valuation refers to appraising a company’s equity before it goes public or receives investments from external funding or financing. In other words, this valuation refers to assessing the money the enterprise is worth before one funnels investments into it.
Potential investors tend to rely on this valuation to understand the company’s current value. Interestingly, however, this value can change. This is because the valuation could occur before each financing round — regardless of whether such investments are private or public.
Understanding what the valuation looks like before investments can help potential investors decide the amount of funding they will offer and how much ownership they might expect in return.
Company leaders may not accept the pre-money valuation if such an appraisal fails to reflect the company’s aspirations. Regardless, obtaining such figures and analysis from expert appraisers like those at BA FL|GA|HI is helpful in understanding an investment’s impact on a particular firm.
What is a post-money valuation, and how does it impact the pre-money valuation?
Pre-money valuations do not consider any new capital anticipated to be received from potential investors. Instead, this valuation only accounts for the company’s present value before the next financing round occurs.
Although pre-money valuations are straightforward to calculate, you would still need the post-money valuation. Post-money valuations reflect the value of a company after it receives an investment. This investment may include any amount of capital raised through public or private sources.
Calculating Post-Money Valuation
To calculate, the post-money valuation considers the total amount of financing raised divided by the percentage of equity ownership. For example, if an outside investor has invested $5 million with an implied equity ownership stake at 20% after financing, then the post-money valuation is $25 million.
With this figure in mind, an appraiser can now calculate the pre-money valuation, which considers the difference between the post-money valuation and investment amount. Regardless, it is important to realize that pre- and post-money valuations influence one another.
For example, a company that plans to go public may propose a business plan to attract potential investors. If venture capitalists estimate that the company will raise $200 million in its IPO, it is said to have $200 million in pre-money. These estimates can also be used to evaluate the company before and after receiving funding.
Are all rounds of venture funding the same?
There are a variety of venture funding rounds that will impact the growth potential of your enterprise. Some of those rounds include:
- Pre-seed/seed stage — This stage consists of funding from close friends and families of the entrepreneurs. Angel investor financing might also occur during this phase.
- Series A — This round of funding tends to come from various early-stage investment firms, and the first-time investments usually come from institutions. Startups tend to optimize their products and business model during this phase.
- Series B/C — Known as the expansion stage, this phase tends to bring in various funding from early-stage venture firms. The startup has gained traction and shown progress in its growth potential. Traditional Business Valuation becomes more useful.
- Series D — This tends to be the growth equity stage when new investors provide capital, assuming that a public offering is soon.
What else should you keep in mind about Valuation Timing?
When seeking a pre- or post-money valuation, don’t make mistakes that can be easily avoided.
First, keep in mind that valuations are not permanent. A startup is only worth what investors are willing to pay at a specific time. Although business owners may not necessarily agree with every valuation the enterprise receives, you must remember that no valuation is ever permanent.
Additionally, just because an investor is interested in the business does not necessarily mean they will see eye-to-eye on everything with the business owner. After receiving a pre-revenue valuation that you are happy with, it is a good idea to speak to your business partners to ensure that everyone is on the same page about how to proceed.
Business Valuation Timing: Conclusion
Operating a startup is exciting and rewarding. To spur growth, you may consider acquiring outside investments and financing. Depending on when such funding occurs, a pre-money or post-money valuation may be an effective way to assess your company’s value. Understanding a company’s true value and worth can be helpful as you strategize and execute a potential investment.