Then, focus your company’s business plan on closing these gaps. Identify and understand the gaps (technical or commercial) between your business and theirs. Understand the valuations of other companies at slightly later stages. For example, if you have gaps in your management team, then identify the people that would join the team after the funding is secured. Maximize the potential exit valuation by removing any doubt or obstacle that the investor perceives as limiting the upside valuation.Show the investor why there is huge potential exit value for your company. They will have a maximum valuation based on their view of the future valuation and the perceived competitiveness for the deal, but will try to keep the price they pay closer to the lower part of the range. Investors will use these methodologies to set a valuation range. As you can see, investors use the post-money valuation to estimate the price an investment must command when they exit or sell the company. If the VC owned 20% for a $1 million investment, then the post-money valuation of the company at the time of the initial investment was $5 million. If the VC invested $1 million into the company, they would make 20 times their investment. The VC would earn $20 million on their investment at exit. For example, assume an exit valuation of $100 million and the VC owns 20% of the company at the time of the exit.Most early-stage investors look for 10 to 20 times the return on their investment (later-stage investors tend to look for 3 to 5 times the return) within two to five years. The value can be based either on recent merger and acquisition (M&A) transactions in the sector or the valuation of similar public companies. Potential value at exit: VCs and other investors have a good sense of a company’s exit value. Although some information may not be public, many entrepreneurs and VCs know through word of mouth what the recent valuations have been for comparable companies. However, transactions that are more than two years old are not considered market. Several databases-including VentureSource, Venture Wire and VentureXpert -might provide information that establishes a valuation range for comparable companies. Recent comparable financings: The VC will identify similar companies, in sector and stage, as the investment opportunity.Most venture capital funds (VCs) investing in early-stage companies will use two valuation methodologies to establish the price they will pay for an investment:
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