Explanation

Qokoon uses a sophisticated version of the VC Method for valuing startups.

In summary, the VC method uses an estimation of the future value of the company and, together with the return the investor expects to make, calculates both the value of the company and the equity participation the new investor should receive in exchange from their investment in the company.
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The VC Method is one of several ways to calculate the valuation of a startup. We like this method as it provides very clear insights and context into how the valuation of the company was determined.
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You can use Qokoon to understand how the valuation of your startup is affected by changes in key assumptions, like future value of the company or the return sought by the investor.

VC Method Explained – Step by Step

The following is an explanation of how to think about the VC method step by step

1. Investor wants to invest £1m(step1 in the chart)

2. Investor wants to multiply his investment by 10x in 5 years, so he wants his stake in the company to be worth£10m in year 5. This is equivalent to a 58% annual return, or IRR (step 2)

3. The value of the equity of the company in five years is estimated at £200m. This is the key assumption(step 3)

4. If the value of the equity of the company in year five is £200m and the investor wants £10m, then he will need to have 5% of the equity (step 4)

Now we work backwards from the future

5. If it is assumed that future rounds will dilute the ownership of the investor by 20% then, in order to have5% of the equity in year five, the investor needs to start with an equity ownership of 6.25%, because 6.25% diluted by 20% is 5%, or in other words, 80%of 6.25 is 5% (step 5)

6. If £1m from the investor is worth 6.25% of the equity, then the remaining 93.75%, which is the value of the startup (pre-money valuation) is worth £15. This is calculated as £1m divided by 6.25% minus £1m (£1/6.25% - £1m) (Step 6)

Finally, the post-money equity valuation is £16m, which is calculated as the pre-money equity valuation (£15m)plus the money invested (£1m)

Disclaimer: Qokoon's valuation software is intended solely for estimating the value of startups. Valuing startups is extremely complicated given the level of uncertainty surrounding their future, and at best, any startup valuation is an estimate. Qokoon assumes no liability or responsibility for any agreements or decisions made based on the valuation obtained using this software.