Returns & Metrics
How do VCs value a startup?
Quick Answer
VCs use a combination of methods: comparable company analysis (revenue multiples), discounted cash flow (DCF) for later-stage, scorecard/checklist for pre-revenue, and market-driven pricing based on competitive dynamics and supply/demand for the round.
Detailed Answer
Startup valuation in VC is as much art as science, especially at early stages where traditional financial metrics don't apply.
Valuation methods by stage:
**Pre-Revenue (Pre-seed/Seed):** - **Scorecard method** — Rate team, market, product, traction vs. comparable deals - **Comparable deals** — What are similar companies raising at? (AngelList, PitchBook data) - **Rule of thumb** — Pre-seed: $3-8M pre-money; Seed: $8-20M pre-money (varies by market)
**Revenue Stage (Series A+):** - **Revenue multiples** — ARR × industry multiple (SaaS: 10-30x ARR for fast-growing) - **Comparable public companies** — Discount public multiples by 30-50% for illiquidity - **Comparable transactions** — Recent M&A and funding rounds in the space
**Growth Stage (Series B+):** - **DCF analysis** — Discount projected cash flows (less common in VC) - **Forward revenue multiples** — Next 12 months projected ARR × multiple - **LBO analysis** — For PE-style growth rounds
Key valuation drivers: - Growth rate (most important — fast growth commands premium multiples) - Market size (TAM) - Team quality and track record - Competitive dynamics (multiple VCs bidding = higher price) - Unit economics (gross margin, CAC payback, retention)
Reality: At seed stage, valuation is primarily driven by market conditions and competitive dynamics, not financial analysis. The best companies set their price; others negotiate.
Related Questions
What is IRR (Internal Rate of Return)?
IRR is the annualized return rate that makes the net present value of all cash flows equal to zero, accounting for the timing of investments and distributions. Top-quartile VC funds target 20-30% net IRR.
What is ARR (Annual Recurring Revenue)?
ARR is the annualized value of recurring subscription revenue, calculated as MRR × 12. It's the primary growth metric for SaaS companies, with VCs typically expecting 2-3x year-over-year growth for Series A candidates.
What is MOIC (Multiple on Invested Capital)?
MOIC is the ratio of total value returned to total capital invested, regardless of time. A 3x MOIC means investors received 3 times their money back. Top-quartile VC funds target 2.5-3.5x net MOIC.
What is burn rate?
Burn rate is the monthly rate at which a startup spends cash beyond its revenue. Gross burn is total monthly spend; net burn is spend minus revenue. Runway = Cash on Hand ÷ Monthly Net Burn Rate.