This video explains the importance of valuation in fundraising, highlighting its role as a price tag and market signal for a business. It discusses how valuation typically increases through different financing rounds, impacting equity holdings as the business scales.
What this video covers
Why are the valuations so important? The valuation is super important because it’s really that price tag. It is a way to signal to the market – obviously, the more that the business grows, the more the valuation is going to be. But, essentially, the valuation is going to send a signal to the market so that people understand what is ultimately the value of the business.
That happens again during the multiple fundraising rounds that you’re going to do. Ideally, you go from Seed to Series A to Series B to Series C and beyond. We’ve heard the different types of financing cycles, and from financing cycle to financing cycle, the valuation grows.
What that means is that the people that hold the shares of the business may hold a less amount of equity as you continue to scale up, and as you continue to mature the business. But, obviously, the more that you scale, the hope is that the valuation increases in parallel. Also, on the acquisitions is the price tag that they’re going to be giving. That is going to be buying everyone out and providing the returns and the cash for you, or the stock, and for the investors that have invested in your business.
What is the pre-money valuation? The pre-money valuation, in essence, is the value of the business before the money is injected, either from investments or perhaps from an acquisition. It is the value of that company that has been established via one of the multiple methods to establish a valuation, and that is pricing it for the next course of action to happen.
What is the post-money valuation? The post-money valuation, as the name says it, is the value of the business after that investment has come in.
Basically, if we were to put it into an example, let’s say that the pre-money valuation of your business is
0 million, and you’re asking for a
million investment. The post-money valuation is the 0 million from the pre-money valuation with that
million that is being invested, and as that is resolved, you’re looking at 2 million, and that
2 million is the post-money valuation.
In terms of debt and valuation, you need to understand that typically the debt is going to be taken outside of what the valuation is. There are certain cases, for example, if you have convertible notes that are converting into equity, that could affect the post-money valuation because if we take a look at the post-money valuation example, where you have a
0 million dollar value,
million dollars of money that is actually invested.
If you had convertible notes, that
million is going to trigger those notes to convert into equity. What’s going to happen is, for example, if you have
million in convertible notes that had been invested before this
million investment, what’s going to happen is that your post-money valuation is not going to be the
2 million that we were talking about before. It’s going to be
3 million because you’re adding that
million as well. So, in this case, that convertible note is going to impact the post-money valuation that you’re going to have in the end.
When it comes to valuation and terms, ultimately, you want to make sure that you are not the first one talking because investors are going to ask you, “What is the value of your business? The minute that you’re talking and you are disclosing the valuation remember that they’re going to negotiate you down. They’re going to always negotiate a price under.
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