Want to know how Venture Capitalists think about valuing your startup company? Here is an article by Scott Lenet of DFJ Frontier, who have a Sacramento office. Looks like formulas aren’t used; rather valuation is based on three things:
- Valuation of deals done on comparable companies
- Investors’ experience, and having the opportunity to see many deals, done or not
- Whether the investment return at the time the company exits (e.g., sells to another company, or does an IPO), under the best circumstances, meets the VC firm’s criteria
The article could lead one to think that a 10 times (10x) return is great for the investor. Well, we are not sure that is universally accepted. Consider the early stage investor (angel or seed stage VC) where maybe only one in ten of their investments really make it; 10x will just get you your money back on your entire portfolio (the great one just makes up for the nine that fail or just muddle along)! We would think experienced investors will have higher expectations!
