Written by Chris Walton, JDIf you’re a startup founder raising capital, you probably know by now that putting a number on what your startup is worth is rather challenging. Startups often have limited financial history and little or no operating income, so there isn’t always much hard data to work with.
Instead, VCs rely more heavily on qualitative factors like your market opportunity, traction, and team, and use valuation methods that can account for the uncertainty that comes with an early-stage business.
At Eton, we’ve valued hundreds of startups and worked alongside many VC firms, so we know the ins and outs of the process. In this guide, we’ll take you through everything you need to know about venture capital valuation, including:
Key Takeaways:
Venture capital valuation is the process of determining a startup’s value for a funding round. That valuation determines how much equity an investor receives in exchange for their investment and, in turn, how much ownership existing shareholders retain.
You’ll usually see that value expressed in two ways:
For early-stage startups with little or no revenue and limited financial history, arriving at that using traditional valuation methods can be difficult.
One of the most widely used approaches in these cases is the Venture Capital Method, which works backward from the startup’s expected value at exit to determine what it’s worth today, based on the return the investor expects to earn.
Here’s how it works:
Despite its name, the Venture Capital Valuation Method is just one of several methods VCs use to value startups. It is, however, one of the most widely used for early-stage companies, so we’ll start there before covering five other VC valuation methods.
The VC Valuation Method starts by estimating what a startup could be worth when the investor eventually exits, usually through a sale or IPO.
To estimate that future value, investors project where the startup’s financials could be by the expected exit date and apply an appropriate valuation multiple based on comparable companies.
This is where factors like the startup’s team, market opportunity, product, traction, and growth potential also matter. Investors use them alongside the available financial data to assess whether the startup’s projected growth and future exit value are realistic.
They then work backward from that exit value to determine the post-money valuation today that still gives the investor their target return.
Subtracting the investment amount gives the pre-money valuation, and dividing the investment by the post-money valuation gives the investor’s ownership stake.
Important note: This simplified explanation assumes the investor’s ownership percentage remains unchanged through exit. In practice, VCs may also account for expected dilution from future funding rounds when determining the ownership stake they need today.
The VC Method is most useful for early-stage, high-growth companies that don’t yet have the financial track record of a more established business.
It tends to work best when:
The exact formula depends on whether the investor expresses their required return as an annual rate or a return multiple.
If it’s expressed as an annual rate:
Post-money valuation = Exit value ÷ (1 + Required rate of return)ⁿ |
Here, n is the number of years until the expected exit.
If it’s expressed as a target return multiple, or how many times the investor expects to earn back their original investment at exit:
Post-money valuation = Exit value ÷ Target return multiple |
Once the post-money valuation is established, subtract the new investment to determine the pre-money valuation, or what the startup is valued at immediately before the investment.
Pre-money valuation = Post-money valuation − Investment amount |
The investor’s required ownership stake can then be calculated as:
Required ownership = Investment amount ÷ Post-money valuation |
Say a startup is looking to raise $8 million in a Series A round. Based on its financial projections, it expects to reach $100 million in revenue and $10 million in profit by Year 5, when the VC expects to exit the investment.
To estimate the startup’s value at exit, the VC looks at comparable companies. If similar companies are trading at 10x earnings, applying that multiple to the startup’s projected $10 million profit gives:
$10 million × 10 = $100 million exit value |
Now, say the VC is targeting a 30% annual return over the five-year investment period. Using the annual-rate formula:
$100 million ÷ (1 + 0.30)⁵ = approximately $27 million post-money valuation |
Since the startup is raising $8 million, subtracting that investment gives its pre-money valuation:
$27 million − $8 million = $19 million pre-money valuation |
Finally, dividing the $8 million investment by the $27 million post-money valuation gives the VC’s required ownership stake:
$8 million ÷ $27 million = approximately 30% ownership |
So, based on these assumptions, the startup has a $19 million pre-money valuation, a $27 million post-money valuation, and the VC receives approximately 30% ownership for its $8 million investment.
If the VC expresses its required return as a target return multiple instead, the calculation is even simpler. For example, if the startup is expected to be worth $100 million at exit and the VC targets a 10x return:
$100 million ÷ 10 = $10 million post-money valuation |
In this case, the lower valuation reflects the higher return the investor is targeting. With the same expected exit value, the more an investor needs to make on their investment, the lower the valuation they can pay today.
The Berkus Method, also referred to as the Checklist Method, calculates the value of early-stage startups without relying on financial forecasts. Instead, it assesses qualitative factors related to a startup’s operations and risks.
This method is ideal for early-stage, pre-revenue startups, particularly those with the potential to reach more than $20 million in revenue within the next five years. While it was developed with technology startups in mind, it can be applied to startups across industries.
The Berkus Method assigns a value ranging from $0 to $500,000 to each of five key factors:
This allows for a pre-revenue valuation of up to $2 million, or up to $2.5 million once product rollout or sales are factored in.
Assuming a startup scores the following for each factor:
The total valuation would be all the values added up, which is $1.5 million.
The Scorecard Method, also known as the Bill Payne Method, helps investors value pre-revenue or minimal-revenue startups by comparing them with similar startups and adjusting that benchmark based on a series of weighted factors.
The result is an adjusted pre-money valuation that reflects how the startup compares with other companies at a similar stage.
This method is best suited to pre-seed and seed-stage startups with little or no revenue and limited financial history. It works well when there is enough valuation data from comparable startups at a similar stage and in the same region and business sector to establish a reliable starting point.
The First Chicago Method accounts for the uncertainty of startup investing by valuing the company under several possible future scenarios instead of relying on a single forecast.
Typically, investors model three scenarios:
Each scenario is valued separately and assigned a probability based on how likely it is to occur. The three values are then combined to arrive at a probability-weighted valuation.
This method is well-suited to early- to growth-stage companies where future performance is still uncertain, but there is enough financial and operating data to build meaningful forecasts for different outcomes.
Assume the three scenarios produce the following valuations and probabilities:
Add the three weighted values together:
$72 million + $45 million + $7.5 million = $124.5 million
The company’s estimated valuation under the First Chicago Method would therefore be $124.5 million, or approximately $125 million.
The Comparables Method values a startup by looking at how similar publicly traded companies are valued by the market.
Investors compare financial metrics using valuation multiples such as:
The appropriate multiple depends on the startup and its financial profile. For example, revenue multiples can be more useful for high-growth startups that aren’t yet profitable, while earnings or EBITDA multiples require the company to have positive earnings or EBITDA.
This method works best when there are enough similar public companies to build a meaningful peer group and the startup has financial metrics that can reasonably be compared with them.
The strongest comparables aren’t simply companies in the same industry. They should ideally have similar business models, growth rates, size, customers, and risk profiles.
Value = Startup Financial Metric × Comparable Company Multiple
Assume comparable companies are trading at an average P/E multiple of 25x, and the company being valued has earnings of $4 million.
Value = $4 million × 25 = $100 million
The company’s estimated equity value using the Comparables Method would be $100 million in this case.
The Discounted Cash Flow (DCF) Method values a company based on the cash flows it is expected to generate in the future.
Those future cash flows are discounted back to their value today to account for the time value of money and the risk involved in achieving them. The higher the discount rate, the less those future cash flows are worth today.
DCF is more useful for later-stage startups with enough financial and operating history to build reasonable cash flow forecasts. For very early-stage startups with highly uncertain or negative cash flows, the assumptions required can make the resulting valuation less reliable.
The basic DCF formula is:
Value = CF₁ ÷ (1 + r)¹ + CF₂ ÷ (1 + r)² + … + CFₙ ÷ (1 + r)ⁿ + TV ÷ (1 + r)ⁿ
Where:
For the terminal value, the two common approaches are:
Where g is the assumed long-term growth rate.
The exit multiple is typically based on comparable companies and can be applied to a metric such as EBITDA.
Suppose a company is expected to generate the following free cash flows over the next five years:
Assume a 10% discount rate and a 2% long-term growth rate.
Discounting the five annual cash flows back to their present value gives a total of approximately $5.2 million.
Using the Perpetuity Growth Method, the terminal value at the end of Year 5 is:
TV = $1.8 million × (1 + 0.02) ÷ (0.10 − 0.02) = $22.95 million
Discounting that terminal value back to today gives approximately $14.25 million.
Finally, add the two present values together:
$5.2 million + $14.25 million = approximately $19.45 million
Here, the company’s estimated value using the DCF Method would be $19.45 million.
Need a ballpark estimate of your startup’s value? We’ve created this free startup valuation calculator to give you a quick starting point.
As you can probably tell by now, whichever valuation method a VC uses, the result depends heavily on the assumptions and inputs behind it.
To make sound investment decisions in the inherently risky world of startup investing, VCs first look at a range of factors that shape those assumptions and help them assess the company’s risks, potential returns, and future performance, including:
For founders, this means the numbers are only part of the valuation story. The strength of the business itself has just as much influence on the value investors arrive at.
Applying one or more of the valuation methods discussed above is only one part of a broader process. Before arriving at a valuation and making an investment, VCs typically assess the startup from several angles and verify the information they’re working with.
The process typically looks something like this:
Because there’s a lot that goes into the valuation process, you don’t have to navigate it alone. Eton’s valuation experts can help you determine a defensible valuation for your next funding round. Get in touch for a free consultation.
Ring is a useful example of just how much a startup’s value can change as it proves its product, gains traction, and attracts investor interest.
Jamie Siminoff began building what would become Ring in 2011. Its first product, then called DoorBot, was a Wi-Fi-enabled video doorbell that allowed homeowners to see and speak to visitors through their smartphones.
In 2013, Siminoff appeared on Shark Tank seeking $700,000 for 10% of DoorBot. That offer implied a valuation of approximately $7 million.
He ultimately left without a deal. Kevin O’Leary made an offer, but Siminoff turned it down.
The exposure still proved valuable. As the company continued developing its product and building traction, DoorBot became Ring and began attracting outside investment.
By 2015, Ring raised a $28 million funding round, bringing its total private capital raised at the time to $37.5 million. Investors included Richard Branson, American Family Insurance, True Ventures, Upfront Ventures, Shea Ventures, and others.
Ring continued raising capital as it grew. In 2017, the company raised another $109 million in Series D funding, giving it more capital to expand beyond its original video doorbell.
We don’t have enough public information to say exactly which valuation methods Ring’s investors used during these funding rounds. But its journey illustrates many of the factors that can influence a venture capital valuation.
When Siminoff entered Shark Tank, DoorBot was still an early-stage company with an unproven product and significant uncertainty around its future. Over the following years, Ring improved its product, gained customers, expanded its product line, and attracted increasingly prominent investors.
In other words, investors had more evidence on which to base their assumptions about Ring’s future growth and potential value.
In 2018, Amazon acquired Ring. The purchase price was widely reported at around $1 billion, while Amazon later disclosed approximately $839 million in cash consideration, net of cash acquired, in its financial filings.
The acquisition gave Ring additional resources to expand its home-security offering while continuing to operate under the Ring brand.
Siminoff stayed on to lead Ring after the deal. He stepped away from the company in 2023, then returned to lead it again in 2025.
This journey shows how dramatically a startup’s valuation can change as the business proves itself, and how the factors VCs consider alongside the numbers can carry so much weight in a startup valuation.
If you’d like expert support with your startup’s valuation, Eton is here to help.
Since 2010, we’ve delivered thousands of audit-defensible startup valuations, covering fundraising, 409A valuations, M&A advisory, and complex securities and other critical transactions.
We’ve also worked alongside venture capital firms during due diligence, so we understand what investors look for when assessing a startup and its valuation.
Our boutique team includes former Big 4 professionals and Stanford Law lawyers. Every engagement is senior-led and built using rigorous valuation methodologies designed to stand up to investor, auditor, and regulatory scrutiny.
We also keep the process straightforward. Once we have the documents and information we need, we typically deliver valuations within 10 days, with a one-day rush option available for tighter deadlines.
You’ll work directly with a senior valuation expert who can answer your questions, explain the assumptions behind your valuation, and keep you informed throughout the process.
Whether you’re preparing for a funding round, issuing equity, or making another decision that requires a defensible valuation, contact Eton to discuss what you need.
But don’t just take it from us. Here’s what other startup founders have said about working with Eton:
Have more questions about venture capital valuation? I answered them below:
The VC Valuation Method and a 409A valuation serve completely different purposes.
The VC Method is used by investors to work backward from a startup’s expected value at exit and determine what it’s worth today based on the return they expect to earn.
A 409A valuation is performed for tax compliance. It determines the fair market value (FMV) of a private company’s common stock at a specific point in time, primarily to set compliant strike prices for employee stock options.
VC investors also typically purchase preferred shares with additional rights and negotiate their investment based on the company’s future potential and expected returns. A 409A values common stock based on its fair market value at the valuation date. This is why a company’s 409A valuation is typically lower than the valuation associated with a VC funding round.
To support an accurate venture capital valuation, provide complete, up-to-date information about your company, including your financials, projections, capital structure, traction, market, and any recent developments that could affect its value.
Your projections should be realistic and well-supported, with clear assumptions behind expected growth and future performance. Investors or valuation professionals can then assess those projections alongside market data and other relevant factors.
You should also work with an experienced valuation professional. Startup valuations involve significant judgment, and the appropriate methods and assumptions depend on your company’s stage, financial profile, and circumstances.
Experienced professionals like our team at Eton Venture Services can make sure the valuation is built on the right approach and can be properly supported.
Venture capital valuation uses many of the same underlying valuation principles as other business valuations.
The main difference is the type of company being valued. Startups often have limited financial history, little or no profit, and much greater uncertainty around future performance, so investors may need to rely more heavily on forward-looking assumptions and startup-specific valuation methods.
Here are the main differences at a glance:
Aspect | Venture Capital Valuation | Valuation of More Established Companies |
Financial history | Often limited, particularly for early-stage startups | Usually has a longer track record of revenue, earnings, and cash flow |
Future performance | Often depends heavily on assumptions about future growth, scalability, and exit value | Forecasts can usually be informed by a more established operating history |
Methods used | May use the VC Method, Berkus Method, Scorecard Method, First Chicago Method, comparables, or DCF, depending on the startup’s stage | Commonly uses methods under the income, market, and asset approaches, including DCF and comparable-company methods |
Profitability | The company may be pre-revenue or unprofitable and still have significant value based on its future potential | Historical and expected earnings or cash flow can often provide stronger support for the valuation |
Uncertainty | Typically involves greater uncertainty around growth, profitability, market adoption, and exit outcomes | Usually has more historical evidence available to support assumptions about future performance |
Key considerations | May place greater weight on factors such as the team, market opportunity, traction, scalability, and growth potential | Can place greater weight on demonstrated financial performance, established operations, market position, and expected future cash flows |
There’s no fixed schedule for updating a venture capital valuation. A startup will typically be valued again when it raises a new funding round or when significant changes to the business or market mean its previous valuation may no longer reflect its current position.
For example, major changes in revenue, traction, product development, market conditions, or the company’s outlook can all affect how investors value the business.
This is different from a 409A valuation, which needs to be updated at least every 12 months, or sooner following a material event, if the company is relying on it to set compliant stock option strike prices.
Schedule a free consultation meeting to discuss your valuation needs.
