Here we look at the most common methods used by VC funds for valuing startups at the late seed or series A stages where a pre-money valuation needs to be negotiated with a VC fund investor to complete a round of capital. This ultimately means that a valuation is needed if an investor is going to invest.

This stage is defined by the stage in the development lifecycle where product market fit or PMF has been achieved, where you have an ideal match between what the startup is offering and what the market demands. At this stage, valuation is still focused on the company's qualitative factors, since they won't yet be generating substantial revenues and certainly not any profits, but there might be some estimated profit forecasts that have begun to be produced. The main method for valuation used at this stage is the VC method.

The venture capital method, or VC method is used by many VC funds to calculate the theoretical valuation of a startup based on their target return on investment, ROI or target IRR, internal rate of return.

The quick and dirty calculation is for the VC fund or any investor to estimate the price at which they would exit. Assuming the startup will be acquired by another company, or the startup will go public at some point in the future.

Let's estimate this future exit value to be a hundred million dollars. Now, to calculate the current post money value, the VC method then requires that this estimated exit price is divided by their target return on investment If we assume a 20 times return in this example, the post money valuation for the startups equity is now $5 million, 100 million divided by the 20 times.

To calculate the pre-money valuation for the startups equity, now just subtract the investment being made by the VC fund. Let's assume the VC fund is looking to invest 2 million. That way you can derive the pre-money valuation in this case of $3 million.