The VC valuation method was introduced by Harvard Business School Professor Bill Sahlman. It works out pre-money valuation by first determining post-money valuation, using industry metrics. The idea is.... VC's along with other investors realize their returns when a liquidity event (an exit) occurs and they expect a rate of return on their investments.

How does the Venture Capital Valuation Methodology Work?

The venture capital valuation methodology is simple and stems from the following equations:

ROI = terminal value / post-money valuation;

which means

Post-money valuation = terminal value / anticipated ROI

to arrive at Pre-money valuation:

Post-money valuation - funding round = Pre-money valuation

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