Comparing valuations between rounds

By April 10, 2015Venice Project

We’ve just been writing an update for investors about the progress our partner companies have been making. A few of them have done good up rounds and the easiest way to describe the magnitude is to talk about the valuation multiple.

From the perspective of existing investors the right way to calculate the valuation multiple is to compare the pre-money valuation of the new round with the post-money valuation of the last round, which is the same as the increase in share price. (As a refresher, the post-money valuation is calculated as the pre-money valuation plus the amount of money invested.)

Investors and entrepreneurs alike want to present the progress in the best light by showing the biggest multiple they can and they often default to comparing the post-money valuation of the new round with the post-money valuation of the last round. At first glance that seems to be a fair representation of how far things have moved forward, but it doesn’t account for the impact of the new money.

This is best explained with a fictitious example.

  • ACME Hot Food co first raises a round of £2m at £6m pre-money and hence £8m post-money
  • Twelve months later the company raises a further £8m at £8m pre-money and hence £16m post-money
  • The share price and valuation of the company hasn’t moved forwards because the new investor valued the company at £8m, the same as the post-money valuation of the previous round – the share price won’t have changed
  • Comparing the pre-money valuation of the new round with post-money valuation of the old round shows this clearly – £8m to £8m – ACME Hot Food co has achieved something in raising more money, but there has been no uplift in valuation
  • However, comparing the post-money of the new round with the post-money of the old round gives the illusion that the valuation has doubled – £8m to £16m

Note: if the option pool has been increased between rounds this will have the effect of reducing the increase in share price and should be factored into the analysis.

  • Miles Lambie

    Nice article, Nic – agreed that pre to post gives the correct view of valuation uplift. However, in terms of progress, although ACME Hot Food hasn’t raised at a better valuation, would it not be fair to say that the fact that investors are confident enough to put in £8m more to help grow the business (vs. £2m for the previous round) is indicative of some progress, albeit not quite what original investors were hoping for?

  • Hi Miles – yes – the new round is definitely a positive sign.