Pre-money valuation is one of the important numbers that you will consider on a balance sheet when deciding whether to invest in a company. Here’s what you need to know about pre-money valuation, whether you’re an angel or venture investor or a company in need of financing.
What is Pre-Money Valuation?
Pre-money valuation is how much a company is worth before it gets other sources of income, such as loans or investments. It is how much a company is worth before there have been investments made into it.
Unless an entrepreneur has a tremendous amount of personal wealth, they will likely need to accept loans or investments, which will make the pre-money valuation quite different than the post-money valuation. Pre-money valuation is important to investors who want to know what share they will have in the company based on how much they invest.
Fluctuating Pre-Money Valuation
The pre-money valuation is not constant. It varies depending on a number of aspects, which may cause a company to be more or less valuable aside from outside investments or loans.
Whenever a company wants to get financing from private or public sources, they will have the pre-money valuation determined. Before a company is traded on the public market for the first time, pre-money value will certainly be determined. If you’re trying to find an angel investor or venture funding, you will present your pre-money valuation to them.
How do Investors Use Pre-money Valuation?
Investors use the pre-money valuation to decide how much money they want to give the company and what share of the company they will get for this investment. There is sometimes debate about the pre-money valuation, as the aspects that affect it may not be black and white.
Sometimes there will be debate back and forth between company leadership and a potential investor, with a company claiming that their company has a higher pre-money valuation than the investor is suggesting. The lower the pre-money valuation, the more income the investor has to gain, and the more share in the company they will own.
Calculating Pre-Money Valuation
If you have post-money valuation, determining pre-money valuation is quite simple. Simply subtract the investment amount from the post-money valuation, and you will have the pre-money valuation.
What if the Company is Not Yet Active?
If your company isn’t yet producing products or services, you may wonder how the value could possibly be determined. In the absence of income from company activities and sales, investors can bace the pre-money valuation on comparison with similar companies.
If a company is creating a brand new industry, which is quite uncommon, the pre-money valuation can still be determined using the finances of previous businesses that started a new industry. For instance, if you want to know how a company producing a new kind of electronic device will do, look at how companies in the past who produced new electronic devices.
Where to Get Money
Practically all companies need an influx of money from a loan or an investor as they grow. There are a number of options for where you can get money to grow your business.
The advantage of taking out loans if that while you’ll have to pay them back, you won’t lose any ownership of the company. If you have good credit and your company is already making a good income, there’s a great chance that you’ll be able to get a reasonable loan to grow your company.
Starting your company with a loan may be more challenging, but if you have a great business plan and can convince a lender that you will be successful, you may well be able to take out a business loan to get started.
Venture investors are willing to take on the higher risks of investing into individual companies to accrue the payoff of ownership as the company grows. Venture investors are made up of groups of people with shared goals in risk and income generation.
There is generally a professional firm in charge of making decisions about which investments to make. Venture investors may put small amounts into a number of startups, or they may only back only one or two companies, depending on the management decisions of the group.
An angel investor is usually only one person who has substantial finances to back a startup. Generally, these investments are quite substantial and may be the initial income needed to start a business or boost its growth. Angel Investors often have a personal stock in the company. They may be the one who started it or they may be closely related to an entrepreneur whose idea they believe in.
Determine Your Pre-money Valuation
If you are looking for investors for your startup, determining your pre-money valuation is an essential first place to start. If you’re not sure what it is, do your research to see what the pre-money valuation is for other comparable businesses so that you won’t be taken for a ride once you do find investors.