Pre-money valuation refers to the estimated value of a company or a startup before it receives additional funding in the form of an investment round. It represents the worth of the company as determined by its founders, investors, or financial analysts before any external funding is injected.

How Is Pre-Money Valuation Done?

Pre-money valuation involves assessing the value of a company before it receives additional funding in an investment round. Here is a breakdown of how it is calculated:

Comparable Analysis: This means making a comparison between similar companies in the industry that have undergone recent funding rounds or have been acquired. Comparing their valuations, growth trajectories, revenue, and market positions can provide benchmarks for the company being valued.

Market Multiples: Estimating value by using multiples based on sales, profits, or customers of similar businesses. A company's worth could be determined by multiplying its yearly income, for instance.

Discounted Cash Flow (DCF): The process of projecting future cash flows for a business and discounting them to their present value is known as discounted cash flow, or DCF.  This method requires making assumptions about future performance and growth.

Asset-Based Approach:  Determining the company's worth by looking at its material and immaterial assets, such as cash reserves, real estate, equipment, and intellectual property.

Stage of Development: A company's valuation can be greatly impacted by taking into account its scalability, market potential, and growth stage. Early-stage companies might be valued differently than more mature, revenue-generating ones.

Negotiation: Discussions between potential investors and the company's founders ultimately influence the pre-money valuation through negotiation. It creates a balance between what the company believes it is worth and what investors are willing to pay.

Example

Let's consider a historic funding round for a company:

Company: Uber

In 2010, Uber raised funding at a pre-money valuation of around $60 million. At that time, they secured approximately $11 million in funding.

Using the formula for post-money valuation: Pre-money valuation + Investment amount = Post-money valuation

The pre-money valuation of Uber in 2010 = $60 million

Investment amount = $11 million

Therefore, the post-money valuation after the investment in 2010 was around $71 million ($60 million pre-money valuation + $11 million investment).

This means that the investment of $11 million represented approximately a 15.5% ownership stake in Uber at that time, as the total value of the company increased to around $71 million post-investment.

Pre-Money And Post-Money 

Pre-money and post-money, although directly linked, have their differences. 

Pre-Money Valuation:

Pre-money valuation is the estimate of a company's value before any outside funds or investments are made. It is decided by considering the company's assets, market potential, revenue, growth prospects, and other relevant factors prior to the infusion of additional funds.

It serves as a baseline valuation used during investment negotiations and determines the ownership percentage an investor will receive for their investment.

Formula: Pre-money valuation + Investment amount = Post-money valuation

Post-Money Valuation:

Post-money valuation is the value of a company immediately after external funding or investment has been added to it. It's derived by adding the investment amount to the pre-money valuation. Post-money valuation determines the total value of the company after the investment round, which affects the ownership stake investors receive in exchange for their capital.

Formula: Pre-money valuation + Investment amount = Post-money valuation

Post-money valuation is determined after the investment has been received, whereas pre-money valuation is determined prior to the investment round. Additionally, pre-money valuation serves as the foundation for investment negotiations, establishing the ownership percentage that an investor will purchase. Post-money valuation reflects the new value of the company after the investment round.