Establishing a price for investment with a VC is a difficult experience. Part of the reason is that valuing high growth (high risk) companies requires a lot of judgment. Valuation is an art, not a science, they used to tell us…
It is always helpful for a seller to understand how a buyer approaches a valuation. Here is a post from Fred Wilson on the topic.
There are a lot of theoretical holes in the approach, as outlined, and a lot of debatable valuation issues, such as: the use of Enterprise Value; the appropriateness of EBITDA multiples applied to historical, current or future earnings; revenue multiples; and, the thereafter “exit” valuation.
Regardless, the approach is common in the VC world and, therefore, a good primer for entrepreneurs.
Posted by Scott Sinclair, Range Corporate Advisors
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