Early Stage Valuation

CHAPTER 4Seed Stage Valuation and the Venture Capital Method

Andreas Dal Santoand Antonella Puca

A company in the “seed” stage is a new company that is in the process of establishing its commercial operations. In this initial stage there is little or no product revenue and the company is in the process of setting up its management team. At the very inception of the company's operations, funding is typically provided by the founders and a close circle of friends and family. As the company begins to show evidence of a viable product or service, “angel” investors are likely to step in and become a primary source of funding for the company. Angel financing initially consists of relatively small investments ($50,000 to $250,000) from one or a few investors. As the company approaches its first round of venture capital financing (Series A), the size of financing rounds will typically grow to $2–$3 million, with more investors involved. The Series A round marks the graduation of the company out of its infancy and into a world with greater availability of capital and a much wider range of players, including institutional investors.

This chapter examines the approach to valuation for companies that are in the seed stage. The first section considers the market for seed stage companies, in which angel investors have a leading role. The second section presents the notion of premoney and postmoney valuation and discusses how it applies to seed-stage companies. The third section illustrates ...