Post-Money Valuation - Explained
What is Post-Money Valuation?
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Table of ContentsWhat is Post-money Valuation?How is Post-Money Valuation Used? Academic Research on Post-Money Valuation
What is Post-money Valuation?
Post Money Valuation (PMV) is the value of a firm after an external financing and equity injection. It is basically the valuation of a firm after new investments into the company from the angel investors or venture capitalists. Valuations estimated prior to the addition of these financial resources are Pre-Money Valuations. Post-Money Valuation = Pre Money Valuation + A new capital amount obtained from the external stockholders.
How is Post-Money Valuation Used?
The stockholders, angel shareholders, and venture capitalists make use of pre-money valuations to estimate the capital amount they require in exchange for funds invested. Lets suppose, a firm has a pre-money valuation of one hundred million US dollars. A venture capitalist adds twenty-five million US dollars to the firm. This produces a one hundred and twenty-five million dollar post-money valuation (one hundred million dollars pre-money valuation + the twenty-five million dollars of the investor). The stockholder will recieve a twenty percent interest in the firm because twenty-five million US dollars is equivalent to 1/5th of the Post money valuation.The pre-money and post-money valuation is critical in calculating the percentage of ownership of the investor. It is the cornerstone of valuation methods, such as the Venture Capital Method and the First Chicago Method.
Academic Research on Post-Money Valuation
- Valuation of venture capital investments: empirical evidence, Sepp, T. J., & Laamanen, T. (2001). R&D Management, 31(2), 215-230. The authors examine a BV (Binomial Valuation) method in creating the risk-return data of venture equity investments. The method has consistency with the old data of the same. The initial step ventures have greater risk and return volatility as compared to the next steps. Moreover, the authors evaluate the predictive strength of this model and make its comparison with the traditional model.
- Developing the selection and valuation capabilities through learning: The case of corporate venture capital, Yang, Y., Narayanan, V. K., & Zahra, S. (2009). Journal of Business Venturing, 24(3), 261-273. This research aims to check the effects of experience acquisition, diversity and intensity on the progress of choice and valuation abilities that assist the parent firm produce greater financial returns of short duration and make the schematic performance better for the long run. Stage diversity can increase the ability of valuation.
- Fund size, limited attention and valuation of venture capital backed firms, Cumming, D., & Dai, N. (2011). Journal of Empirical Finance, 18(1), 2-15. This research analyses the impacts of financial resources size on the valuations of a company that is acting as an investee in the venture equity market. There is a convex relation in the company valuations and financial resources size. The scale diseconomy is due to the limitations from the quantity and quality of Human Resources in case of growth of financial resources.
- The valuation of cash-flowless high-risk ventures, Messica, A. (2008). The Journal of Private Equity, 43-48. The valuation of venture equity comes under the subject of science, not an art. If we make the forecast of the cash flow absent, we cannot implement the DCF technique (Discounted Cash Flow), which is a traditional technique of venture valuation. The author offers a new VPM (Venture Pricing Model). It is helpful in the venture valuation of high risk and high profit. It is also an effective instrument for decision making.
- Small innovative company's valuation within venture capital financing of projects in the construction industry, Bril, A., Kalinina, O., & Ilin, I. (2017). In MATEC Web of Conferences (Vol. 106, p. 08010). EDP Sciences. This paper presents a challenging solution for the business of venture equity. The firms valuation ensures the buyback procedure in preparing a contract on an initial companys financing in the Russian Federation. The authors present an instance of economic indicators checking and estimation on the initial step of particular modules of the electric framework in the business of construction.
- Negotiating the best valuation and terms for early-stage investment, Bartlett, J. W. (1999). The Journal of Private Equity, 7-14. This paper suggests how to negotiate the optimal valuation and conditions for initial step investment. The author uses various models to interpret the valuation concept.Understanding Valuation: A Venture Investor's Perspective, Callow, D., & Larsen, M. (2003). Boston Millennia Partners. This research is based on the understanding of an important model of valuation. The authors explain venture details from the perspective of a stockholder.
- Valuing young, start-up and growth companies: estimation issues and valuation challenges, Damodaran, A. (2009). The valuation of new firms is not easy due to several reasons. Some are on the initial step with the least revenue or no profit, no loss. The authors elaborate the critics of venture equity model for the valuation. It is used worldwide, but according to the writers, it must be renewed with some changes.
- Basic venture capital formula, Sahlman, W. A., & Willis, R. M. (2003). Note, August. In this paper, the authors present a formula for measuring fundamental venture equity.
- A world of difference? The impact of corporate venture capitalists' investment motivation on startup valuation, Rhm, P., Khn, A., Kuckertz, A., & Dehnen, H. S. (2018). A Journal of Business Economics, 88(3-4), 531-557. This research makes categories of the CVCs (Corporate Venture Capital) into further groups through the examination of their planned and motivated financial investment. The authors use CATA (Computer Aided Text Analysis) and also the Cluster Analysis to differentiate the valuations of the startups.
- Can European unicorns defend the high valuations?: a challenge of the post-money valuation approach, Lomheim, K. H., & ritsland, O. T. (2018). (Master's thesis). The authors take a sample of twelve European models to demonstrate that the post-money valuations exaggerate the VC backed firms value. For this, they propose a DCF model. Most of the samples are overvalued while there are also some companies that are a bit undervalued. So, a number of companies require abnormal functional improvement.
- Post-money valuation, Hbner, G. (2008). Encyclopedia of Alternative Investments, 362. This study highlights the important concepts related to the post-money valuation and the scenarios, in which it leads to loss.