Post-money valuation is one of the essential numbers that any business presents on its balance sheet when it wants to win investors or loans. Here’s what you need to know about post and pre-valuation and how to improve your balance sheet numbers.
Understanding Balance Sheets
To understand post-money valuation, you must first have a knowledge of balance sheets. The balance sheet informs about the assets and liabilities of a given company. It also informs of the shareholder or shareholders equity at the time that the sheet is produced.
In short, it is an overarching financial statement about how much a company is worth and how much has been invested into them at a given time.
Balance sheets work intuitively to “balance” assets against liabilities and shareholder equity to determine a company’s available assets.
Shareholder’s Equity + Liabilities = Assets
It sounds complicated at first, but it makes a lot of sense. Companies need to pay for the things that they buy. Unless they happen to be starting off with a very large amount of initial capital, they’ll need to borrow money, which is known as liabilities, or get investors to put money in, which is known as shareholder’s equity.
As a rule of thumb, the more money is loaned out or invested, the more interest the investor or lender will take. The longer a company uses the money without returning it, the more they may have to pay in interest as well.
Balance sheets can’t say anything about trends over time, only how a company’s finances stand at a particular moment. Early in a company’s history or after a big growth period, you might expect the liabilities to be higher, since companies will have just borrowed and not had time yet to pay back the loans. Looking at balance sheets over time can help to inform how a business operates over time.
What is Post-Money Valuation?
After any outside financing or capital sources are added to a company’s balance sheet, the company’s estimated value is the post-money valuation. It often is used to determine the value that a start-up has in the market.
What is Pre-Money Valuation?
The value of a company before outside financing and sources of capital are deducted is known as the pre-money valuation. This is the money that a given startup has before it starts getting investments.
Sometimes it can be hard to determine what a company might be worth prior to investment dollars. Investment money is straightforward to calculate, but the value of a company prior to investment is often more complex to understand.
Comparing Post and Pre Money Valuation
Pre-money valuation + equity from outside = post-money valuation.
The bigger the difference between the post and pre valuation, the more a company has taken financial assistance from outside, and the more interest those outside investors or lenders have in the company. The more that an investor puts into a company, the larger percentage they generally expect to have in ownership of the company.
Where Does Post-Money Valuation Come From?
Post-money valuation is the estimated market value that a startup has after they have received financing from angel investors and venture capitalists. But what are these investors and what effects do they have on Pre-Money and Post-Money Valuation?
An angel investor is a private investor, generally an individual, who offers significant financing to an entrepreneur or startup. Most of the time, these investors expect a substantial share of ownership in the company in return.
An angel investor must have a very high degree of faith in a startup to entrust them with the kind of sums required to make a significant impact on a young business. These funds are often a single, one-time investment which the company uses to get off the ground. Angel Investors may also step up to help a company through a second growth period or a hard spot.
Many investors want investment opportunities that provide reasonably high payoff with the lowest possible risk. However, some investors are willing to take more risks for a higher payoff. Venture capitalists take a risk on providing significant capital to startups in exchange for the opportunity for ownership. Venture capitalist must be able to spot a small company that has the potential for tremendous growth to make good investments. Usually a number of partners invest into a fund that makes the investment decisions. Risks vary, but in general, these are considered some of the higher risk and reward investments.
How to Improve your Post-Money Valuation
If you are having trouble obtaining investment or even loans to get your business off the ground, you may find yourself in an endless loop in which your balance sheets do not encourage investing, which in turn means that pre and post-money valuation can’t improve.
Investors often like to see other investors who have already made the decision to take a chance on your company. If you’re having a hard time getting venture capitalists involved, consider seeking out an angel investor who believes in what you’re doing to knock you out of the rut and jolt your business into success.