How it works
Valuation is the value assigned to a company in an investment round. It is expressed as pre-money, value before the investment, or post-money, value after the investment includes the new capital.
The calculation combines several factors: current revenue, ARR, annual recurring revenue, growth rate, addressable market, TAM, comparables, multiples of similar companies, and qualitative factors such as team, technology and moat. For AI startups, valuation tends to be high because the market expects accelerated growth.
The practical formula: if a startup has ARR of 10 million and the sector multiple is 20x, the valuation can be 200 million. But the multiple varies a lot: early stage AI startups can have multiples of 50x or more.
Practical example
An AI startup with ARR of 5 million and growth of 300% per year can be valued at 100 to 250 million, depending on stage and market. If it raises 25 million in a Series A round, the investor receives about 10% to 20% of the company, post-money of 125 to 250 million.
For a founder, understanding valuation matters because it determines how much of the company you give in exchange for capital and what the level of investor expectations is.
What it is used for
It is used to negotiate investment rounds, define each partner's stake and evaluate acquisitions. It is also used by investors to compare opportunities and by founders to understand the cost of capital.
Difference between pre-money and post-money
Pre-money is the value of the company before receiving the investment. Post-money is pre-money plus the invested capital. If pre-money is 100 million and the investment is 25 million, post-money is 125 million. The investor's stake is investment divided by post-money, 25/125 = 20%.