I answered a question recently from a linkedin connection, to see if it sparks any debate I thought I'd repeat it here:
How should Web 2.0 companies value their businesses when looking for investment?
For what it's worth my answer was...
This is really crude but really meant to be a framework for you to do your own numbers...
- Take an exit that has happened that looks in the same ballpark as where you'd realistically hope to end up..... e.g. Feedburner sold for (I believe around) $100m
- Assume you'll need at least one more round of finance that currently planned (that's just the way it usually seems to work out!) and that the next round VC's will therefore demand 40% now to have 25% of the final exit- i.e. $25m from the proceeds.
- The next round VC's need a 10x markup in that scenario, so that sort-of works. i.e. they might give you $2.5m for that 40%
- Therefore your company is maybe worth $3-4m.
I'd suggest that If you take this model and then factor some differences for your own deal you'll not be a million miles out! Bear in mind strange things can happen when there has been a massive exit but there are zillions of competing early-stage companies ;-)
Best of luck with the round!
Ed
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Any views?
