"How is this company worth $10 billion?"Startup valuations confuse many investors. Numbers seem arbitrary, disconnected from fundamentals. But there is logic - once you understand the methods.This guide explains how professionals actually value startups. By the end, you'll be able to assess whether any valuation makes sense. For a broader framework on evaluating deals, see our guide to evaluating pre-IPO opportunities like a professional.
Step 1: Understand Pre-Money vs Post-MoneyBefore any math, understand these basic terms:Pre-Money ValuationWhat the company is worth BEFORE the new investment.Post-Money ValuationWhat the company is worth AFTER the new investment (pre-money + new investment).Why It MattersExample: Company raises $10M at $50M post-money valuation.Pre-money valuation: $40MNew investment: $10MInvestor ownership: $10M ÷ $50M = 20%If you're buying at "$50M valuation," you're paying post-money price. The company was only worth $40M before your money went in.The Dilution TrapEach funding round dilutes existing shareholders. A company worth $10M at Series A might be "worth" $100M at Series C - but if they raised $80M along the way, early investors own much less than they think.
Step 2: Revenue Multiple MethodThe most common valuation method for growth-stage startups.The FormulaValuation = Annual Revenue × Revenue MultipleFinding the Right MultipleMultiples vary by:Industry: SaaS trades higher than servicesGrowth rate: Faster growth = higher multipleMargin profile: High gross margins justify higher multiplesMarket conditions: Bull markets = higher multiplesTypical Multiples (as of 2025-2026)SaaS (>40% growth): 10-20x revenueSaaS ( 5-10x revenueE-commerce: 1-3x revenueFintech: 5-15x revenueMarketplaces: 2-5x GMV or 10-20x take rate revenueExample CalculationSaaS company with $20M ARR growing 100% YoY:Market multiple for high-growth SaaS: 15xValuation: $20M × 15 = $300M
Step 3: Comparable Analysis (Comps)Compare to similar companies that have been valued.Finding ComparablesLook for companies with similar:Business modelGrowth rateMarket sizeStage of developmentSources for CompsPublic markets: Similar public companies provide benchmarksRecent funding rounds: What are similar private companies raising at?Acquisitions: What multiples were paid in M&A deals?The Comparison FrameworkCompanyRevenueValuationMultipleGrowthCompany A (public)$100M$1B10x30%Company B (recent round)$50M$600M12x50%Target company$30M??????60%If target grows faster than comps, deserves higher multiple. Maybe 14-15x = $420-450M valuation.
Step 4: DCF for Late-StageDiscounted Cash Flow works better for profitable or near-profitable companies.The ConceptValue = Sum of all future cash flows, discounted back to today's dollars.Simplified FrameworkProject cash flows for 5-10 yearsApply terminal value for years beyond projectionDiscount to present using appropriate rate (typically 20-30% for startups)Why VCs Often Skip DCFEarly-stage companies have:Negative cash flowsHighly uncertain projectionsRevenue multiples that better capture growth optionalityDCF works better for pre-IPO companies with clear path to profitability.When to Use DCFCompany is profitable or nearly soBusiness model is proven and scalableCash flows are somewhat predictable
Step 5: Spot OvervaluationNot all valuations are justified. Here's how to spot problems:Red FlagsMultiple far above comps: 30x revenue when peers trade at 10x? Why is this company 3x better?Circular logic: "It's worth $1B because the last round was at $800M." What if that round was overpriced?Pro-forma everything: Valuations based on projections, not actual results.Vanity metrics: Valued on users, not revenue. If users don't monetize, they're worthless.The "Entry vs Exit" TestWork backwards:If this company IPOs, what's a realistic public market valuation?Is that valuation higher than current private valuation?Is the gap big enough to justify the risk and illiquidity?If a company is valued at $10B privately but comparable public companies trade at $8B, you're buying at a premium with no exit.The 2021 ProblemMany 2021 valuations assumed ZIRP (zero interest rate) conditions forever. When rates rose, multiples compressed. Always ask: "Does this valuation work in a normal rate environment?" Many companies that should have stayed private were victims of exactly this dynamic.
Tools and ResourcesData SourcesPitchBook: Comprehensive private market data (paid)CB Insights: Funding rounds, valuations (paid)Crunchbase: Basic funding data (free tier available)Public Market CompsKoyfin: Public company multiples and financialsSimply Wall St: Visual valuation analysisCompany filings: SEC EDGAR for public company dataValuation CalculatorsMany VC firms publish valuation frameworksIPO Genie's AI analysis includes valuation assessment
Frequently Asked QuestionsQ: Why do similar companies have different valuations?Growth rate is biggest driver. A company growing 100% YoY might trade at 20x revenue while a 20% grower trades at 5x. Also: competitive position, management team, capital efficiency, and market timing.Q: What's a "unicorn" worth exactly?A unicorn is any company valued at $1B+. But that $1B can be justified or absurd depending on fundamentals. Never assume unicorn status means good investment.Q: How do I know if I'm paying too much?Compare to public market comps. If private valuation is >1.5x similar public companies, you're paying a premium for illiquidity - which should be a discount, not premium.Q: Should I trust the company's projections?No. Assume projections are optimistic. Discount revenue forecasts by 30-50% and see if valuation still makes sense. Professional investors rarely believe management projections.Q: What multiple should I use for crypto/Web3?Revenue multiples are harder in crypto - many projects have minimal revenue. Look at TVL, protocol revenue, or token revenue (if any). Be skeptical of valuations based only on FDV and narratives.
