The VC Method: how investors calculate your startup's valuation
The backwards math funds run — exit value, required return and future dilution — with a worked example.
When an investor asks "what's your valuation?", they already have a model. The VC Method doesn't try to forecast cash flows (impossible at pre-seed and seed): it starts at the exit and works backwards.
Three steps
- Estimate the exit value: revenue in the exit year × a multiple from comparable companies.
- Apply the required return: early-stage funds usually want 10x their money, or 25% to 40% IRR per year.
- Account for future dilution: later rounds will dilute today's investor too.
The example
$10M of revenue in the exit year at a 10x multiple: a $100M exit. The fund wants 10x. With no future dilution, today's post-money is 100 ÷ 10 = $10M. With a $2M investment, pre-money is $8M and the investor owns 20%.
Now add two future rounds of 20% each. Only 0.8 × 0.8 = 64% of today's stake survives. The post-money the fund will accept drops to 100 × 0.64 ÷ 10 = $6.4M.
What it changes in a negotiation
Two founders with the same revenue get different term sheets because required returns differ between funds. Knowing the math on the other side lets you argue the assumptions (multiple, timeline, dilution), not just the final number.
The VC Method calculator shows post- and pre-money, each side's stake through exit, a sensitivity table and, next to it, what the investor will check: runway, burn multiple, CLTV:CAC and retention.