Venture Capital Method

The Venture Capital Method for valuations of startups is one of the most widely used methods, especially for startups without revenue. It was developed by Bill Sahlman, a professor at Harvard Business School, in 1987. He created it as a way to help investors work backwards from a future outcome instead of guessing with numbers that don’t exist yet. Unlike some of the other methods that score on qualitative traits, this method is almost all quantitative which makes it appealing to many. 

There are 6 steps to this process:

• Estimating the investment needed

• Forecasting the startup’s financials

• Determining the timing of exit

• Calculate the multiple at exit

• Discount to PV at the desired rate of return

• Determine the valuation and desired ownership stake

The first step is to estimate the investment needed. This is just the amount the founder is asking for in this round. While it sounds simple, it’s the anchor for everything else in this method. Investors want to see this number tied to a real plan. Examples of this include hiring new talent, launching in a new market, or hitting a new milestone. They essentially want to see a reason to justify this, and the next round of funding.

The next step is to forecast the startup’s financials. Since this method is used a lot for pre-money startups, this step requires projecting several years of growth to be able to guess what the company’s revenue will look like at the time of exit. Since there’s no internal financial history to look at, most investors look at comparable companies in the same industry and area. The more thorough and realistic this forecast is, the more credible the valuation is.

The third step is to determine the time of exit. Most startups evaluated with this method use a 5-7 year horizon, since that’s typically how long it takes for a company to go from early-stage to IPO/acquisition. This step is really important because it directly affects how much the future value gets discounted later. A shorter timeline means less discounting, while a longer one shrinks the present value more.

The fourth step is calculating the multiple at exit. This number is based on a lot of research. Investors usually use an industry-appropriate standard, and apply it to the number from step 2. An example is if the company is expected to have $10 million in revenue by year 5, and other companies in that industry typically sell for 8x the revenue, the projected exit value would be $80 million. 

The fifth step is discounting that exit value back to the present value at the desired rate of return. This is where the investor’s risk is factored in. Early-stage investors look for very high annual rates of return. This is due to the fact that so many companies fail, so the ones that succeed have to make up for the losses in the others. This required rate of return, combined with the number of years until exit, is used to shrink the exit value into what the company is worth today.

The last step is to determine the valuation and desired ownership stake. Once the present value has been calculated, that number becomes the post-money valuation. From there, dividing the investment amount by the post-money valuation gives the investor's ownership percentage. Subtracting the investment from the post-money valuation also gives the pre-money valuation, which is typically the figure that ends up in the term sheet.

This method has a few pros and cons. It has actual expected returns, which gives both sides clear views for negotiations. It forces founders to agree on assumptions about the future instead of vague ideas of worth, and is based on a lot of research. Its weaknesses are mainly about how many assumptions the model is based on. A lot of the steps are projections, and small changes can have a big impact on the valuation. This method also doesn’t account for future funding, so the percentage that an investor actually ends up having is lower than what’s typically projected in this model.

Still, this method remains one of the most common and trusted for evaluating early-stage companies because it turns the future into a predictable number. It’s not perfect, but it gives both sides a shared starting point and explains why, if you’ve ever watched Shark Tank, the early checks come with investors wanting large shares of the company.

Works Cited

Hinckley, Mike. “Venture Capital Valuation: A Guide to Valuing Startups.” Growth Equity Interview Guide, https://growthequityinterviewguide.com/venture-capital/venture-capital-term-sheets/venture-capital-valuation. Accessed 6 September 2026.

“Venture Capital Valuation (VC).” Wall Street Prep, 11 June 2024, https://www.wallstreetprep.com/knowledge/vc-valuation-6-steps-to-valuing-early-stage-firms-excel-template/. Accessed 6 September 2026.

Walton, Chris. “Venture Capital Valuation: 7 VC Valuation Methods & the Process.” ETON Venture Services, 2 September 2025, https://etonvs.com/valuation/venture-capital-valuation/#elementor-toc__heading-anchor-7. Accessed 11 September 2026.