Key Differences Between Pre and Post-Money Valuation
You are probably familiar with the term “valuation” which is commonly used when discussing funding rounds. Valuation is the process of assigning a monetary value to a company. With the advancement in the financial landscape, the methods and tools of valuation have become more robust and sophisticated. While the two terms associated with valuation are pre-money and post-money valuations, which are purely based on the event’s funding rounds. Considering how the terms are often misused, it is essential to supply clarification on the differences between pre and post-money valuations.
Pre-money refers to the valuation before any money is raised. Post-money refers to the valuation after the money has been raised. Both terms indicate a company’s value before or after a specific event such as an investment round.
Pre-Money Valuation
The pre-money valuation is a company’s estimated initial value which is before external capital is invested in a company or any latest round of financing has occurred. The pre-money valuation is usually done during the due diligence process. It is usually to determine a company’s valuation by applying a valuation methodology to a company’s financial data.
Post-Money Valuation
Post-money valuation is done after an investment is made in a company, or in other words after external capital is injected into a company. A company’s post-money valuation is usually supported by the amount of capital used plus the net cash flow from operations. Post-money valuation is highly dependent on the amount of money that has been invested into a company and its ability to generate income over time.
According to statistics, the average amount of funding from Series A to Series C in the United States ranges from $20.4 million to $89.5 million. This shows the need for pre-money and post-money valuation to be done in order to secure, evaluate and finance investment.
Now that we are familiar with the two terms, it is important to note that both pre-money and post-money valuation is a fundamental process in evaluating and financing a company. In this light, it is imperative to draw a distinction between the two terms to avoid confusion. Here are the top differences between pre-money vs post-money valuation:
Sources and Data
A pre-money valuation relies on the company’s historical data, performance, and future projections in order to present a fair value of it. Due to the fact that a pre-money valuation is done before the capital has been injected, the data and metrics in the analysis are based on certain assumptions.
On the other hand, a post-money valuation is based on the actual amount of cash invested, appreciation in the capital, and effects of the investment on the company’s operations. It is more likely to be more realistic as actual cash flows are considered.
Purpose and Objectives
The purpose of a pre-money valuation is to guide the company’s decision on making an investment. As such, pre-money valuation determines a baseline for investors, especially when a company is seeking funding. Additionally, pre-money valuation is done for other purposes such as structuring an investment round, making an acquisition deal, or evaluating a potential strategic partner.
While a post-money valuation is done more to determine the success of the investment and to gauge the company’s growth after the investment, it is also done to compare the company’s value before and after the investment.
Reliability and Credibility
Pre-money valuation is based on assumptions and projections and thus is prone to errors. With this, the pre-money valuation may not be completely reliable as the metrics applied in generating it might suffer from certain inaccuracies. It is important to ensure that the assumptions, projections, and valuation methods used in the analysis are based on facts and reliable data.
While a post-money valuation is based on actual facts and figures that are considered in making a thorough evaluation of the company, this is because a post-money valuation is done after the capital has been invested in a company and its operations are already reflected in its actual performance.
Valuation Methodology
So how to calculate pre-money valuation? In general, the most common valuation methodology used in a pre-money valuation is the Berkus Approach, Cost-To-Duplicate Approach, Future Valuation Method, the Market Multiple Approach, the Risk Factor Summation Method, and Discounted Cash Flow (DCF) Method. These valuation methods are commonly used as they provide the necessary data to support the pre-money valuation.
In contrast, calculating post-money valuation is more likely to be based on the simple calculations of the company’s capitalization, which is the sum of the money invested plus the net value of the company (pre-money valuation). This is due to the fact that a post-money valuation is done after the investment has been made.
Understanding the difference between pre-money and post-money valuations is not just important in raising capital, but in all the financial transactions that we undertake. From strategizing, planning, and executing operations to investing and structuring an investment round, valuation should be one of the main elements to look at when making any financial decision.
To sum up, pre-money and post-money valuation are the two critical and integral components in a company’s financing and investment process. Without either of the two, it would be impossible for investors and companies to have a framework in which to evaluate and assess the value of a company. Having said that, understanding the two terms and making a distinction between them allows better processes to be implemented.
Eqvista provides valuation solutions that include pre-money and post-money valuation. The advanced methodologies and analytics in calculating a company’s valuation allow for an accurate valuation of the company. Eqvista’s best-in-class valuation tools are designed for detailed and reliable analysis, making it a powerful financial reporting tool. Be it for raising capital, equity investments, mergers and acquisitions, or other financial transactions, Eqvista provides solutions that are sure to meet the needs of any business.
