How Early-Stage Valuations Are Really Set

What investors actually use

Gompers, Gornall, Kaplan and Strebulaev asked 885 venture capitalists in 2016 how they value companies. The most common evaluation metric was the cash-on-cash multiple — how many times its money the fund expects back — used by 63 percent, followed by the internal rate of return at 42 percent. Only 22 percent used net present value methods. Nine percent of all respondents, and 17 percent of early-stage investors, used no quantitative evaluation metric at all; 20 percent of all and 31 percent of early-stage investors said they do not forecast cash flows when they invest.

Asked what drives the valuation they offer, exit considerations came first — 86 percent called them important and 46 percent the most important factor — followed by comparable company valuations (80 percent important, 29 percent most important) and the investor's desired ownership (63 percent important, 18 percent most important). Competitive pressure from other investors was rated important by 43 percent, though the authors found it mattered more in information technology than in healthcare.

Those who did state hurdles were demanding: an average required internal rate of return of 31 percent and an average required multiple of about 5.5 times, with a median of 5, higher for smaller and earlier-stage funds. Those figures are the investor's way of pricing in the power law from Lesson 1.1: most investments fail, so the ones that work must return a great deal.

The venture capital method

Damodaran's 2009 paper on valuing young companies describes the approach most widely used. Estimate the company's revenue or earnings a few years out — two to five years, typically matching when the investor expects to exit. Multiply by the multiple at which comparable public companies trade, or at which comparable companies were recently sold, to get a value at exit. Discount that value back at a target rate of return high enough to cover both the business risk and the chance the company does not survive; his table gives typical targets of 50 to 70 percent for start-ups and 40 to 60 percent for first-stage companies.

A worked example. A company expects 20 million dollars of revenue in five years in a sector where comparable companies are valued at six times revenue: a 120 million dollar exit value. An investor targeting a ten-times return on this round needs the round's post-money to be no more than 12 million dollars — 120 divided by 10 — before accounting for dilution from future rounds, which pushes the acceptable price lower still. Work the same example with a five-times target and the ceiling is 24 million. The method's sensitivity to the target multiple is the first thing to notice.

Damodaran's criticism is the second. Because the value rises with projected revenue, the method turns projections into a bargaining position: founders push them up, investors push them down, and the 'estimate' becomes a negotiation. It also cuts off the forecast early and borrows today's multiples for a sale years away, and it folds the probability of failure into one high discount rate rather than estimating it. Those are reasons to treat the result as a range and a negotiating vocabulary, not as a measurement.

Comparables and target ownership

In practice, two inputs anchor most early-stage prices more than any model.

Comparables are what similar companies raised at recently. The 2026 medians from Lesson 1.3 — seed pre-money around 18.3 million dollars, Series A around 60.3 million — are the broadest comparables there are, and investors in a given sector, stage and geography will have narrower ones in their heads. The PitchBook-NVCA data also shows a large premium for AI companies at every series in 2026, which means an AI company and a non-AI company quoting the same median are quoting different markets.

Target ownership is the investor's portfolio arithmetic. A fund that needs to own a certain share of each company to make its returns work will often hold that share roughly constant and let the price adjust to the round size. If an investor wants 20 percent and the company needs 4 million dollars, the post-money is 20 million almost by definition. That is why changing the round size often moves the price more than any argument about the business does.

For SAFEs, the same reasoning sets the cap. The YC user guide's observation that founders and investors usually negotiate only one item — the valuation cap — means the cap carries all of this weight.

Arguing a price

With those methods in view, a founder or desk can prepare a range and defend it.

Start from comparables for your stage, sector and geography, and be honest about which side of the median your company sits on and why. Show the exit logic: a credible path to the revenue scale at which your sector's companies are valued, so the investor's own venture capital method yields a price you can live with. Know the investor's target ownership, and size the round to it — a smaller round at a fair price can beat a larger one that forces the price down. And remember that competition between investors was, in the survey, a secondary driver of price on average but a real one in competitive sectors: the strongest valuation argument is another term sheet.

For a placement agent the job is the same on the issuer's behalf, with one addition. A price the desk cannot support with comparables is a price the desk's investors will not pay, and a mandate taken at an unsupportable valuation is a mandate that will fail in public.