Walk me through the VC method for a pre-revenue company raising a Series A — and its known flaws.
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Work backwards from the exit: estimate an exit value in year five to seven — typically a revenue or earnings multiple on the company's projected scale — then discount it to today at the fund's target rate of return, often 40-60% for early stage, to get the post-money valuation. Pre-money is post-money minus the new round, and the required ownership is investment over post-money, adjusted for expected dilution from future rounds and the option pool (the pool is typically carved out pre-money, which quietly shifts dilution to founders). The flaws are structural: the 'discount rate' is not a cost of capital but a bundle of failure probability, illiquidity and fund economics; the exit value is a scenario dressed as a number; and the method values the financing round rather than the enterprise. That's why practitioners triangulate with comparable round pricing and scorecard-style adjustments — and why interviewers reward candidates who can both execute the mechanics and name what the mechanics hide.
WHAT INTERVIEWERS LISTEN FOR
- ✓backwards from exit value at target multiple
- ✓40-60% target returns bundle failure risk and illiquidity
- ✓post-money → pre-money → ownership, adjusted for future dilution
- ✓option pool carve-out shifts dilution to founders
- ✓flaw: values the round, not the enterprise — triangulate
COMMON MISTAKES
- ✗treating the target return as a CAPM-style discount rate
- ✗ignoring future-round dilution in ownership math
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