VR Valuation Estimates: How They Work

While we don't want to give away our complete algorithm to aspiring competitors, we can understand why you would want to know how we come to our valuation estimates.

We use standard, multiples-based valuation procedures to get our estimate that are based on years of valuation experience and work in private equity and venture capital fields. Valuation is both art and science and our valuation estimate is not a complete, appraisal-type valuation. Rather it is a quick estimate that should be directionally correct. We also believe that the trending of the valuation should be very accurate.

The basics of multiples-based valuation involve multiplying two numbers:

1. A valuation ratio--this ratio tells you how valuable a given unit of something is. For example, the value of a dollar of revenue or the value of a dollar of EBITDA for a company in a given industry. In real estate, the common valuation ratio is value per square foot for a house in a given area.
2. The total number of "units" you are valuing. If you are using a value to revenue ratio, you would multiple that ratio by the total revenue for the company you are valuing. If you are valuing a house, you could multiply the price per square foot ratio by the total number of square feet in the house.

When you combine 1 and 2, you can estimate the value of a company. We generally use Enterprise Value (EV) / Revenue and Enterprise Value (EV) / EBITDA ratios, since these are the most accepted in the private equity business for most industries. However, our database has the ability to value companies using just about any ratio and we are adding new ratio information daily.

We use a few more tricks of the trade. For example, we mix the value of your company based on current financial results with an estimate of the value of your company based on projected financial results (in the future)--this is especially important for startups who may not have any Revenue or EBITDA in the present but expect to have significant revenue in the future. You can play with this assumption yourself by chaning the "Weighting on future projections" in our valuation tool. If you weight this at 0%, we will value your company only based on its current results.

It is important to note that valuations based on uncertain information--like future financial projections--should be taken with a big grain of salt. While all venture capitalists will project out the results of a company and make some valuation estimate based on this, they also use "gut" feel and other things based on the company's management team, etc., to get to a proper valuation. Often, they significantly discount the projections that the management team provides. Finally, ultimate a valuation in this context is really a two-party negotiation based on beliefs about highly uncertain future outcomes. So our tool will provide an estimate here but the results will only be as valid as the assumptions.

The valuation tool's accuracy will greatly improve the more that the company's current results are significant (e.g., significant levels of revenue and EBITDA) and when the projections are accurate.

Some final notes: we weight the multiples that we use based on our estimate of the likelihood of an M&A exit for the company or an IPO. Please feel free to change this number. The higher the percentage, the more likely it is that the company will exit via transaction rather than IPO.

We also use an illiquidity discount--this is a widely accepted valuation discount that should be applied to private companies since their equity is not liquid. 15-25% seems to be a relatively normal standard range for this.

Finally, as we compare our valuation estimates to actual outcomes, we reserve the right to tweak our regression analysis and our model. Please feel free to click "Include VR Proprietary Inputs" if you would like to take advantage of these findings in the future.

Enjoy! We had a lot of fun making this and we hope you will enjoy using it!