What Does Pre-Money Valuation Mean?
A pre-money valuation (also known as pre-money) is a familiar term that refers to the value of a company's stock before it goes public or receives other investments. The term is often used by venture capitalists.
Understanding Pre-Money Valuation
For example, let's say that Jim's Fabless Donut Shop is thinking of going public. If management and venture capitalists estimate that the company will raise $100 million in the IPO, it is said to have $100 million in pre-money.
Valuing a company's stock before it goes public is a difficult task. When venture capitalists and entrepreneurs talk about pre-money, they have to be very careful not to fall into the trap of "counting their chickens before the eggs have hatched" – or, in other words, spending money they don't actually have.
How Pre-Money Valuations Are Determined
Pre-money valuation can also refer to the period before any investment or funding of any type is put towards a company, not just when it is traded on public markets. This includes a valuation prior to seed, angel, or venture funding is put into a company. A pre-money valuation at this stage may also coincide with the company being pre-revenue, meaning that it has yet to generate any sales.
The company might not yet have its product or service ready for release. This means its pre-money valuation will be based on a variety of other factors. One such measure may be comparable businesses. An assessment of the revenue and market value of established, more mature companies that have a similar focus and operational approach can serve as a gauge of the potential for pre-money companies.
Even if the pre-money company claims it is creating an entirely new industry with new business models, its prospects will likely be cast in the vein of an earlier business. For example, if a new company planned to produce a new type of automated vacuum cleaner, its pre-money valuation might be established in part by assessing the performance of other makers of robot vacuums. Other factors that may contribute to the pre-money valuation can be the experience and track record of its founders and leaderships, the feasibility of delivering on promised services, and any competition that may arise.
Who Determines the Pre-Money Valuation
The pre-money valuation may be a figure proposed by a potential investor. The number could then be used as a basis for the amount of funding they will provide and how much ownership they expect in return. The leadership of the company might reject pre-valuations proposed by others until they reach an amount that matches the aspirations of the company.