Discounting a target exit back to today
Pre-Money Today = Exit Value / (1 + Target Return)ⁿ − Investment
Which inputs swing the valuation most
| Input | Uncertainty | Impact on Valuation |
|---|---|---|
| Exit value | Very high — 5-year revenue estimate × exit multiple | Largest driver |
| Exit timing | High — could be 3 years or 10 | Directly affects discount |
| Target return | Moderate — set by fund economics | Higher target = lower valuation |
| Dilution | Moderate — future rounds dilute | Reduces effective ownership |
Why VC target returns look so high
VC target returns (30–50% annually) seem high, but they compensate for the power law: most investments fail. A 40% target return over 5 years requires a 5.4x MOIC — necessary when 2/3 of deals lose money.
Reverse-engineer a Series A valuation
Take a public company that IPO’d recently and reverse-engineer: what exit value and return assumptions would have justified the Series A valuation 5 years earlier?
Discount a future exit to a price today
A VC expects a startup to be worth $500M in 5 years. At a 40% target return, what’s the maximum they should pay today?
Startup value hinges on the exit scenario
Work backward from a target multiple
VC target return: 10x over 5 years. Startup has $1M revenue, growing 100%/year. At exit (Year 5) revenue will be ~$32M. Exit multiple 8x revenue = $256M exit. What's the max entry price for a $5M check to achieve 10x?
Check your understanding
Sit with the ideas.
A VC expects a logistics automation startup to be worth $5 billion at exit in 7 years. The fund requires a 25x return on this investment. What post-money valuation should the VC offer today?
Why: