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Investment Amount

Posted on 07. Jul, 2008 by squareroots in Graphical Examples

The investment amount was briefly discussed in the article on pre-money valuation. However, another aspect needs to be fully understood when raising money in a competitive environment with large VC funds. This is that the pre-money valuation goes up with the amount of money raised if all other things are held constant. This is especially important when considering large VC funds as they have a lot of money to put to work.

Let’s take an example, illustrated to the right. An entrepreneur needs $2M given their current cash flow projections. However, the entrepreneur wants a very high valuation to avoid dilution. If the investors require the entrepreneur to take more money (due to the size of the fund, e.g. they have a $500M fund and need to put roughly $30-50M in each company over its lifetime), the investor is willing to be flexible about pre-money valuation. The amount of invested cash spent by the company makes no difference to the ownership percentages (although investors are usually very interested in their portfolio companies’ cashflows). In a competitive environment, this is easy to justify. Simply put, a higher amount of money yields a higher pre-money valuation because the percentage ownership enters into the rationale on both sides.

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