Hope Value?

March 28, 2023

I’ve been thinking a lot about the issue of post-money valuations of companies that have received VC backing in the last few days… 

I’m sure you know that the pre-money valuation is the value of the company before the new investment is made.   

To uncover the post money valuation you add the capital invested.  

That seems pretty simple doesn’t it?   

But it is important to be aware that investors do not always pay as much attention to the pre-money valuation as you might think.  

For very high potential businesses, the investor might be more along the mindset of “how much money does the company need to get to the next step” (often another fundraise) and “how much equity will the company sell me?”   

Frequently the % of equity that is available may be relatively small and if so the combination of a large fundraise and a small % of equity bought can infer that post money the company has reached a staggering valuation.   

And they may be right.  

However, we always challenge this.   

We look for the reality of the situation.   

Has the company changed in its essence between the day before an investment is made and the day after?   

Probably not, other than there is now a much large sum of cash in the bank.  

If you have a moment you may wish to think about this issue yourself. If a company pre-investment comprises a nascent product and a great team the intrinsic value of the company probably will not have changed.   

What will have changed is that with the cash in the bank, there is a greater chance that the proposed business plan can be achieved.  

That is hope value. It’s intangible.  But must not be ignored.  

Sometimes it will reflect a real increase in value in the business, but sometimes, a grounded look at the company will suggest that this hope value is not yet really real and the valuation on paper should take this into account.  

When you look at the preference rights VCs will typically demand, the outlook for the ordinary equity may actually be worse post investment.  

If you have a client where people are struggling to make sense of a company’s or shareholding’s value do let us know.  We would be happy to have a quick chat to discuss in the first instance or to scope and quote for a more extensive exercise if necessary.