Your valuation is driven by your exit value and your money multiple.

You can use the following logic to calculate your money multiple if you plan to raise 1 round:

What internal rate of return (IRR) does the investor want to make on his portfolio? You can look this up at investeurope.eu. Assume a 15.0% IRR.

When will the investor sell his shares? Assume that he exits after 5 years.

A 15.0% IRR on his portfolio and 5 years till exit means the investor wants to make a 2.0x money multiple (MM) on his portfolio.

How many milestones do you have to achieve until the time of exit? Assume 5 milestones.

What is the probability of success (POS) for each milestone? You either achieve a milestone or not. So assume a 50% probability of success per milestone.

Five milestones with a 50% probability of success per milestone results in a 3.1% probability of success for your startup.

A 2.0x money multiple on the investor’s portfolio and a 3.1% probability of success for your startup means the investor wants to make a 64.4x money multiple on your startup.

**Wait, what? 64.4x? I have to discount my exit value with 64.4x? Really?**

If you raise a Series Seed: yes, really.

A seed-stage startup typically has at least 5 years and 5 milestones to go before an exit.

A 15.0% internal rate of return and 50% probability of success per milestone aren’t too weird either.

And that’s when you raise only 1 round. If you plan to raise more rounds, your Series Seed money multiple will be even higher. More on that in a later post.

**But what about all those angel deals at a $1-2m valuation?**

Angels generally overvalue startups.

They would need an exit value of 64.4 * $1-2m = $64-129m to make a 15.0% internal rate of return.

With a 5.0 EBITDA multiple you can only get a $64-129m exit value when the startup makes $13-26m EBITDA in year 5. I can think of quite a few recent seed and crowdfunding deals where that doesn’t seem very likely.

And again, that’s when the startup raises only 1 round. More rounds = higher Series Seed money multiple = higher required EBITDA in year 5.

Thanks to Hans Westerhof and Chretien Herben.

*Joachim Blazer is founder at Venture Value. Contact him at **joachim@venturevalue.com**.*

*Venture Value does startup valuations for founders who want to raise money with an investor.*