How exactly do VCs and the like figure out how much a company is potentially worth? X amount of user, demographic coverage + allure, X% growth month-to-month?
I've worked as an analyst for an early-stage VC firm, and at that stage valuation is much more an art than a science. With pre-revenue companies, there are two important questions for the VCs to ask themselves:
1. How much money do they need?
2. How large a percentage of equity do we want?
#1 can be easily determined. #2 needs to be played with a bit, as a good VC firm won't want to take enough equity to demotivate the founders at all, yet still wants to see an attractive return (based very roughly on their own financial projections for your startup).
This is, of course, how it works after a firm has decided to make an investment in your startup. Good VCs won't really even bother with pre-revenue company valuations until after they've decided that they want to work with you.
It's done totally by the seat of the pants, based on how formidable the founders seem, how sexy the idea seems (as far as the investor can tell), and above all, how much interest there is from other investors.
A public company (or even one that has recently sold shares on SOME market) has a price.
Divide the price by the earnings, and you get the P/E ratio.
There is a range of sane P/E ratios. No stock ever trades at a P/E of 5,000. 1,5,and 10 are plausible P/E ratios.
One rule of thumb (advanced by the Motley Fool guys) is that the P/E ratio should be about the same as the P/E should be around the percentage annual growth (P/E/G).
Anyway, let's assume that your startup is going to sell someday for a P/E of 5. That tells us that the price will be 5 times the earnings.
So: tell me what you expect your earnings will be at this future date?
Let's say that you're entering a $1 billion/yr market, and you expect to grab 10% of it: your revenue will be $100 million. You expect that of every $100 that enters the company as revenue, 90% will be spent on salaries, Jolt, and Aeron chairs. So you've got a 10% profit ratio...and on that $100 million of revenue, you expect to earn $10 million of earnings.
Jump back to the P/E stuff. If your P/E is 5, then you've just described a company that might be worth $50 million.
Of course, maybe it would actually be worth $300 million because it's a strategic buy for someone else. Or maybe it would actually be worth $0, because it's based on a stupid idea that will be killed by someone else.
...but that's a first stab at the valuation if everything goes right, and the company succeeds wildly, and someone else buys it at a typical P/E ratio.
There are other valuation formulas, but they tend to boil down to this one at the base (i.e. the demographic coverage, etc. that you mention are ways to figure out total market, or your share of the market, etc.)
With companies that are too new to be profitable, it has more to do with what the venture capitalist is willing to invest for a certain % ownership than an appraisal of the actual value of a company.
1. How much money do they need? 2. How large a percentage of equity do we want?
#1 can be easily determined. #2 needs to be played with a bit, as a good VC firm won't want to take enough equity to demotivate the founders at all, yet still wants to see an attractive return (based very roughly on their own financial projections for your startup).
#1 * 1/#2 = post-money (after investment) valuation
post-money valuation - #1 = pre-money (before investment) valuation
This is, of course, how it works after a firm has decided to make an investment in your startup. Good VCs won't really even bother with pre-revenue company valuations until after they've decided that they want to work with you.