Calculating the Pre-Money Value of an EdTech Company
What Is a Pre-Money Valuation?
One of the first questions I get from potential clients is how do you calculate the pre-money value of an EdTech company.
A pre-money valuation refers to the value of a company before it receives any external funding from investors. Put another way; a pre-money valuation is how much a company is worth before you start your capital raise. Angel investors and venture capital firms use a company’s pre-money value to determine what their investment in the company is worth.
Key Points
- A pre-money valuation is the value of an EdTech company before it receives an investment from an external investor.
- Potential investors use a company’s pre-money value to determine its worth before investing in it.
- Post-money valuations are different from pre-money valuations. A post-money valuation estimates a company’s value after it receives funding.
- This article was written for founders and managers of EdTech companies, but the same concepts apply to any business seeking angel investors or venture capital funding.
Understanding Pre-Money Valuation
Pre-money is the valuation of a company before a round of financing and gives investors a picture of the company’s current value. Pre-money values are determined before each round of funding a company receives. You can and should re-evaluate your pre-money valuation each time you seek seed, angel, Series A, B, or C round of venture funding.
How To Calculate a Pre-Money Valuation
The management team of the company seeking funding typically proposes a pre-money valuation to potential investors. However, “value is in the eye of the investor,” so each potential investor will have their own idea of the company’s pre-money valuation.
Calculating the pre-money valuation for a company is pretty straightforward. Here’s the basic formula:
Pre-Money Valuation = Post-Money Valuation – Investment Amount
So, if an EdTech company’s post-money valuation is $30 million after receiving a $10 million investment has a pre-money valuation of $20 million.
As you can see, a company’s pre-money valuation is heavily dependent on the company’s post-money valuation, so I encourage you to read my article “How to Value an EdTech Company: Multiples & Example.” In that article, I describe in-depth how to calculate a company’s post-money valuation and provide real-world multiples and an example.
Remember that the pre-money valuation is the basis for determining the amount of funding that investors are willing to provide and how much of the company’s equity they want in return. The company’s management team might propose one value and talk to dozens of potential investors before finding an investor who agrees with the company’s estimate of value. In most cases, the actual pre-money valuation used is heavily negotiated between the investors and management.
Things to Consider
First, remember that an EdTech company’s pre-money valuation is not a static number. That means it can and does change day by day. That’s because a company’s post-money valuation, and hence its pre-money valuation, are affected by general market demand, the public stock market, interest rates, investor appetites, and the company’s performance.
Next, remember that a pre-money valuation is done before each round of funding a company seeks. The pre-money value of an EdTech business will change based on the financing round (i.e, risk level), performance of the company, and market conditions. If a company is growing nicely and hitting its targets, its pre-money value should increase with each financing round, despite the increased investment required.
Third, remember that a pre-money valuation is still possible on early-stage EdTech companies that are pre-revenue, meaning the company has not generated any sales yet. In a pre-revenue company, investors will base its pre-money valuation on a combination of other value factors, including valuations of comparable businesses, projections, growth rates of similar companies, etc. Investors often use insider knowledge of the revenue and market potential of other more established, mature companies in the same sector or that have a similar business model to predict how successful a company will be.
Fourth, even if your EdTech company claims it has created a new industry with new unique solutions, and a new business model, investors will still calculate its value based on the businesses they already know.
Fifth, investors often say, “we invest in people, not companies,” and that’s true. The pre-money valuation of your EdTech company will be greatly affected by the experience and track record of its founders and management team and the likelihood that they will deliver on their promises.
Post-Money vs. Pre-Money Valuations
As its name implies, a post-money valuation differs from a pre-money value because it indicates how much a company is worth after receiving an investment.
To calculate the post-money valuation, please see my article “How to Value an EdTech Company: Multiples & Example.” In that article, I show you how to calculate the post-money value of your EdTech company, so you can figure out how much money you can potentially raise from investors.
Example of Pre-Money Valuation
In that article, I used an example of an EdTech company that determined it had a post-money value of $2.3 million. I also assumed that management projected it needed $1 million in seed money from investors to hit its revenue goals and achieve its exit value.
So, if we assume that the post-money valuation is $2.3 million and the company needs $1 million in seed money, that implies the founders and management team will potentially need to give up 44% of their equity to raise $1 million in growth capital.
That also implies the company’s pre-money value is $1.3 million, because, as we learned above, the pre-money value of your business is calculated as follows:
Pre-Money Value = Post-money value – Investment Amount
$1,300,000 = $2,300,000 – $1,000,000
Understanding the relationship between pre-money and post-money values is important because it allows founders, management teams, and investors to calculate how much equity needs to be given up to incentivize an investor to invest.
About the Author and Jackim Woods & Co.
Rich Jackim is an education industry investment banker and educational industry entrepreneur, and former mergers and acquisitions attorney.
For the last 25 years, Rich has been providing boutique investment banking services to middle-market companies in the education sector.
Rich also founded a successful training and certification company called the Exit Planning Institute which he sold to a private equity group in 2012.
Rich is also the author of the critically acclaimed book, The $10 Trillion Dollar Opportunity: Designing Successful Exit Strategies for Middle Market Businesses.
Jackim Woods & Co offers skilled mergers and acquisitions advisory services to privately owned schools, colleges, and EdTech companies in both sell-side and buy-side transactions. Jackim Woods & Co has arranged over 100 successful transactions, ranging from less than one million to more than eighty million dollars in value.
If you own an education-related business and are interested in exploring your options, I would welcome an opportunity to speak with you. Feel free to contact me at 224-513-5142 or rjackim@jackimwoods.com.
