5X Rule of Post Money-Valuation

As an investor reviewing deals, you’ll hear a wide range of startups with various fundraises and pre-money valuations.  

So, how can you screen the deals to find those who have ‘reasonable’ valuations?

Try the 5X rule.

The 5X rule says to take the post-money valuation and multiply times 5. If the company sells for that price, then the investors will do well.  

If you don’t think the company will be able to sell for that price, then the company is overvalued and will most likely not provide a return to the investor.

Entrepreneurs usually quote their fundraise target and their pre-money valuation. 

To find the post-money valuation, add the fundraise amount to the pre-money valuation.

Here’s a recent example. The company is raising $2M on a pre-money valuation of $10M yielding a $12M post-money.  

By multiplying 5*12, we see a target exit value of $60M. Most companies in the space were exiting at $25M to $30M, so this one was overvalued.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.