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Q: I have been playing around with our spreadsheet and I think I have it figured out. I am stepping into the ring with a couple of VCs next month and I want to make sure I do not get taken to the cleaners. I am curious as to how close to what they might do to come up with a valuation your spreadsheet is?

A: As you would have noticed the Valuation depends on two main things. First the required return, this is normally related to perceived risk. So the riskier the business the higher the required return expected. It is most likely that investors will perceive your venture as being riskier than you do and therefore expect a higher return. The second is the forecast which is driven by the relative indicators. These depend on what you see happening in the market and the business. If there are different views (as there will be) these will result in different valuations. The bottom line is that you are entering into a negotiation where you need to demonstrate that the risk in your venture is as low as possible and that the basis of your assumptions are valid. The business valuation model provides much greater scope to do this than a straight accounting valuation as it uses relative indicators which reflect the potential of both the market and the business. Obviously the more support you can provide to you validate your inputs the stronger your position will be. All the best.

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