Understanding valuation requires distinguishing between Pre-Money and Post-Money valuation. Pre-Money Valuation is the value of the company immediately before a new investment is deposited. Post-Money Valuation is the value of the company immediately after the investment is received, calculated as Pre-Money Valuation plus the investment amount. For example, if a company has a Pre-Money valuation of $10 million and receives a $5 million investment, the Post-Money valuation becomes $15 million.
Valuation is the primary variable that dictates dilution. The percentage of the company an investor receives is calculated by dividing the investment amount by the Post-Money Valuation. In a SmartUp seed round example, if a founder raises $1 million at a $4 million Pre-Money valuation, the Post-Money valuation becomes $5 million, the investor receives 20% of the company, and the founders are diluted by 20%.
Yonatan Stern contrasts two valuation approaches. In the traditional VC model, valuation is growth-based. Venture Capitalists prioritize rapid revenue growth and value companies using revenue multiples, creating large paper gains but often forcing startups to burn cash to sustain unnatural growth. In contrast, the SmartUp model is profit-based. Companies are valued based on profitability and positive cash flow, creating a valuation floor derived from a Price-to-Earnings multiple, typically between 15 and 20. For example, a company generating $1 million in annual profit is intrinsically worth between $20 million and $30 million.
Valuation is also affected by funding dynamics such as up rounds and down rounds. An up round occurs when a company raises capital at a higher valuation than before. A down round occurs when a company raises money at a lower valuation, usually after missing targets and running out of cash. In down rounds, founder equity can be severely reduced, and investors may demand aggressive terms such as Participating Preferred stock.
From a strategic perspective, profitable companies are easier to sell and often command higher valuations because buyers acquire a functioning cash-generating business. Profitability also gives founders leverage, as they are not forced to accept unfavorable valuation terms during an exit.
