Before You Run the Valuation, You Need to Build the Valuation

When people talk about valuation, the conversation often jumps straight to methodology.

Should we use OPM? PWERM? Calibration to the last financing round? A market approach?

But methodology is not where the valuation process starts.

In reality, the calculation is one of the final steps. Before you can produce a valuation, you first need to build it.

1. Establish the capital structure

Everything begins with reliable, up-to-date investment data.

The cap table must accurately reflect the current ownership structure, including:

• Preferred shares

• SAFEs

• Convertible instruments

• Employee options

• Warrants

But ownership alone isn't enough.

Liquidation preferences, participation rights, conversion features, seniority, and other economic terms need to be incorporated so that the waterfall correctly reflects how value would actually be distributed.

This is the structural foundation of the valuation.

2. Understand what has changed

Next comes the company itself.

Since the last valuation date:

• Has performance exceeded or missed expectations?

• Has additional capital been raised?

• Have growth prospects improved or deteriorated?

• Is an exit more or less likely?

• Has the expected exit value changed?

• Will additional funding be required before an exit?

At this stage, the goal is simply to understand where the company is today versus where it was at the prior valuation date.

3. Determine what those changes mean for value

Gathering information is only the beginning.

The finance team must then assess the valuation implications of those developments.

For example:

• How should a higher probability of success impact value?

• What happens if expected exit values decline?

• How should future dilution from another funding round be reflected?

This is where company developments become valuation judgment.

The central question becomes:

What has changed since the last valuation, and how should those changes affect our view of value today?

4. Translate judgment into valuation inputs

The next step is turning those conclusions into assumptions.

This might involve:

• Adjusting exit probabilities

• Revising expected exit values

• Updating expected time to exit

• Incorporating future financing rounds

• Revising other key assumptions

This is the bridge between understanding the business and valuing the business.

5. Select the appropriate methodology

Only now does methodology enter the process.

Depending on the facts and circumstances, the appropriate approach might be:

• OPM

• PWERM

• Calibration to a recent financing round

• Market-based approaches

• Other methodologies

The methodology should reflect the investment's circumstances and the conclusions reached in the earlier stages.

6. Run the numbers

Finally, the calculation can be performed.

By this point, much of the important work has already happened.

✅ The capital structure has been established.

✅ Changes in the company have been identified.

✅ Valuation implications have been considered.

✅ Assumptions have been determined.

✅ The methodology has been selected.

Only then do we arrive at the number.

The key point

A valuation is not just a calculation. It's the output of a process.

And the quality of that number depends on the quality of every step that came before it.

That's why we increasingly view the calculation itself as almost the end of the story, not the beginning.

The real challenge is building the valuation before running the valuation.