How do Venture Capitalist value your startup

There are generally two ways VC's do their Voodoo !!

1. Early Stage start-up - This is more of an art and less of a science. To calculate the exact value of a business is tough, since a lot of assumptions used can change over time starting with from the definition of the market the startup is going after. However, the general method used is - start with the market size, estimate as to how much of the market share this startup can potentially capture and then multiply these two with the profit margins. This would generally give you an idea of the value of the startup. But as you can imagine there are a lot of variables and most numbers are best a gestimate firstly because there are no published authoritative reports on how big the market size is or would be and secondly, over time how would the competitive landscape change - meaning, how much market share and the startups' profit margins might be. Hence, frequently you would find a lot of Venture capital firms focusing on the sectors they know best(so the assumptions/variables have been tested and verified against) and investing money with people they trust (so they are reducing at least one variable/risk - the management's ability to deliver.

2. Late stage start-up with some cash flows - Again, you would use the same methodology as you would with early stage start-ups, the only difference is the variables/assumptions are more grounded in reality. Firstly because the company has been in operation for a while so you can judge from past performance as to market share and profit margins. Secondly, hopefully you are in a sector which seems attractive to other enterpueners and you see competition - you a benchmark to compare your startup both in terms of precedent deals that other VC's have done as well as market share and profit margin numbers to compare.