We were curious and wanted this be an educational exercise as we are getting close to approaching investors with some of our traction. Any good resources or advice?
It determines how much ownership existing shareholders or members will give investors in exchange for financing. Here's an example: Say you want to raise $1 million in financing. If you place a PMV of $1 million on your startup, then investors would receive 50 percent ownership and the company would forgo 50 percent.
I'm assuming you're asking "how do we come up with the amount of our pre-money valuation?" If so, my answer has two parts based on multiple seed and series A startups:
1) it's kinda arbitrary. You and your investors get on the same page and just pick one. e.g. a recent startup wanted to raise $4-6mm while having our VC own 36-42%. From that we backed into the pre-money evaluation. Mind you we hadn't any revenue. The pre-money was on our shared vision of the value of the idea and execution/background of the team.
2) you look at comparable companies, market size, funding climate, company financials, company KPIs and model a pre-money valuation. Then you get investors to agree with you.
Bottom line IMO - until you get somebody to provide "post-money" then your "pre-money" is a fiction and you shouldn't waste too much time on it. Spend your time building the business and locating supportive investors.