The Art and Science of Company Valuations (Infographic) See a visual explanation of how young companies are valued, in some cases before they're even making money.

By Catherine Clifford

Opinions expressed by Entrepreneur contributors are their own.

Shutterstock

Instagram, Spotify, Square, Pinterest, and the list goes on: It's starting to seem like billion-dollar startup valuations are a dime a dozen. But how does a young company get a billion-dollar price tag?

The below infographic by San Francisco-based startup organization Funders and Founders details how a startup is typically valued. A valuation is simply an estimated value of a company and is often based on assumptions about a startup's potential. It's not an exact science, explains Anna Vital, the author of the infographic in a blog post. A company's valuation is important because it can determine the percentage of the company that should be given to an investor in exchange for cash, Vital says.

Related: How Instagram Went From Idea to $1 Billion in Less Than Two Years

Click to Enlarge+

How to Jumpstart Your Social-Media Marketing During the Summer Slowdown

Wavy Line
Catherine Clifford

Senior Entrepreneurship Writer at CNBC

Catherine Clifford is senior entrepreneurship writer at CNBC. She was formerly a senior writer at Entrepreneur.com, the small business reporter at CNNMoney and an assistant in the New York bureau for CNN. Clifford attended Columbia University where she earned a bachelor's degree. She lives in Brooklyn, N.Y. You can follow her on Twitter at @CatClifford.

Editor's Pick

She's Been Coding Since Age 7 and Presented Her Life-Saving App to Tim Cook Last Year. Now 17, She's on Track to Solve Even Bigger Problems.
Lock
I Helped Grow 4 Unicorns Over 10 Years That Generated $18 Billion in Online Revenues. Here's What I've Learned.
Lock
Want to Break Bad Habits and Supercharge Your Business? Use This Technique.
Lock
Don't Have Any Clients But Need Customer Testimonials? Follow These 3 Tricks To Boost Your Rep.
Why Are Some Wines More Expensive Than Others? A Top Winemaker Gives a Full-Bodied Explanation.

Related Topics

Fundraising

Working Remote? These Are the Biggest Dos and Don'ts of Video Conferencing

As more and more businesses go remote, these are ways to be more effective and efficient on conference calls.

Growing a Business

The Best Way to Run a Business Meeting

All too often, meetings run longer than they should and fail to keep attendees engaged. Here's how to run a meeting the right way.

Marketing

The Rise of Nano-Influencers: How the Smallest Voices are Making the Biggest Impact

The bigger an influencer is, the more beneficial it is for a brand to collaborate with them, right? Not necessarily.

Management

Which Hiring Strategy Is Right for Your Startup? My Experience Says This One

Startup businesses face a unique environment when it comes to adding the talent it needs during their earliest stages of operations, and every hiring decision is critically important to get right the first time.

Science & Technology

How AI Is Transforming the Accounting Industry — and What the Future Will Look Like

It's time to harness the power of AI and transform bookkeeping.