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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

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

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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

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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.

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