The process of getting to a valuation is more art than science, explained participants in the panel, "The Price is Right: Placing a Value on a Private Company," at The New York Venture Summit on Wednesday. Getting to a valuation is a watershed event for an early-stage company, said the panelists, including partners from FTVentures, Warburg Pincus and Atlas Venture. The VCs advised the entrepreneurs in the audience to approach things from the investor's point of view, keeping in mind that when investors ponder backing a company, they consider what the liquidity event will be and work backwards from there.

As long as venture capital returns are dependent on a few home runs, partners need to hit internal rates of return in the 30%-40% range, in order to give their limited partners a return in the 20%-30% range, explained Walter Beinecke, a partner at Brook Venture Fund.

Jay Goldberg, a senior managing director at Hudson Ventures, added that going in, VCs have to estimate "how much money will it ultimately take for this company to be successful," and base their valuation models on that. VCs compare the company to its peers' valuations and try to calculate how much money and sweat equity the founders put into the company before it was founded.

Another factor VCs take into account when sizing up potential investments is how big their stake will be. A venture firm typically wants roughly 20% of the company. Sole investors want a percentage north of that, said Kodiak Venture Partners' Chip Meakem.

In later rounds, the panelists pointed out, one of the quickest ways to increase a company's valuation is to hit key milestones in sales figures, major customers and technology development. They also warned of the dangers of getting too high a valuation in early rounds, potentially pricing new VCs out in later stages. —George White