How to Value Your Startup: Do you need a high valuation?Data: 03/05
Not necessarily. When you get a high valuation for your seed round, for the next round you need a higher valuation. That means you need to grow a lot between the two rounds. Within 18 months you need to show that you grew ten times. If you don’t you either raise a “down round,” if someone wants to put more cash into a slow-growing business, usually at very unfavorable terms, or you run out of cash.
It comes down to two strategies.
- One is, go big or go home. Raise as much as possible at the highest valuation possible, spend all the money fast to grow as fast a possible. If it works you get a much higher valuation in the next round, so high in fact that your seed round can pay for itself. If a slower-growing startup will experience 55% dilution, the faster growing startup will only be diluted 30%. So you saved yourself the 25% that you spent in the seed round. Basically, you got free money and free investor advice.
- Raise as you go. Raise only that which you absolutely need. Spend as little as possible. Aim for a steady growth rate. There is nothing wrong with steadily growing your startup, and thus your valuation raising steadily. It might not get you in the news, but you will raise your next round.
Things to remember :
1. The valuation only exists if investors validate it
Traditionally, there’s a lead investor that validates a valuation, but a lot of companies now raise without a lead. By getting a few investors to buy in at a specific valuation, they’re effectively validating the amount. Either way, your valuation doesn’t truly exist until it’s validated.
2. Don’t risk a down round
A down round happens when the valuation of your next round is less than your current round. No one comes away from that undamaged. That can happen when people are too aggressive about their valuation in that first round. Don’t let that be you.
3. Terms often matter more than the valuation
For a higher valuation, you may be giving up some control, like a board seat. I’d keep your terms as clean and standard as possible.
4. Map out multiple stages of financing
Take a moment and project out your equity over multiple rounds of financing. You need to make sure there’s enough equity to sell, while keeping enough equity for the founders and team. I hear of companies that sell 50% of their company for a few hundred thousands dollars. That won’t leave enough equity to sell for future financing rounds.
5. Drive for a ‘fair’ valuation
That probably depends a lot per company, but I kept that word in my head as I figured everything out.
6. Make sure your valuation doesn’t exclude great investors
Even though it’s hard to know an investor’s value add in advance, make sure you’re not picking a valuation that prevents great investors from investing. Note, if it’s a great company, not all great investors will walk away from a high valuation .
7. Treat investors well when fundraising
Invariably, you’ll run into investors that think your valuation is too high. The only right behavior is to be consistently nice and explain your thought process.