What is the valuation of your startup?

When you talk to a VC about raising capital, one of the cornerstones of the conversation is your startup’s valuation. This is much harder for founders to understand than for investors, because investors do such valuations every day, while founders usually face it for the first time in their lives. Today, I’ll explain how investors think about valuation. By the way, you won’t need expensive consultants for this. Please also subscribe to me on LinkedIn (Denis Kalyshkin).

Let me start with a story from my own life. When I was a young venture analyst just starting out at a VC fund, I once asked a partner how much a startup was worth. The partner stuck his thumb in his mouth, wet it, then raised his hand high above his head as if he were checking the direction of the wind. Then he said, “$5 million post-money.” That was the moment I understood how most valuations are made.

In practice, this is called the “comparables method.” If any of you have ever bought real estate or a used car, you’ll easily understand how it works. You look at how much your potential purchase costs compared to other similar assets. Then you decide how much better or worse it is relative to the others and what premium or discount you’re willing to apply.

This is exactly how venture investors value startups. Every day, we see startups. Some of the are better, some are worse. We also see that some deals close quickly, while others drag on for months. All of this shapes our subjective sense of what valuation we’re willing to do a deal at. If the founder agrees with that valuation, the deal happens. If the market is overheated, like in 2021, valuations go up; if the market cools down, valuations go down. It’s that simple. No fancy formulas. In fact, this is how the price of any product or service is determined, because it is the intersection of supply and demand. It’s just that many products are more standardized and have price tags, so you don’t notice the process.

So the question becomes: how do you figure out what your startup is worth? In short, ask someone who sees a lot of startups. For example, you can ask a VC you know. But not everyone has such contacts. In that case, there are various reports from firms like KPMG or Carta that show valuations, average sizes of the round, and percentage of equity stakes granted in the deals in various parts of the world. This will give you upper and lower benchmarks for the range.

Next, you need to refine that range. How do you do that? You’ll have to run 100+ meetings with investors anyway. Start with those you’re least eager to raise money from and test different valuation ranges with them. You can also say directly in a meeting that you’re just starting investor conversations and are listening to what the market is offering, then ask what valuation range would be acceptable to them.

Let me also point out a couple of common mistakes:

1. Paying valuators to price your startup. Some founders pay professional appraisers to value their startup, usually using an NPV (net present value) model. In most cases, these people have never valued startups and don’t realize that this method simply doesn’t apply here. Trying to prove a valuation to an investor using such a document is pointless. Don’t waste your money or time.

2. Listening to friends’ advice like “don’t give up more than 5% of the company.” Before taking such advice seriously, ask your friend at what valuation and when they themselves closed a round. In the vast majority of cases, these are theoretical numbers from the internet that have nothing to do with reality. Be very cautious with this kind of advice. You need to look at real deals similar to yours that were closed in your geography relatively recently.

I hope this post helps you better understand how much your startup is worth. Good luck with your fundraising!