\n
Avoid comparing your startup\u2019s valuation to others if you want to keep your sanity<\/h3>\n
You\u2019re raising $3M on a $18M valuation (or at least trying to). You\u2019re pitching my angel group on investing in your pre-seed round. When you finish your presentation, we start the Q&A. A bunch of hands go up. The first question: what makes your startup worth $18M?<\/p>\n
\u201cThat\u2019s a great question,\u201d you answer, though you want to strangle the guy (me).<\/p>\n
Fortunately, you have enough sense not to start talking about discounted cash flows since that would do nothing but get a few chuckles and a thank you for presenting to us today.<\/p>\n
So you tell us about Competitor A which raised their pre-seed at a $25M valuation and are now worth more than $100M in their Series A. You mention Competitor B where A16Z just dropped $7.5M at a $40M valuation. And you\u2019re further along than them. With a better product.<\/p>\n
Your $18M offer is not only fair, you tell us, but a ridiculous bargain. \u201cGet in now while you can,\u201d you say, trying to build that FOMO. \u201cOur next round will be at $50M. Or more!\u201d<\/p>\n
We nod and say thank you for coming in.<\/p>\n
After you leave the zoom, us investors huddle together. The tech and market look interesting, we conclude, though the company is still very early. But at that valuation, we\u2019re not interested. I get volunteered to break the news to you, and we move on to the next pitch<\/p>\n
\u201cWhat\u2019s wrong with an $18M valuation,\u201d you cry, voice dripping with frustration. \u201cOur competitors have higher valuations,\u201d you remind me though you didn\u2019t need to.<\/p>\n
The aphorism, \u201cComparison is the thief of joy,\u201d is widely attributed to President Theodore Roosevelt. Whether he actually said it doesn\u2019t matter. What matters is that if you compare your valuation to others, instead of focusing on how to get the money you need to build the business, you\u2019ll only drive yourself crazy with envy and frustration.<\/p>\n
As investors, we absolutely don\u2019t care about your sample size of 2 for setting your valuation. There\u2019s too many variables, and too much statistical variation.<\/p>\n
Are they further along with development or customer traction? Do their founders have better exits, better credentials, better industry connections? Are their investors accelerators, CVCs, big VC funds, or economic development agencies that don\u2019t really care about early-stage valuation? Was their valuation set during the pandemic bubble when valuations were even more insane than now? Or were their founders just better storytellers than you?<\/p>\n
The simple answer is that we don\u2019t know how their valuation was set, and we\u2019re not going to bother to find out. Because their valuation doesn\u2019t matter to us.<\/p>\n
Setting the Valuation \u2014 In Theory<\/h3>\n
So what does matter in setting the valuation? It comes down to a simple but subjective analysis of risk vs reward.<\/p>\n
For reward, if things go right, pre-seed\/seed investors want a minimum 10x return within 5\u20137 years, with potential upside to 100x. Do\u00a0realistic\u00a0<\/em>revenue projections and exit multiples match that narrative? The lower the valuation, obviously, the higher the reward at exit.<\/p>\nRather than telling us about the valuation of other startups in your space, we want to hear about those exits. Who did those companies exit to and at what multiple of revenue? The bigger that potential return in the future, the more the business is worth now.<\/p>\n
Balanced against the reward is the risk. From the seed stage, perhaps 1 out of 10 startups reach a positive outcome for investors. From pre-seed, it\u2019s more like 1 out of 20.<\/p>\n
What\u2019s going to make your startup the one that succeeds where the other 19 of your cohort fall by the wayside?<\/p>\n
Is it the founding team that\u2019s been there and done that? Is it customers lined up desperately waiting for your product? Is there a moat to keep out the competitors that will crawl out of the woodwork once you prove the market?<\/p>\n
Most importantly, how far along are you in the journey? Pre-seed and seed are very rough labels. How many customers do you have, how much revenue, how fast is the business growing? If you don\u2019t have revenue yet, how long will it take and how much more capital will you need to get to commercialization? And especially for hardtech and life sciences, how likely is your technology to actually work outside the lab?<\/p>\n
Put it all together and we have a vague sense of the level of risk vs. the potential reward.<\/p>\n
But how does that translate to an actual valuation? Unfortunately, not very easily.<\/p>\n
Setting the Valuation \u2014 Real World<\/h3>\n
In the end, we do compare your valuation. Not against a few competitors, but against all the other startups we can invest in. For investment, that\u2019s your competition.<\/p>\n
Another startup with $1M in revenue is offering a $10M valuation. Should we invest in them or you? They have more traction, but a smaller market.<\/p>\n
How about a startup with no revenue yet asking for a $20M valuation? Doesn\u2019t seem attractive until you learn their team consists of top researchers in diabetes with a potential cure already in clinical trials. Higher risk, yes, but massive reward if it works.<\/p>\n
Our small group hears 250 pitches a year. We invest in 3 or 4 of them. Which ones? It isn\u2019t always the lowest valuation or the best traction. It\u2019s not necessarily the strongest team or the biggest market. It\u2019s the combination of all of the above that provides the best risk vs reward.<\/p>\n
The valuation then is the price that gets investors excited enough to write a check. A price that makes your startup more attractive than all the others pitching us.<\/p>\n
But What About My Friends? What About the Competitors?<\/h3>\n
It\u2019s tempting to compare yourself to other startups as if valuation were a game where the highest number wins. It\u2019s not. So don\u2019t go there. Just don\u2019t. It\u2019ll won\u2019t accomplish anything other than making yourself crazy.<\/p>\n
What matters is not your valuation now. You\u2019re at the first checkpoint of a marathon. Who cares if a few people dash out in front of you. The goal is not to lead the pack; it\u2019s to get to the finish line. Along the way, 90% of them will fall by the wayside. You can wave as you pass.<\/p>\n
Leaving analogies aside, the goal of early rounds is not to have a high valuation. It\u2019s not to be valued higher than the other startups in your accelerator cohort. It\u2019s simply to get the money you need to get to the next milestone. That\u2019s all. Take whatever valuation gets investors writing checks.<\/p>\n
Once you reach the next major milestone, risk goes down. That means valuation goes up. And then you can raise the next round at a higher valuation.<\/p>\n
Keep yourself focused on the milestones that get you to that finish line far off in the distance. Don\u2019t think about the valuation of anyone else until you reach the exit. Because they just don\u2019t matter.<\/p>\n<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":"
Avoid comparing your startup\u2019s valuation to others if you want to keep your sanity You\u2019re raising $3M on a $18M valuation (or at least trying to). You\u2019re pitching my angel group on investing in your pre-seed round. When you finish your presentation, we start the Q&A. A bunch of hands go up. The first question: […]<\/p>\n","protected":false},"author":1,"featured_media":7038321,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12034],"tags":[2214,13598,4678,6605,5554,11441],"dealstore":[],"offerexpiration":[],"class_list":["post-7038320","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-angel-investor","tag-angels","tag-comparison","tag-joy","tag-pitching","tag-thief","tag-valuation"],"yoast_head":"\n
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