How do you know if your startup valuation is too high?
Bear in mind that until a business gets fairly sizeable — there are no great comparables, no great valuation metrics.
Once you hit $10m, $20m in revenues, you can start to use public comps as a reasonable way to value a “startup”.
But in the early days — none of the valuations make sense.
You want a $4.7m post money. But really, if you are pre-revenue, how can you even be worth $100k? Or $1m? Let alone $4,700,000 — already?
My first startup had about $50m of R&D behind it, $6m in customer commits, and our pre-money valuation was $4m. My second had barely a prototype, and its pre-money valuation was $6m. I mean — why?
The reason is context.
Early stage investments are around context.
$1m is a common pre-money valuation for many tech startups outside of the Bay Area at the early seed stage. One simple reason is investors typically look to invest $X00,000 for about 30% of the company.
By contrast, YC is the most successful accelerator. That creates a lot of context. Hot YC startups these days tend to get $7m pre, and the best ones $12m pre. There is no real reason. Other than — context. That’s what the last ones got.
If the market is telling you the valuation is too high. It is.
Either go find another market that may tell you differently. Or adjust.
The reality is, your pre-seed, pre-revenue startup is worth nothing today — except as an option on potential future value. Valuing options is really, really tough.