How do you know if your startup valuation is too high?

echojason@gmail.com'

JASON LEMKIN

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.

So …

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.

View original question on quora

Published on June 14, 2017
  • Jason,
    In the case of post-seed, $1.5m ARR startups looking to raise another round…would you look only at financials (current + projections) for valuation?

Share This