Before you take money from a venture capital firm, you’ll agree to a valuation — how much your startup is worth. That valuation will also affect how much of your company you own. Optimizing for a higher valuation can sometimes mean owning less of your company, so strategies for each founder can vary widely.
How a valuation is determined, investors say, is more an art than a science. There are standard factors that will be considered before putting a price tag on a startup, but the biggest factor turns out to be demand — how many other investors are vying to put money into your company. That said, there’s a lot an entrepreneur can do to influence valuation (aside from, you know, building something that’s valuable). The more investors you pitch to and the better you are at telling your story, the more interest you’ll generate, which will drive up your price.
As a rule of thumb, the valuation will generally be set in line with the return the investor wants — if the seed round is $1 million and your investors want a 10x return, the valuation will likely be set at $10 million.
But investors are far from arbitrary with valuations. “You’re buying part of the company as an investor,” says Caitlin Strandberg of Flybridge Capital Partners. “The investor wants it to be as accurate as possible.”
That said, the seemingly “over the top” valuations on the market are a result of investors believing they’ve found an outlier. These big, fast-growing opportunities are few and far between, so when a someone thinks they’ve found one, the valuation can jump.
“I’m seeing a rationalization of valuations right now ,” says Jalak Jobanputra, managing partner at FuturePerfect Ventures. “We’re seeing a slowdown — more diligence being done.”
Here are eight things investors analyze when making a valuation.
