Valuations are also a reflection of prevailing sentiment around technology and market trends.
Consequently, valuations are both an art and a science, so there are no hard and fast rules for how much a startup should be worth.
Your funding journey problems have progressed from, “How do I meet VCs?” to “How much money do I request from VCs?” It’s a nice problem to have, but it’s still tricky to figure it out.
In the early days of your business, it’s difficult to put a dollar value on your company. Most valuations of early-stage VCs are a bet on the future value of the company. They’re also a reflection of prevailing sentiment around technology and market trends.
Consequently, valuations are both an art and a science, so there are no hard and fast rules for how much a startup should be worth. Some startups may wind up with a multi-million-dollar valuation at the seed stage while others struggle to hit $1 million.
Generally speaking, startup founders should:
As a founder, you need to carefully consider how much you need versus how much equity you’re willing to give away. Equity dilution occurs when you give away portions of your company in exchange for resources, usually some cash or talent. Remember that if all goes according to plan, you’ll be making the VC rounds again and will need equity on tap for future fundraises. You don’t want to give away too much too fast. Funders won’t want to invest in companies with too many other stakeholders calling the shots.
Avoid taking more money than you need. While it’s useful to have a buffer for unexpected costs, it’s important not to let your eyes get bigger than your stomach. And it’s not just about equity dilution. With more money comes more problems in the form of pressure to do something productive with it. It also makes it harder to exit down the road. Taking on too much capital means investors will balk at impressive, but modest, exit opportunities that don’t give them the ROI they anticipated.
As discussed earlier, a milestone-based approach ensures you’re deliberate and thoughtful about the money you receive. Even if you manage to receive money without a clear explanation for its use, you risk falling into the trap of becoming spoiled by your riches which can lead to unfocused spending sprees and losing your ability to run a lean operation.
“If I were to dispense any advice, I would really envision someone coming up with key milestones and understanding a pathway to success, identifying where they want to go, and what their gaps are. Is it capital? Is it management advice? Be clear on what prevents you from being successful at your next step and go about solving that problem. You’ll find a lot more interest from investors if you have that clarity.” – Marshall Ring, CEO, Manitoba Tech Accelerator
Your business model will understandably have a combination of knowns and unknowns, but you should still scrutinize them all and be clear on the assumptions you’ve made to produce certain numbers. This will help you understand your business’ risk and by extension, how much risk a VC might be willing to take on. If you don’t take a hard look at your numbers, your VCs certainly will and a lack of understanding will impact whether you give away too much or too little of your company in exchange for funding.