The Truth About Startup Valuation

Contrary to what many Venture Capitalists, Angel investors, and especially Investment Bankers want you to believe, early-stage company valuation is more of an art than a science.

Over the years, numerous investors have come up with various creative ideas to determine the value of a company that is just starting based on its growth potential: DCF analysis, comparable company analysis, precedent transactions analysis (PTA), asset-based valuation, the Black-Scholes model, the VC method, the Chicago method, the Berkus method, risk factor summation method, the rule of thirds, and the list goes on and on... (feel free to research them to get an idea of the variables investors consider for each method).

Interestingly, every single methodology used yields completely different results!

"So, how exactly do Angels and VCs arrive at a valuation for my company?" you may be asking yourself. Well, in addition to all these models that give them an idea on how high they can go to still achieve their desired ROI, the answer lies within the most fundamental law of economics: the law of supply and demand.

The valuation of your company (or the terms you are negotiating in your convertible note or SAFE) will be directly correlated to the number of investors interested in your company. The more investors you attract, the more leverage you will have to negotiate better terms, and the more pressure investors will feel to accept your offer (did anyone say FOMO?). Conversely, the fewer investors are interested in your company, the less negotiating power you will have, and the worse the valuation and terms for your round.

External factors that significantly impact the terms investors are willing to accept include the economic environment and recent technology trends, such as the blockchain, NFTs, and AI craze in the last couple of years.

Nevertheless, it's still a good idea to use multiple valuation methodologies to establish a starting point for negotiation with investors. These valuations can support your case, especially if your assumptions have been previously validated.

I hope these key insights help you gain a better understanding of how investors will ultimately determine the value of your company and how you can leverage it to secure better terms for your next round.

If you need help with valuing your company to initiate negotiations for your next equity, SAFE, or Convertible Note round, contact us. We are here to help you!

Fernando Moreno
Growth Partner