Valuing my startup
Valuing a startup is one of the most nebulous, tricky parts of running a venture-style business. Theoretically, your company should be able to raise money at about the same price for which it could be acquired — that’s what the business is worth. But what if you don’t have a whole lot of revenues? What if you’re relatively early on? Then you probably couldn’t be acquired, but can’t raise at a premoney of $0.
Valuation is always a negotiated term. It’s always a balance of what investors are willing to pay and entrepreneurs are willing to accept. There’s no rule for what a company is objectively “worth.” However, here are some general guidelines.
If you’re sub-$500k in annual revenues, then it’s pretty much impossible to use your revenues to impute a valuation. This is just a negotiated term — basically, it’s made up. Unless you’ve got years of R&D into a product or an exceptional story, it’s hard to top a $5M premoney at this level.
If you’re post $1M in revenue, generally public market comparables are the best way to determine your valuation. Basically, look at the price of similar companies that trade on the public market, and what their multiple on revenue is — then you subtract 1.3x for what is known as the “illiquidity premium” — since your stock can’t be sold on the public market tomorrow, investors deserve a premium for the risk and lockup. A way to short circuit this process is just to check the Bessemer Cloud Index. It’s maintained by a great firm (Bessemer Ventures) and synthesizes public market data for you.
Keep in mind that revenue times the cloud index number doesn’t work in most cases — it’s just a good benchmark. Other factors like market size, technology, team, and of course, growth rate all factor into valuation. For example, a company with $4M in ARR that took 10 years to reach that level, one that has gone from $2M to $4M in 12 months, and one that’s gone from $500k to $4M ARR in 12 months will all be valued very differently.
So while this should provide some type of a framework for you — your $1M ARR startup is probably not worth $30M premoney –just know that this is a negotiation. The goal is to find a way to get the business the capital it needs while aligning investor incentives to success of the business, and allowing them to be compensated for the risk they’re taking. As long as everyone negotiates with this in mind and with a common set of principles at their core (like what a reasonable public market comp would be), you’ll get to the right number eventually.