There’s been a lot of talk over the last month about Unicorns and Unicorpses. Everyone is getting very excited (and agitated) about $1bn startup valuations… often driven by big later stage private financing rounds.
In his recent ‘Uncorpse’ post, Brad Feld made this point and it stuck with me:
This made me think about the seed stage — where the numbers involved are an order of magnitude smaller. Both founders and investors spend a lot of time deliberating over the seed valuation of a company, when the numbers involved mean nothing yet anyway. Seed stage valuations don’t identify the actual value of the company, they are only a perception of the value the company could create in the future. Mainly because pretty much nothing has actually been created yet.
Therefore there is no real science in the calculation, it’s actually more of an emotional calculation that is dependant on a set of variables to be defined by the founding team and investors.
To help both founders and investors save time I thought I could lay out some very simple guidelines. These should help the startup and investor be aligned and to work together on a sensible valuation rather than a senseless tug-of-war.
1. Set some milestones that you want to achieve in a defined period of time. This is your runway.
For example, 20k mrr in 12mths, 50k MAUs in 18mths, team of 8, 2 new verticals etc etc..
THIS IS THE MOST IMPORTANT PART. You should set these milestones with your investors, advisors and team.
2. Decide on the resources you need to achieve said milestones and how much you feel you need to spend each month. This is your monthly burn.
For example, hire 3 more devs, 1 customer success, other overheads.
3. Decide on what percentage of equity you are happy to give away at this stage. At this point you should take into account other funding rounds that may come in the future and remember that the management team need to stay motivated and incentivised.
For a seed round this could be anywhere from 15%-30% depending on how well developed the company is.
4. Calculate your pre-money valuation:
Note on pre-money valuation: Pre-money valuation is the valuation of a company BEFORE it receives investment. Post-money valuation is the valuation of a company after capital hits the bank. This sounds obvious but if mixed up then the difference in dilution can be significant.
Investment = Runway x Burn
Investment/Post-money Valuation = Dilution%
Post-money Valuation = Investment/Dilution%
Pre-money Valuation = Post-money valuation — Investment
e.g. 18 months at 20k burn = 360k
£1.8m post-money valuation
= £1.44m pre-money valuation
‘Wave your finger in the air and push as high as possible’