Learn From VC: “5 Steps Framework To Determine Your Startup Valuation”
Many founders ask me, “How do I know what my startup’s valuation should be?”
Here’s a simple framework that you can use to determine your startup’s valuation:
- Identify your key milestones
Remember, raising capital from VCs relies on hitting milestones that expand your startup’s growth potential. At later stages, this is driven by metrics like ARR, active users, retention, and growth rate. But at pre-seed, seed, and Series A, milestones are more narrative-driven.
The first step in planning a fundraiser is understanding what milestones you’ll need to hit before your next round. That will shape the growth strategy you pitch to investors now.
2. What’s Your Expected Burn
Next, conservatively map out the cash you’ll need to burn to hit your milestones. Always assume you’ll need 1.5x more than you think, in case things go wrong.
This forces you to think through a full, honest growth strategy. Work backwards from the milestones:
- What needs to happen for them to be true?
- How long will that take in optimistic, realistic, and pessimistic scenarios?
- How much will you need to spend?
- Can you move faster or reduce risk by spending more?
Map this out month-by-month against your expected revenue. VCs don’t expect profitability, but this shows your total burn and monthly burn rate before your next raise.
3. Your Round Size?
To determine your fundraising size, use this formula:
Fundraise size = expected total burn + (expected burn rate * 12) — current cash
VCs typically want 12 months of runway, so multiply your expected burn rate by 12 and add that to your total burn between raises.
(Your current cash is what’s in the bank now.)
Example: Let’s say your startup has a burn $50K per month over the next 10 months before you’ll hit your milestones for the next round and you have $100K in the bank right now:
$500K + ($50K * 12) — $100K = $1,000,000 round size
4. Calculate Your Valuation
Consider how much of the company you’re willing to sell in this round. Generally, startups sell 10–20% per round.
Do an honest risk assessment — more unknowns mean you’ll need to be on the higher end. If you don’t urgently need to raise, you can negotiate lower.
In our example, let’s assume you want to sell 15% for $1 million. That sets our valuation around $6.7 million, or $7 million to keep it simple.
5. Double Check the Markets Right Now
Now look at recent deals in your industry and consider market factors using Pitchbook. Talk to VCs not pitching to get context on whether valuations are “high” or “low” right now.
If valuations are “high” you can be aggressive with your story. If “low”, you’ll need to rely more on traction and metrics and may need to accept selling more equity than preferred.
In our example, let’s assume the markets are “low”, so you might have to choose between a $6M valuation or raising less capital than desired.
That’s it.
— —
Interested in startups & venture capital?
Subscribed to my Venture Curator newsletter to get daily tactics on startup building: https://theventurecrew.substack.com/
