The process of figuring out how to value a startup is often an inexact science.
In my day-to-day at Fidelity Private Shares℠, I spend a lot of my time connecting early-stage startup founders with venture capitalists. I see founders go through the valuation process regularly. This collaborative exercise involves finding a number that works for both sides and sets the company up for future success.
Startup valuations can be tricky, especially for new founders. The valuation may be difficult to achieve for a variety of reasons: there are no fool-proof methods, the market can change, and you’re working with a lot of unknowns.
Naturally, founders are usually searching for valuation advice. At a recent PrimeTime VC panel, I had the chance to have the following four VCs debate the topic of startup valuations :
- Victoria Kennedy, the founder and GP of Seed to Harvest
- Jesse Middleton, a general partner at Flybridge Capital
- Zehra Naqvi, a two-time founder and an investor at Headline Ventures
- Olivia O'Sullivan, a partner at Forum Ventures
Let’s explore some helpful information from the people writing startup fundraising checks.
How to value a startup: 8 tips from experienced venture capitalists
The four VCs provided the following tips for anyone learning how to value their startup:
1. Be aware of market changes
As market conditions change, so do valuations. Some companies saw the benefits of a startup-friendly market in 2021, a record-breaking year for global venture investment. But the tides are shifting, and you might find it a bit more difficult to raise in 2024 and beyond.
“We were in a pretty founder-friendly market — and now that's becoming less founder-friendly and more investor-friendly,” Vicotria Kennedy said.
So, if you did raise in a founder's market, keep in mind that subsequent raises in different market conditions could yield lower valuations.
2. Raise what you need
A good rule of thumb for many startup founders; take a measured approach to raising capital.
“When you're early stage just make sure you're setting yourself up for success,” Naqvi said. “Don't try and go for a valuation that doesn't make sense. Make sure you can point to everything when it comes to the reasoning as to why you're coming up with a valuation.”
Some founders can get caught up in the numbers game, chasing the highest valuation possible. However, this can lead to down rounds in the future.
“If you don't need a million dollars, you also don't need to raise a million dollars just to say you raised a million dollars,” Kennedy said.
3. Set a valuation that can be tripled during your next round
How do you raise enough money to support your growth without going overboard? Jesse Middleton GP at Flybridge suggests setting a valuation that can be tripled in your next round.
“You’re setting yourself up for failure if you set a cap or a price in a round that’s not able to be 3x’d the next time around,” Middleton said.
Having a lower initial valuation can help to make sure your valuation has room to grow as your company scales.
4. Don’t put a valuation in your pitch deck
Many sales people know that you rarely want to be the person coming to the table with a number first. The same thing may apply to founders looking to raise from VCs.
“We’re going to talk you down; that’s our job, we do this a lot,” Middleton said. “I’ve backed 68 companies. I think I’ve talked most of them down, and the ones who I haven’t [talked down] are probably my best founders.”
Both you and your investors know that you’re looking to raise as much as you can within your means. Don’t sell yourself short by bringing a number to the table and potentially ending up with a lesser deal.
5. Pricing should be a transparent conversation
It’s okay to have an open dialogue with your VC partner.
“Have a conversation about valuation,” Naqvi said. “If they came up with it, how did they? What went into that?”
Don’t shy away from these conversations that can offer insights into how the VCs are thinking about your business.
“It's a conversation,” O'Sullivan said. “It’s not going to be set in stone the first time you have a meeting and can continue to evolve as the round comes together and as you get checks coming in.”
6. Choose your partners wisely
On the topic of collaboration: you should carefully consider your options when choosing your partners.
“I cannot stress this enough; think a lot about who you're partnering with from an investor standpoint,” Kennedy said.
The money you raise is part of your business and you’ll have a close relationship with your partners. Be sure to put as much care into choosing your investor partners as you would anyone else on your team.
This relationship’s foundation will matter if your business hits a rough patch.
“Say you take a deal but it's not that friendly,” Kennedy said. “When things get rough, it will be tough if you don't have the partnership and the relationship with that person to move through it.”
You may want to be able to lean on and trust your investors, so be sure you’re selecting someone with whom you can weather the storm.
7. Review your deal terms
Take the time to review the terms and ask questions about anything you’re unsure of when considering a deal.
“I'm seeing a lot of interesting terms being put into deals,” Kennedy said. “The things you want to think about are: What are the terms? What do they mean? How can they affect me in the future?” Kennedy said.
She recommends fully understanding the terms and thinking about what they might mean down the line.
“Do a lot of scenario planning,” Kennedy said. “You can't really predict the future, but if you know the consequences of your choices, at least you're prepared for what might happen.”
8. Know what you’re ready for
The final tip the VCs had was to be realistic about your business and the stage you’re in.
“I think it's really important to recognize that the Tech Crunch article that calls you a unicorn is not worth trying to get a billion-dollar valuation if you're not ready for it,” Naqvi said.
Reaching a valuation isn’t a competition. It’s simply a step in the company journey that can set you up for the next phase of growth.
Stay fundraising-ready with Fidelity Private Shares
If you’re thinking about your valuation, you’re probably also thinking about fundraising. Preparation is key for private companies seeking VC funding. It may be difficult to project numbers or estimate a valuation, but it can be easier when founders have done their share of the leg work beforehand.
This includes having accurate numbers, a cap table, a business plan, and all the relevant documents organized for investors. While you can’t know the future and startup valuation methods can vary, you can still be confident in your business. Using a solution like Fidelity Private Shares can help you do just that.
You can use Fidelity Private Shares to create a source of truth for your startup.
Our platform will help you manage equity, secure documents, automate financings, and improve investor communication.
You might not be able to control or predict your valuation. What you can control is your fundraising readiness, and Fidelity Private Shares is here to help.
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