i've helped over 100 founders raise their first round from vcs
their most common question?
how to find the right valuation for their startup
here's the 5 step framework i share with them:
most founders focus on maximizing their valuation
instead, they should think about:
- how much capital they need
- how much of the company they're willing to sell
- the current state of the markets
and work backwards from their next round
1. map out milestones
hitting milestones is how you show investors that your startup can be really big
ask investors what milestones would be interesting for your NEXT round
now you know what you need to accomplish with the money you raise in this round
2. understand your expected burn
how much will you need to lose to hit those milestones?
assume it's 1.5x what you think
use a spreadsheet to determine two numbers:
- total burn needed to hit your milestones
- monthly burn rate by the time you hit them
3. calculate your round size
before you determine a valuation, calculate how much capital you need to raise
investors will want you to have 12 months of runway when you go to raise again
here's a simple formula:
round size = total burn + (burn rate * 12) - current cash
4. clarify how much you're selling
aim to sell 10-20% of your startup in the first round
where they fall in that range is based on:
- macro market conditions
- how much traction you have
- how on-trend your startup is
get investor opinions on these before you raise
5. arrive at your valuation
with this framework, calculating your valuation is the easy part
valuation = round size / % of company you're selling
start conservatively
you can always raise your valuation if the round heats up, but overshooting will make it tough to fill
i went deeper on this framework and how to apply it in my newsletter:
houck.news/p/valuations
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how to determine the valuation of your startup:
1. map out milestones for your next round
2. understand your expected burn
3. calculate how much you need to raise
4. clarify how much you're selling
5. arrive at your valuation