i've helped hundreds of founders raise their first round of capital
their most common question? what their startup's valuation should be
here's my 5 step framework for how to value early stage startups:
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
you'll likely need to raise more than one round
the capital you raise now needs to get you to the next one
identify the milestones you'll need to hit between now and then
2. understand your expected burn
how much will you need to burn to hit those milestones?
assume it's 1.5x what you think
create optimistic, realistic, and pessimistic scenarios
you'll need both your monthly burn and the total amount you plan to burn before your next round
3. calculate your round size
you should raise enough so that you'll have 12 months of runway when you raise again
having a cushion will make raising your next round much easier and less stressful
round size = expected total burn + (expected monthly burn * 12) - current cash
4. back into your valuation
common mistake: trying to maximize your valuation
instead, think about how much of the company you're willing to sell
aim to sell 10-20% for a pre-seed
valuation = round size * 100 / the % you're selling
5. check the markets
macro factors can impact your chance of success
look at:
- recent deals in your space
- public market revenue multiples
- recent capital raised by vcs / vc sentiment on twitter
adjust either the % you plan to sell or how much you want to raise as needed
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how to value early stage startups:
1. map out milestones
2. understand expected burn
3. calculate round size
4. back into a valuation
5. double check the markets