Valuation for Pre-revenue, pre-traction startup

Came across come discussions on the valuation for a pre-revenue, pre-traction startup.

A: At this stage it’s really what people are willing to pay for it. You could assume that you are good enough to get funded by a seed feed, or you’re on par with the startups they fund. They generally give you $20k for about 7%. This means you are worth $380k. “Comparable Analysis” means that you could compare what other startups have gotten. Y-Combinator and all the american seed funds would be a good comparable/proxy, if you’re pre traction.

B: Typically investors look for 4X or more in returns of investments and exits within 3 years. Work on that as a basis.

C: You’ll still need some form of quantititive analysis though so focus on the quality of your management team and the size of your market. You can use this to defend your valuation, which will obviously be made up by you 🙂

D: Be careful of the number the VC gives you. Clarify if it is pre-money or post-money valuation, because that will make a big difference in the control stake

From Quora, there is an excellent answer given by David Rose, Managing Partner of Rose Tech Venture, on What is the range of capital you can expect from an Angel vs VC?:

The range is quite wide, and varies depending on whether you’re talking about an individual angel investor or an organized angel group. The average individual investment size into a given company by angels who regularly invest in early stage companies is about US $25,000 although the overall range varies widely. Outside of the major tech centers, you might find individuals participating in the $5K – $10K range, and there are certainly high net worth individuals who can, and do, invest upwards of $1 million in one chunk into early stage deals.

The average amount invested by organized angel groups these days is in the range of $250K – $750K, which is roughly the same range as the so-called “super angels”, who are more correctly described as “micro vcs”.

Traditional venture capital firms have generally started their Series A investments in the $3m – $5m range, with follow-ons in later rounds going up to the tens of millions of dollars. However, with the rapidly decreasing cost of starting up a business, and the pressure at the low end from angels and seed funds, many VCs are now dropping down and, either directly or through special-purpose funds, making much smaller investments.

So, putting it all together, in very, VERY rough ranges, it looks something like this:

From $0 – $25,000 you will likely be investing your own cash out of your own pocket, otherwise no one else will be comfortable investing at all. Once in, this money stays in, and is part of what makes up your Founder’s Equity (along with your work and your intellectual property.)

From $25,000 – $150,000 you will likely be rounding up friends and family to put in the first outside cash on top of yours. This will usually be documented as either a straight sale of Common Stock (which is most typical) or else as Convertible Note which converts into the same security as the next professional round, but at a discount (which is actually better for everyone).

From $150,000 to $1.5m, you are in angel territory, either by lucking into one really rich and generous angel, or (more likely) by pulling together either a bunch of individuals (at $10,000 – $100,000 each), or one or more organized angel groups, or one or more micro-VCs (‘super angels’). Depending on the circumstances, they will invest either in the form of a Convertible Note (but with a cap on valuation), or else in a Series Seed or Series A Convertible Preferred stock round, using similar documentation to that used by VCs.

From +/- $1.5m up to, say, $10m, you’re looking at early stage venture capital funds, which will almost certainly be using something very much like the National Venture Capital Association’s Model Series A documents. They will likely make their first investment about half of what they’re prepared to put in, with the rest coming in one or more follow-on rounds if you execute successfully on your plan.

Finally, north of, say, $10m – $20m, you’d be getting money from a later stage venture capital fund, whose paperwork will be similar to the earlier VCs. They will put in much larger amounts of cash, but your valuation will be much, much higher, so they may end up with a smaller stake than the earlier investors (who would likely have continued to invest in each round in order to maintain their percentage ownership.)

Although this is the canonical progression, keep in mind that the number of companies that get all the way through it is very, very, VERY small. A majority of companies that are started in the US begin and end with the first stage: the founders’ own money. The number of companies that are able to get outside funding then begins to drop by orders of magnitude: the percentages (again, very, rough) are that 25% of startups will get Friends & Family money; 2.5% will get angel money; 0.25% will get early stage VC money; and probably 0.025% will make it to later stage VCs

This represents a personal opinion. If you have read this far, you should definitely follow me on Twitter.

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