“Early stage valuations aren’t really valuations. They are the exhaust fumes of a negotiation about two things — the amount raised and the amount of dilution.” — Fred Wilson; source. “Those guys are…
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Founder-in-Residence @ Platform Venture Studio
Startup valuations are a combination of how much cash is needed and how much (and how many) funds are willing to invest at each stage:
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But with startups, all that matters is growth:
Founder-in-Residence @ Platform Venture Studio
With all these new funds investing in startups, there is no simple formula to valuations.
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"The VC strictly speaking doesn’t set out to value the startup. Yes, the VC does price the share to be allotted to themselves, but this again, like valuation, is a derived outcome of the funding amount and target stake. Valuation is never directly targeted or sought after. Rather, the eventual valuation / the share price emerges once the VC and the founder agree on funding quantum and desired stake."
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"It is important to understand that when (seed) VCs back early stage startups, there is very little data — performance or financial — that is available. The VC is fundamentally betting on the team, the size of the problem they are after, and their ability to create and execute on the product / solution to the problem they are after. At the time a startup approaches the VC, little is clear — how well the startup might do, how fast it could grow, how profitable it may become, how much money it will need to execute, etc.
The VC can, of course, sit alongside the startup and attempt to chalk this out. But they both, and the ecosystem knows that will really be excel storytelling. No one really knows what this will all amount to, and yet the team needs the money now. So how do we determine how much to invest? The solution that the US early stage / venture ecosystem arrived at was to ‘stage’ fundraising in a series of steps, and give only as much money as is required to reach the next stage or level.
Staging works like this: angels / microVCs back idea-stage or near idea-stage startups to reach the stage at which a seed VC would fund them. The seed VC funds the amount that should propel the startup to reach the stage at which a Series A VC backs them. The Series A VC then funds them to get to the stage at which a Series B backs them; and so on till the IPO. Each stage has a funding amount (and a stake target) along with a rough set of qualifying criteria. Over time, VCs have specialized the formula for the stage in which they play in."
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