How do startups calculate their valuations?

“Do you know anyone personally who can help me calculate a valuation for my startup?”

In my opinion, valuing privately held companies at the early stage is more of an art than a science.

I used to tell founders to benchmark against other startups but in this market that is not helpful given that startups were raising at ridiculous valuations in the last 5 years.

Many of those startups are facing the music now raising down rounds, extensions and convertible notes as a consequence.

Most founders think they are price setters but they end up being price takers.

Let me explain:

The key question for founders to ask themselves is:

‘What’s the max dilution you would be willing to take?’ and work backwards from there.

Valuation is something you’ll negotiate with your lead investor. Not something you can set unless it’s a very competitive round and you literally choose who you say no to.

And often founders just don’t know how to defend their valuation so they tie themselves in knots.

Here is an example:

I’m raising 500k and don’t want to dilute more than 20% therefore my minimum post-money valuation is 500k / 20% = 2.5m valuation. Investors have an opportunity to agree and invest or negotiate. The important thing is that you have drawn a line in the sand that you are comfortable with.

What you are comfortable with as a founder is much more sensible than following a mathematical equation you feel uncomfortable with.

Guidelines are better than rules, don’t overthink it.