4 Quick Factors in Startup Valuations

Greece: Judicial revenue, overprint ΘΕΜΙΣ on 1...

Early last week I was talking to an entrepreneur about startup valuations and how for the Series A round it really depends on the amount being raised. The idea is that VCs want to own roughly 1/3 of the business, so if you raise $3 million, your pre-money valuation will be $6 million. If you raise $4 million, your pre-money valuation will be $8 million. Some VCs want 40% of the equity so the pre-money valuation, assuming the same amount raised, will be slightly lower. The valuation is based on the amount being invested and the desired amount of ownership by the investor.

Now, once the startup starts generating revenues the valuation dynamic changes to more traditional metrics. Here are four quick factors in startup valuations:

  • Profits/earnings – the amount of money the startup makes, typically before factors like taxes, interest, depreciation, and ammortization
  • Growth rate – the faster revenues and profits are growing, the more valuable
  • Recurring revenue – the greater the percentage of revenue that’s recurring, the more valuable
  • Gross margins – the greater the gross margins, the more valuable

So, a company that is extremely profitable, growing fast, 100% recurring revenue, and high gross margins will be the most valuable, everything else being equal.

What else? What are some other factors in startup valuations?

4 thoughts on “4 Quick Factors in Startup Valuations

  1. Another important factor is IP
    Strong patents or promising patent pendings can add value too.

    David, great blog.

  2. having learned the hard way, no way i’d invest in a pre-revenue company without the A’s having a majority interest. this is what i experienced with 30 companies:
    1) the company simply fails,
    2) the company runs low on money and is at the mercy of the next round of investors, so the B’s dilute the A’s to nothing. If not the B’s, then certainly the C’s.

  3. you mentions the factors (Profits/earnings,Growth rate,Recurring revenue, gross margins) thank you. but what multiples to use to arrive at actual valuation of the company?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.